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Daily Newsletter, Monday, 01/14/2008

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Table of Contents

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

Market Wrap

Big Blue Get Things Green

Upbeat guidance from Dow Industrials heavyweight International Business Machines (NYSE:IBM) $102.93 +5.38% helped give stocks a much needed lift to start the week, but action in IBM suggests my call for a "modest recession" in 2008 is well underway.

The Dow Industrials (INDU) 12,778.15 +1.36% regained the bulk of Friday's losses after its most-heavily weight price component IBM warned that preliminary Q4 earnings from continuing operations looked to be $2.80/share, which would be up from the $2.26/share reported in the same quarter last year. Big blue said revenues look to be up 10% vs. the year-ago quarter to $28.9 billion, driven by growth in Asia and Europe.

Intl. Business Machines (IBM) - $2 and $1 Box

Having given two (2) consecutive sell signals at $102 and another at $99, today's trade at $102 in IBM does have its bearish vertical count column (Os from $110 to $98) giving us an early observation that market participants my see some longer-term downside risk to $82.

IBM's Bar Chart - Daily Intervals

Last week's email folder had many subscribers asking about "anchor points" for developing channels and the above point and figure chart might just have traders and investors seeing some distribution LOWER in IBM from the recent highs of $121.46 to a low of $99.27 on 11/09/07, then being followed by a relief rally up to $112.19 on 12/26/07 before the most recent distribution back lower.

I've utilized the Andrews Pitchfork (Modified Schiff) tool to now begin developing bearish channel.

It is notable that IBM would have seemed to have MARKET PARTICIPANTS almost "knowing" last week's lows of $97.04 would be found as the stock reversed course from what is only now seen as a 61.8% ($112.38) retracement of the recent range.

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As earnings season kicks off and companies report, or update their visibility on earnings, stocks like IBM become very important.

It's not only what they companies, but it is the MARKET'S reaction to the news that will grab our attention in the weeks and months ahead.

While stocks may sometimes NEVER achieve their bullish, or bearish vertical counts, sometimes they do. Sometimes they'll even EXCEED them.

Still, with some "good news" from IBM, its worth dragging down a retracement to $82.00 on the stock, just to see if market participants think the stock has that type of downside.

Intl. Business Machines (IBM) - Daily Intervals

I can't cover the 30 Dow Industrial components in an evening's market wrap, but that doesn't mean traders and investors can't utilize the techniques I've taught you over the years.

Suffice it to say a break to new lows on IBM would be viewed as BEARISH in my (Jeff Bailey) opinion.

I can almost envision some further gains in IBM up to its 200-day SMA ($108.29) and the upper-end of the Andrews Pitchfork. An aggressive BEAR could short such a trade with a tight stop above $113.92. A more conservative bear could wait for the test of $108.29, then SELL/PUT WEAKNESS back below $106.38.

For many fundamentalists, it certainly "doesn't make sense" that IBM is trading down at these levels with some "upbeat guidance."

With that in mind, it really "won't make sense" if the stock takes out the recent lows.

Bottom line ... when things "don't make sense," that's when we as traders and investors become alert to some type of change taking place.

Here is a sign of "change" for the Dow Diamonds (DIA) $127.51 +1.04% that I would want us to be alert to.

Dow Diamonds (DIA) - Daily Intervals

I would argue that there may not be any "one" particular stock in the very broad Russell 2000 Index ($RUT.X) that could have as much price impact on that index as IBM can have on the Dow Industrials (INDU) 12,778.15 +1.36%, or the Dow Diamonds (DIA) $127.51 +1.04%.

Early last week I was BULLISH the DIA, looking for an "oversold bounce" to $131.50.

But "something changed" and the DIA has started to spend too much time below an Andrews Pitchfork (modified schiff) channel.

In Thursday afternoon's Market Monitor at OptionInvestor.com I alerted traders that the DIA was testing its 11/27/07 trade of $129.00 and was "prairie dog'n." That is, the DIA was sticking its head above that important 11/27/07 intra-day observation (see my 12/03/07 Market Wrap).

As you can see, the DIA "didn't like what it saw" at the $129.00 level, let alone its 11/27/07 close of $129.32 and suggests a change may be taking place.

Dow Diamonds (DIA) - Daily Intervals

I've confessed before that I do not portend to know anything about "wave counts," but I do know how to look at a point and figure chart and identify relative highs and lows, and make adjustments when I observe a change taking place.

If I were to take an Andrews Pitchfork (modified schiff) from the anchor points now shown, a BEARISH, or downward channel becomes present.

As we near this month's (January) option expiration, I also show the major open interest (OI) levels for the DIA's calls and puts.

WIN a FREE StockTrader's Almanac!

Send me (Jeff Bailey) your Dow Diamonds (DIA) guess for this Friday's option expiration 04:15 PM EST close for the Dow Diamonds (DIA). The subscriber CLOSEST to Friday's 04:15 PM EST close wins! In case of a tie, the winner's name will be drawn from a hat, as I have just one extra StockTrader's Almanac to give away. (Amazon.com's shipping error is your reward!)

All entries must be received by me (Jeff Bailey) no later than 09:00 PM EST tomorrow (Tuesday, 01/15/08).

Send your "Friday's Close" guess to jeffoption@comcast.net

I will contact/verify the winner for address to ship to.

Another Dow component that has gotten headlines in recent months had shares of Citigroup (NYSE:C) $29.06 +1.75% bouncing from yet another 52-week low found last week.

CNBC reported today that sources it deemed reliable will have the banking giant set to announce further writedowns that could be as high as $24 billion. There was also speculation later in the day that the company will reduce its dividend.

Citigroup (C) - Weekly Intervals

The news flows out of Citigroup (C) have been "negative" for months, and so far, the stock's price hasn't disappointed bears.

Since breaking to an initial 52-week low below the $45.00 level, C's losses accelerated.

With rumor and speculation of more bad news coming, a WEEKLY CLOSE above $32.33 would be shocking. Perhaps suggesting a "change" has taken place.

Several weeks ago an analyst thought the time to try nipping away at C from the bullish side was to wait for the company to cut their dividend.

Citigroup (C) reports earnings/losses tomorrow morning before the opening bell. Consensus is for a loss of $1.00/share on revenues of $10.64 billion.

Plenty of time to get bullish C, but would suggest that BEARS have locked in some type of gain at this point.

Closing U.S. Market Watch - 01/14/2008

Gold and silver as depicted by the StreetTracks Gold (GLD) $89.55 +1.09% and iShares Silver Trust (SLV) $162.80 +1.26% continued their surge to record levels with the U.S. Dollar Index (DXY) exhibiting weakness.

StreetTracks Gold (GLD) - Daily Intervals

In Thursday evening's Market Monitor at OptionInvestor.com, I scrambled to try and warn potential "gold shorts" what they needed to see as another "top" was about to be found.

The "break" back below mid-point of an Andrews Pitchfork (modified schiff) wasn't found, but with overhead supply nonexistent, new highs are!

Further near-term gain looks to be $92.50, and with the FOMC meeting and decision on rates slated for release on January 31st, gold is probably the toughest and most dangerous short on the list.
 


New Plays

New Option Plays

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

Play Editor's Note: I think LLTC, a semiconductor stock, is poised to rally back to $30.00. Unfortunately, the company reports earnings on Tuesday night and we don't like to hold a directional play over an earnings report, especially a bullish position. You might want to consider some sort of straddle or strangle but I didn't like what it would cost for a February position. I would not play Januarys. FYI: Intel also reports on Tuesday night.


New Calls

None today.
 

New Puts

Precision Castparts - PCP - cls: 124.50 ch: +0.97 stop: 130.25

Company Description:
Precision Castparts Corp. is a worldwide, diversified manufacturer of complex metal components and products. It serves the aerospace, power generation, automotive, and general industrial and other markets. (source: company press release or website)

Why We Like It:
The aerospace and defense market was a huge winner in 2007 but the tide may be turning, especially for PCP. The stock appears to have produced a top over the last few months and the breakdown under support near $130 and its 200-dma is very bearish. The stock has been unable to rally back. The recent oversold bounce back to the $126-128 zone looks like a new entry point to buy puts. We have two targets. Our first target is near the recent low in the $115.50-115.00 range. Our second target is the $110-105 zone but this is aggressive target and PCP will probably not hit our second target before we have to exit ahead of its January 22nd earnings report. FYI: The P&F chart is bearish with an $88 target.

Suggested Options:
We are suggesting the February puts.

BUY PUT FEB 130 PCP-NF open interest=226 current ask $10.30
BUY PUT FEB 125 PCP-NE open interest= 64 current ask $ 7.40
BUY PUT FEB 120 PCP-ND open interest=175 current ask $ 5.10

Picked on January 14 at $124.50
Change since picked: + 0.00
Earnings Date 01/22/08 (confirmed)
Average Daily Volume = 1.1 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - cls: 178.78 chg: +6.09 stop: 164.75

Shares of AAPL bounced higher on Monday as bulls start to take positions ahead of the MacWorld expo tomorrow. There is growing expectation for AAPL to announce a super-thin notebook PC and some sort of download-movie rental deal. Shares of AAPL are now facing potential resistance near $180 and its 50-dma. The intraday high today was $179.42. Our first target is the $179.50-180.00 zone. Our second target is $188.00-190.00.

Picked on January 11 at $171.00 *triggered
Change since picked: + 7.78
Earnings Date 01/22/08 (confirmed)
Average Daily Volume = 38 million

---

BP Prudhoe - BPT - cls: 81.45 chg: +1.38 stop: 77.90

Right on cue shares of BPT dipped toward $80.00 today. Shares hit $80.48 this morning providing us an entry point. We were suggesting new positions in the $80.50-79.00 range. Now that the play is open our target is the $89.90-90.00 zone. More conservative traders may want to do some profit taking near $85.00, which will probably be short-term resistance. We are suggesting the March calls.

Picked on January 14 at $ 80.50 *triggered
Change since picked: + 0.95
Earnings Date 00/00/08 (unconfirmed)
Average Daily Volume = 84 thousand

---

Blackstone - BX - close: 20.39 chg: +0.33 stop: 17.24

Traders bought the early dip to $20.00 this morning. Seeing the $20.00 level hold as support is a good sign. We're leaving our stop loss at $17.24 for today but it's probably time to start looking at adjusting it higher. BX should have additional short-term support near $19.00. Our target is the $24.00-25.00 range. We do not want to hold over the February earnings report.

Picked on January 10 at $19.84
Change since picked: + 0.55
Earnings Date 02/11/08 (unconfirmed)
Average Daily Volume: 2.7 million

---

Covance - CVD - cls: 95.66 change: -0.26 stop: 86.99

CVD may have under performed the market today shares still aren't seeing a lot of profit taking. If CVD doesn't pull back soon we'll probably drop it as a bullish candidate and just put it on our watch list. We would not chase it at current levels. The stock looks short-term overbought and due for a correction. Our suggested entry point is the $90.50-90.00 zone. Our first conservative target is $94.50-95.00. Our second, more aggressive target is the $99.00-100.00 range. FYI: We are unfortunately, running low on time. We don't want to hold over earnings.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/23/08 (unconfirmed)
Average Daily Volume = 395 thousand

---

Entergy - ETR - cls: 123.10 chg: -1.29 stop: 119.95

With the market in rally mode today investors ignored the more defensive names like ETR. Shares slipped about 1%. We remain bullish on the stock but readers can probably wait for a dip near $122 as a potential entry point. We've only got a couple of weeks before earnings come out. Our short-term target is $129.50-130.00. More aggressive traders may want to aim higher. We're suggesting a stop loss at $119.95 but more conservative traders could try a stop just under Friday's low.

Picked on January 13 at $124.39
Change since picked: - 1.29
Earnings Date 01/29/08 (confirmed)
Average Daily Volume = 1.6 million

---

Foster Wheeler - FWLT - cls: 141.17 chg: -0.41 stop: 137.85

The S&P 500 was up 1% and the DJIA up 1.3%. Yet shares of FWLT slipped lower. This relative weakness is a warning for the bulls. Following Friday's "inside" day, today's move is even more bearish. More conservative traders will seriously want to consider an early exit now or a tighter stop. The intraday low today was $138.85. We are not suggesting new positions unless we see a new move over $144 or $145. FWLT has already hit our initial target in the $149.50-150.00 zone. Our second target is the $158.00-160.00 range. FYI: FWLT is due to split 2-for-1 on January 22nd.

Picked on January 09 at $142.90
Change since picked: - 1.73
Earnings Date 02/27/08 (unconfirmed)
Average Daily Volume = 1.7 million

---

Genzyme - GENZ - close: 78.68 change: +0.12 stop: 74.95

Biotech stocks traded sideways today as investors waited to hear Genentech's (DNA) earnings report that came out after the bell tonight. DNA beat estimates by two cents but revenues on some of their key drugs were a little light. Shares of DNA were all over the map after hours. GENZ did not see any after hours movement. If GENZ sees any profit taking the stock should find some support in the $76-78 region. Wait for signs of a bounce before jumping into new positions. If you're worried about resistance at $80.00 then wait for a breakout before buying calls. Our target is the $84.00-85.00 range. The P&F chart looks very bullish with a $94 target. FYI: Any time we play a biotech company it is always a high-risk play due to headline risk. You never know what news might come out concerning an important FDA decision or clinical trial that could dramatically move the stock price and see shares gap one way or the other.

Picked on January 13 at $ 78.56
Change since picked: + 0.12
Earnings Date 02/13/08 (unconfirmed)
Average Daily Volume = 2.5 million

---

Hess Corp. - HES - cls: 92.98 chg: +1.24 stop: 89.90

HES continues to trade sideways. Bulls have consistently been buying dips in the $90.25-90.50 region. The low today was $90.57. While the afternoon bounce looks like a new bullish entry point to buy calls we are still seeing a very short-term bearish trend of lower highs. You may want to wait for a rally over $94.00 before jumping into new positions. A rise over $94 should break the two-week trendline of lower highs. Our target is the $99.00-100.00 range. We do not want to hold over the late January earnings report.

Picked on January 07 at $ 92.00 *triggered
Change since picked: + 0.98
Earnings Date 01/30/08 (unconfirmed)
Average Daily Volume = 4.5 million

---

Inverness Medical - IMA - cls: 60.46 chg: +0.44 stop: 57.45*new*

Bulls bought the dip at $59.00 this morning. The afternoon bounce looks like a new bullish entry point to buy calls. We are raising our stop loss to $57.45. More conservative traders may want to consider a stop closer to $58. Our target is the $64.00-65.00 range.

Picked on January 08 at $ 58.50 *triggered/gap open entry
Change since picked: + 1.96
Earnings Date 02/26/08 (unconfirmed)
Average Daily Volume = 857 thousand

---

Jacobs Engineering - JEC - cls: 89.44 chg: +0.73 stop: 84.45*new*

JEC tried to breakout over the $90.00 level twice today. The early morning spike to $90.35 failed and then the afternoon rebound had JEC staring at $90.00 again. We remain bullish and if you like to buy on momentum then consider waiting for a rise over today's high as a new entry point. We are adjusting our stop loss to $84.45. The $85.00 level should be short-term support. JEC should have stronger support at the 100-dma currently near $82.16. Our target is the $94.00-95.00 range. More aggressive traders may want to aim for $100. This is going to be a short-term play since we plan to exit ahead of the late January earnings report.

Picked on January 09 at $ 86.31
Change since picked: + 3.13
Earnings Date 01/22/08 (unconfirmed)
Average Daily Volume = 1.4 million

---

Joy Global - JOYG - cls: 62.21 chg: +2.20 stop: 57.49

Metal and mining stocks were higher today. Naturally someone who supplies equipment to them like JOYG also moved higher. JOYG rose 3.6% following an intraday dip (and entry point) at $59.80. We would still consider new positions now. We have two targets. Our first target is $67.00. Our second target is $71.50. We do not want to hold over the late February earnings report.

Picked on January 09 at $ 60.19
Change since picked: + 2.02
Earnings Date 02/28/08 (unconfirmed)
Average Daily Volume = 1.7 million

---

McDonalds - MCD - cls: 54.96 chg: +0.64 stop: 53.25

Investors were still a little undecided this morning. MCD bounced around the $55-53.75 region before bulls started accumulating the stock. Shares added 1.17% by the closing bell on above average volume. Our very short-term target is the $57.90-58.00 range. More aggressive traders could aim higher (maybe $60-62). We do not want to hold over the late January earnings report.

Picked on January 13 at $ 54.32
Change since picked: + 0.64
Earnings Date 01/28/08 (confirmed)
Average Daily Volume = 8.6 million

---

Zimmer Holdings - ZMH - cls: 68.79 chg: -1.16 stop: 67.49

Shares of ZMH struggled today. The stock turned in a bearish move. Candlestick readers might call this "dark cloud cover", which is warning of further weakness. The sad news is that ZMH gapped open higher this morning at $70.64. Our suggested entry point to buy calls was at $70.51 so the play is now open (at 70.64). If you're feeling optimistic then seeing traders buy the dip near $68.50 is encouraging. Wait for signs of a bounce or a new move over $70.00 before considering new call positions. Our short-term target is the $74.85-75.00 range. Broken support near $75.00 should be new resistance. We do not want to hold over the late January earnings report.

Picked on January 14 at $ 70.64 *triggered/gap open higher
Change since picked: - 1.85
Earnings Date 01/29/08 (confirmed)
Average Daily Volume = 2.0 million
 

Put Updates

Liberty Media - LCAPA - cls: 109.04 chg: -0.65 stop: 111.15

LCAPA continues to under perform the market. Today's relative weakness is a good sign for the bears. More aggressive traders may want to buy puts now or under $108.65. We are suggesting a trigger at $107.49, which is under the August low. If triggered our target is the $100.25-100.00 range. The P&F chart is bearish with a $98 target. Warning: We cannot find an earnings report date for LCAPA but the company appears to have a history of reporting in February. Not knowing when they report is a risk since we don't want to hold over the event.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/00/08 (unconfirmed)
Average Daily Volume = 653 thousand

---

Priceline.com - PCLN - cls: 100.52 chg: +4.28 stop: 100.51

It does not surprise us to see an oversold bounce in PLCN. That's why we were suggesting a trigger to buy puts. The question is where will the bounce fail? We would keep an eye on potential resistance at $105, $110 and its 10-dma near $106 as overhead resistance. Nimble traders could try and jump in on a failed rally below one of these resistance levels. Currently we're suggesting readers wait for a new relative low. Our suggested entry points to buy puts is at $93.99. If triggered we'll aim for the $82.50-80.00 range. More conservative traders will want to consider exiting near $85.00. Please note that PCLN can be a very volatile stock. Shares had a $10.00 range on Friday alone. Nimble traders could try and buy puts on a failed rally near $100 or $105. We do not want to hold over the mid February earnings report.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 1.6 million

---

Sears Holding - SHLD - cls: 91.38 chg: -4.79 stop: 102.05

We thought SHLD was headed lower but we were not expecting the stock to gap down ten points this morning. The company issued an earnings warning before the opening bell. The stock reacted by gapping open at $86.43. Short covering and bargain hunters managed a five-dollar bounce off its lows. The trend is still bearish but we are NOT suggesting new put positions at this time. We will wait for the oversold bounce to fail. Right now SHLD should have resistance near $95 and again at $100. A failed rally at either could be used as a new entry point. We had two targets. One target was $91.00-90.00. The second target was $85.50-85.00. The P&F chart is bearish with a $78 target.

Picked on January 13 at $ 96.17 (gap down 86.43)
Change since picked: - 4.79
Earnings Date 02/28/08 (unconfirmed)
Average Daily Volume = 3.3 million

---

Shire Plc - SHPGY - close: 66.74 change: -2.13 stop: 70.05

SHPGY gapped open lower after being downgraded before the morning bell. The stock will probably see another bounce at short-term support near $66.00. The trend remains bearish. The stock has already hit our first target near $65. Our second target is the $62.00-60.00 zone.

Picked on December 13 at $ 68.07 *triggered/gap down entry
Change since picked: - 1.33
Earnings Date 02/21/08 (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.)

---

Biogen Idec - BIIB - cls: 59.98 chg: +0.96 stop: n/a

This play is in trouble! We've been waiting for another FDA decision on BIIB's drug Tysabri. That news hit the wires shortly after 3:30 p.m. today. The FDA approved the drug as a treatment for Crohn's disease and the stock moved higher on the news. Unfortunately, that move was not nearly big enough to make this strangle profitable. We were speculating with a high-risk strategy to use January options, which expire after this Friday. Right now if you sold both options we might clear $0.25. It's up to you if you want to bail now or hope for a move before Friday. We are keeping the play open and risking a total loss here. The options we suggested for our strangle were the January $65 call (IHD-AM) and the January $55 put (IDK-MK). Our estimated cost here is $1.05. We are adjusting our exit to anything in the $0.75-1.00 range.

Picked on January 10 at $ 59.18
Change since picked: + 0.80
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume = 4.4 million

---

Encana - ECA - close: 67.94 chg: +0.74 stop: n/a

There is no change from our previous comments. At this point our speculative, high-risk strangle on ECA is dead in the water. The stock will need to see a really big move in a short time frame to give us any sort of decent exit. We're not suggesting new strangle 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 are adjusting our exit to anything in the $0.40-0.65 range.

Picked on December 20 at $ 67.52
Change since picked: + 0.42
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume = 2.7 million
 

Dropped Calls

Hologic - HOLX - close: 69.00 chg: -1.36 stop: 66.75

We are giving up on HOLX. The stock under performed the market today. Not only did shares paint a bearish engulfing candlestick pattern today but we are seeing a bearish head-and-shoulders pattern form over the last four weeks. If HOLX breaks down under $67 it should be headed for the $62 region. HOLX has already hit our initial target in the $69.50-70.00 range.

Picked on December 18 at $ 66.22
Change since picked: + 2.78
Earnings Date 01/30/08 (unconfirmed)
Average Daily Volume = 2.8 million
 

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.

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