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Daily Newsletter, Wednesday, 02/13/2008

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Table of Contents

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

Market Wrap

Market Wrap

New report format tonight--I'm trying a new format for tonight's newsletter in an effort to make it a little easier to read. These reports tend to get a little long and your time is valuable. Feel free to provide feedback on what you like and don't like (I'll probably be trying a couple of different ideas to make it easier for you to find the information you want to focus on).

Wednesday, February 13, 2008

Slippery Slope of Hope


1.0 Overview

1.1 Markets at a Glance--Corrective Bounce
1.2 Hope-filled Rally
1.3 Economic Reports

2.0 Equities

2.1 S&P 500 Index (SPX)
2.2 Dow Jones Industrial Average (DOW)
2.3 Nasdaq-100 Index (NDX)
2.4 Russell 2000 Index (RUT)

3.0 Selected Industry Groups

3.1 Banking Index (BIX)
3.2 U.S. Home Construction Index (DJUSHB)
3.3 Transportation Index chart (TRAN)

4.0 Currencies

4.1 U.S. Dollar (DXY)

5.0 Commodities

5.1 Oil Fund and Index (USO and OIX)
5.2 Gold Fund (GLD)

6.0 Bonds

6.1 10-year Note, Yield (TNX)

7.0 Summary


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1.0 Overview

Today's Numbers

1.1 Markets at a Glance--Corrective Bounce

The bounce off the January lows has many declaring the bear-market decline is over. Say what? That would be the shortest bear market on record I think. Others are saying it was just a correction within the continuing bull market. I could buy that, but I don't. I watch for evidence in the bounces to see what the price patterns are telling me and not what the Cheerleading Network is telling me.

The bounce so far is corrective looking--lots of overlapping highs and lows and full of the types of moves that you see in corrections (it has not been impulsive to the upside). This has me looking for where the bounce might end, to short it, rather than looking for dips to buy. The dip buying will come but not until I hear wailing and gnashing of teeth that there is no bottom in sight and the VIX is north of 60.

As I'll review in the charts, prices remain in established down-channels from the October highs. The trend is your friend and we should therefore be looking for shorting opportunities in a downtrend rather than for bottoms. Most people hate trading in a bear market and therefore would rather look for buying opportunities. I would too but only for short term trades and only if you can watch the market during the day. If you're not comfortable trading the short side, or in a bear market, then cash (U.S. Treasuries) is the place to be right now.

The setup as of tonight is very similar to the setup we had towards the end of December, which was followed by some pretty strong selling into the low on January 23rd.

1.2 Hope-filled Rally

If hope were a commodity I'd buy fistfuls of it during a bear market. Bear market rallies are almost always based on hope. Hope that we've found a bottom, hope that what was causing fear in the market has gone away, for good (think banks and further write-down worries) or hope that those nasty bears will get annihilated by the next surprise Fed rate cut. It's called the slippery slope of hope because so many investors hang onto hope as they watch their investments get cut down with another selloff.

Eventually of course the hope turns into a real rally and those who held on start to feel relieved that they were correct all along. But I've got friends who are still holding and hoping that their tech stocks will return to the year-2000 level when they bought them. It's the reason most will hold onto their investments all the way down into the basement section of Value Village (where they'll be buying their next wardrobe, not that there's anything wrong with that). How many analysts rode the tech dot bomb into the toilet before issuing a sell signal?

The deer-in-the-headlights reaction (freezing when you know you should be stopping yourself out of a bad trade) is a hopeful reaction--"if I don't do anything I just know it will reverse and I'll be able to get out even." Hope is a killer in the stock market--the moment you start hoping is the moment you should be out of your position. If you have a very good reason (at least to you) for holding onto a losing position then it's not hope that's keeping you in the trade. Hopefully (pun intended) that reason is based on sound technical reasons (fundamental reasons if you're a Very long term trader) and not the fingers-crossed variety.

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So the market has seen a bounce from the January lows and of course there are many analysts who are saying the market correction is over and that we're ready to rally. These are the same people who hope there are no more nasty surprises that will cause more credit contraction, bond write-downs, etc. It would be great if their hope comes true but the risks out there, especially in credit land, are currently too large to warrant staying invested based on hope. We need to see concrete evidence that the credit crisis is being resolved and unfortunately we're seeing just the opposite.

There is mounting evidence, as I and others have been warning about for well over a year, that the subprime mess will not stay contained within the subprime world. Prime mortgages are starting to see a spike in loan defaults and foreclosures. Credit card loans, auto loans, commercial loans and you-name-it loans are all seeing the same thing--there's just too much debt (that was packaged and sold to investors globally) and not enough income to pay it down.

I've been saying that the credit implosion will happen mind-boggling fast (relatively speaking--perhaps unwinding in two years, or less, what it took 10 years to build) and it will take the stock market down with it--fear will become pervasive. As I'll review in the charts, the price pattern is perched on the edge of a cliff here and we could be one step away from some very significant and relentless selling that takes hold of the market.

1.3 Economic reports

Today's reports included retail sales and the pre-market reaction to the report is what gave us our gap up this morning. Too bad the rally was over in less than 5 minutes. As you can see, tomorrow's reports will not be market moving.

Retail Sales
People were prepared for a dismal report so when the report instead showed a surprising uptick in sales, the market rallied more out of relief than anything else. Or at least the shorts covered first thing in the morning but then it wasn't followed by any real buying to push it higher.

January retails sales improved +0.3% vs. expectations for -0.3%. Auto sales provided the boost whereas sales in other areas were generally flat. Housing related sales (furniture, electronics, and building materials) were not surprisingly down.

The chart of retail sales shows a down trend since the peak in 2005, chart courtesy briefing.com:

I drew a little uptrend from the low in 2006 and you can see it was recently broken. January's bump higher may be nothing more than a test of its broken trend line. And you thought trend lines only worked on stock prices.

Business Inventories
Inventories increased +0.6% (which helps GDP) while sales declined -0.5% and that made for an inventory-to-sales ratio of 1.26 which is slightly higher than the previous month. But as the following graph shows, the inventory-to-sales ratio has been steadily declining since 1990, chart courtesy briefing.com:

A low I/S sales ratio is very good for businesses as it makes them lean and mean and better able to absorb an economic slowdown. It's a good thing because one is coming.

Crude Inventories
U.S. crude supplies rose 1.1M barrels to 301.1M, about a third less than expected. Gasoline supplies were up by 1.7M barrels and distillate stocks fell by 100K barrels. Capacity utilization rose to 85.1% from 84.3% the previous week.

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2.0 Equities

2.1 S&P 500 Index (SPX)

SPX chart, Daily

SPX has bounced back up to the top of its parallel down-channel and is setup for a turn back down. The significant thing about the price pattern is that the selloff could make the December-January decline look small. The way the pattern is set up, the next decline is likely to drop out the bottom of the parallel down-channel. So that's the risk if you're holding on "hoping" the rally will continue.

Notice the fractal pattern between the November-December bounce and the January-February bounce. The move up from the January low to the lower high today looks like the move up from the November low to the lower high towards the end of December, both at the top of the parallel down-channel. Another 250-point drop in the SPX would take it down to about 1125 by mid March. But the wave pattern suggests the drop could be stronger and faster than that.

But there remains some upside potential, shown in pink, for the rally to make it up to the downtrend line from October. Based on the pattern of the bounce off last week's low I don't particularly like the chances for that to happen but we'll let price lead the way. As noted on the chart, it would be at least short term bullish if SPX can press above 1396. Use a break below 1317 as the signal that something a lot more bearish may be in play.

Key Levels for SPX:
- Short term bullish above 1396
- Longer term bullish above 1460
- Short term bearish below 1317
- Longer term bearish below 1270

SPX chart, 60-min

You can see that the bounce off last week's low is of the sideways/up variety with overlapping highs and lows. This is what gives the bounce a corrective look. Today the rally stopped right at the bottom of the parallel up-channel from the January low where it crossed the top of the parallel down-channel for price action since October. Use a break of the short term uptrend line from Monday's low as the signal that the bounce is probably finished.

SPX chart, Weekly

For a wider perspective of where we are and why I say the selling could become strong and relentless. It's not out of the realm of possibilities to see the 7-year rally off the October 2002 low get retraced in a year's time. Sound too bearish? Consider the risks we're hearing about the massive credit problems and the systemic problems that could cause a collapse in the house of cards we call the banking system.

I like to use EW (Elliott Wave) counts to help me judge where the stock market is and where it could be heading and right now I've got a wave pattern that suggests strong selling is about to take hold. The news about the financial woes only reinforces my belief that there's a good chance it will happen.

2.2 Dow Jones Industrial Average (DOW)

DOW chart, Daily

The DOW's daily chart looks a little messier but I'm trying to show where the rally could be headed if it doesn't turn back down here. First of all notice that stopped at the top of the down-channel like SPX did. I've drawn in a Fib projection at 13253 for two equal legs up from the January low. That projection crosses the downtrend line from October on February 25th. That's also where the top of a bull flag (small parallel up-channel from January) crosses and that kind of correlation always gets my attention.

So again, if the rally can keep going from here, the key level at 12767 needs to get taken out for at least the short term bullish pattern (pink) to play out. But a drop below 12100 would spell trouble for the bulls.

Key Levels for the DOW:
- Short term bullish above 12767
- Longer term bullish above 13300
- Short term bearish below 12100
- Longer term bearish below 11634

DOW chart, 60-min

Same pattern as the SPX--price is getting pinched between the short term uptrend line from Monday and the underside of the broken parallel up-channel from January. I've noted the gap close at 12631 (from the gap down on February 5th) so there is the possibility that we'll see the market make a stab to close it. That could also give us a little "throw-over" above what appears to be a rising wedge--any jump above it and then drop back down inside would be a sell signal.

SPX doesn't show the same gap but the closing price on February 4th was 1380.82 (ES, the S&P 500 emini futures, closed at 1379.25).

2.3 Nasdaq-100 Index (NDX)

Nasdaq-100 (NDX) chart, Daily

The techs have been on a slightly different price path than the blue chips. The rally ended in October at the end of the month instead of the middle and the bounce started earlier in November and finished near the same time as the others in December. This has resulted in a slightly wider parallel down-channel and the top of the channel has not been tagged yet like the DOW and SPX. Its price pattern also supports a little higher in its current bounce to give us a rally off the January low with two equal legs up (or a little more) near 1886 (1880 on the 60-min chart, explained below) or perhaps up to the 1920 area.

If the broader market starts to sell off hard then it will be difficult for the techs to hang on. Either that or the techs will rally and the blue chips will start down before the techs, like they did in October. There are several possibilities but the NDX chart looks better for a continuation higher.

Key Levels for NDX:
- bullish above 1920
- bearish below 1715

Nasdaq-100 (NDX) chart, 60-min

The 60-min chart shows a closer view of the bounce off the January low. It looks more like a big sideways consolidation. For some reason the highs and lows are a little different on the intraday chart than the daily chart and the price projection for two equal legs up on the 60-min chart is just shy of 1880 (it may have to do with the need to combine the old and new NDX symbols in QCharts to get the continuous price chart). I trust the 60-min chart more.

Note gap closure from the gap down on February 5th would be at 1828.88. If price rallies above that then I'd look for a possible top near 1880. I've drawn in the top and bottom of what could be a developing sideways triangle (with the 'D?' label at the next low). That's just a guess at this point and I'll update this regularly on the live Market Monitor.

2.4 Russell 2000 Index (RUT)

Russell-2000 (RUT) chart, Daily

The RUT looks more like the DOW and SPX and it too stopped today at the top of its parallel down-channel. It has exactly the same setup here as the blue chips.

Key Levels for RUT:
- Short term bullish above 731
- Longer term bullish above 770
- Short term bearish below 688
- Longer term bearish below 650

Russell-2000 (RUT) chart, 60-min

The RUT has been slithering up underneath the bottom of its parallel up-channel from the January low. It stopped just shy of the top of its parallel down-channel from the October high. A little higher and it will be able to close its February 5th gap at 723.14.

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3.0 Selected Industry Groups

3.1 Banking Index (BIX), Daily chart

While the broader market has attempted to bounce off this week's lows, the banks have been sitting here like a lump on a log. There are a lot of nervous investors in banks and I don't blame them. They're waiting for the other shoe to drop but nervously hoping (there's that word again) that if they buy the banks here they'll be able to participate in a big relief rally. I think it's too early to be thinking long and I would need to see the banks break their recent high near 297 before I got bullish. In the meantime I think we'll see the banking index take another trip down to the bottom of the parallel down-channel.

BTW, keep an eye on MACD here--if price can rally back up it will get MACD crossing back up at the zero line. Coming down to the zero line and then crossing back up would be a bullish buy signal for the banks.

3.2 U.S. Home Construction Index (DJUSHB), Daily chart

Like the banks, the home builder index has been marking time this week. The daily candles can barely be seen on this chart. I expect another leg down and still think a final low might be found around the 213-216 Fib projections.

3.3 Transportation Index chart (TRAN), Daily chart

I'm hoping we'll see a minor new high for the Transports because it make a good ending pattern for the rally from January. The price pattern for the Trannies has been very difficult to figure out but now it's starting to make some sense here. As shown, the next move should be a strong selloff. A move above 4900 (approximate) would suggest more bullish things, especially since it would be a recovery back above its 50, 100 and 200 moving averages. But the 200-dma has been a brick wall since it broke below it last August.

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4.0 Currencies

4.1 U.S. Dollar (DXY), Daily chart

I haven't seen any evidence yet that suggests the dollar is going to follow the green path higher. Instead the price pattern looks like it will remain in a sideways triangle pattern for at least another month before dropping out of it and making a final low. But a rally above the start of the triangle pattern, 77.85, would negate the pattern and suggest the bullish price path is the right one.

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5.0 Commodities

5.1 Oil Fund and Index (USO and OIX)

Oil Fund (USO), Daily chart

Keep an eye on the dollar for clues for the commodities. Right now the bearish price pattern for oil says the H&S neckline near 68.80 will break (near 85 for oil). Obviously that would be negated with a rally to a new high above 79.09.

Oil Index chart, Daily chart

As goes oil and stocks, so go the oil stocks. It's when they go in different direction that things can get a little confusing. Oil has a potential H&S shoulders topping pattern and stocks have a bearish pattern. Therefore I expect that once the current bounce is finished (either here at the 50% retracement of its January decline or a little higher around 830) we'll see the oil stocks head lower again. It takes a break above 850 (approximate) to say something more bullish is happening (again probably in synch with both an oil and stock market rally, neither of which I expect to see).

5.2 Gold Fund (GLD), Daily chart

Gold is threatening to break down after not being able to make a new high this month (which silver was able to do). That might have been a truncated finish for gold. But I'm watching to see if it can turn back up and head for the 95-96 area (there's a Fib projection for gold at 966, April contract). A break below the 85.77 low in January would say the rally is finished and I believe we'll in for a long downward correction in gold.

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6.0 Bonds

6.1 10-year Note, Yield (TNX), Daily chart

Bonds have been consolidating since the spike up off the January low (in yields). This looks constructive for another rally in yields and then it will be a matter of trying to figure out how high and how long. I think 4.0%-4.3% is the range before yields turn back down.

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7.0 Summary

This is opex week and anything goes. But we're now heading into the tail end of opex and usually most of the squaring of positions has been taken care of by now (with the hope that sold options will simply expire worthless). It's only when there's a big move through high-open-interest strike levels that we will sometimes see an acceleration of the move as hedging exacerbates the selling/buying. So stay aware of the possibility for a big move even though Thursday and Friday of opex have generally been quiet days in the market.

By price patterns and trend lines I see the market as vulnerable to a selloff so be careful if you're long the market. We could get an early rally on Thursday that fails--I'd certainly look at a rally failure as an opportunity to test the short side of the market since it could be a very lucrative play that lasts more than a few weeks. I hesitate to even mention a "position" trade since this market has not been kind to those who don't take profits quickly from a winning trade. Reversals of reversals of head fakes seems to be the norm.

Bear markets are hard to trade but when you see a rally to resistance, if you like playing the short side, you need to take the setup. Declines can be swift and difficult to get in (always worrying about it flying back up against you). That's why I prefer picking tops--I can test it against the high and get out quickly if it presses higher again. I nibble at it until it works (or not--3 times and I figure I'm too early).

Here's a summary of the key levels noted under each of the daily charts:

Key Levels for SPX:
- Short term bullish above 1396
- Longer term bullish above 1460
- Short term bearish below 1317
- Longer term bearish below 1270

Key Levels for the DOW:
- Short term bullish above 12767
- Longer term bullish above 13300
- Short term bearish below 12100
- Longer term bearish below 11634

Key Levels for NDX:
- bullish above 1920
- bearish below 1715

Key Levels for RUT:
- Short term bullish above 731
- Longer term bullish above 770
- Short term bearish below 688
- Longer term bearish below 650

Good luck and I'll see you next Wednesday. Join us on the Market Monitor for live updates in this difficult trading environment.
 


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New Plays

New Option Plays

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

Play Editor's Note: The bulls are putting on a good show for us this week but we're not adding any new plays tonight. We are seeing some bullish candidates in the steel/iron/metals sector and the oil service stocks.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - close: 124.86 change: -4.59 stop: see details

It would be natural for AAPL bulls to be scratching their heads in puzzlement at today's relative weakness. AAPL did lose 3.5%. Yet we warned readers yesterday that the stock was challenging resistance and was probably due for a minor retracement. Our biggest concern today was the bearish engulfing candlestick pattern. The dip to $125 could be used as a new bullish entry point. However, at this time, we would wait to see if shares slip any further into the $122-120 zone and look for a bounce there as a new entry point.

AAPL play #1 - directional calls

The directional call play on AAPL took something of a beating given the sharp decline. Look for a dip and then a bounce in the $122-120 zone as a potential entry point for new positions. We are suggesting a stop loss at 116.99 under last week's low. More conservative traders may want to use a stop closer to $120.

AAPL play #2 - Credit put spread

Today's pull back provides a better entry point to open new credit put spreads but tomorrow might be a better entry point if AAPL dips toward $120. The options we suggested were buying the March $110 put and selling the March $120 put.

AAPL play #3 - Sell Naked Puts

Wait for signs of a bounce before considering new naked put positions. We had suggested selling the March $150 put with plans to buy it back when AAPL hits $139.00.

Picked on February 10 at $125.48
Change since picked: - 0.61
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 44.4 million

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Apollo Group - APOL - close: 72.93 chg: -0.10 stop: 69.95

In some of APOL's short-term technical oscillators we're starting to see more weakness Yet until APOL breaks support we don't see any changes to our strategy. We would use any dip near its rising 100-dma (72.04), which is technical support, as a new bullish entry point to buy calls. Actually any dip in the $72.00-70.50 zone is probably a good spot to buy calls but if APOL is under $71 wait for signs of a bounce before jumping in. Our target is the $80.00-81.00 range.

Picked on February 10 at $ 73.94
Change since picked: - 0.91
Earnings Date 04/07/08 (unconfirmed)
Average Daily Volume = 3.1 million

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CONSOL Energy - CNX - cls: 76.98 change: -3.98 stop: 73.85 *new*

Ouch! Shares of CNX just got slammed today with a 4.9% decline following yesterday's breakout to new highs. It looks like the culprit was a disappointing earnings report from coal producer ANR. Traders used the news as an excuse to lock in profits across the industry. Normally one might consider the pull back toward $75 and the 10-dma in CNX as a potential entry point for new call positions. However, today's session has painted a very clear bearish engulfing candlestick pattern, which is normally seen as a one-day bearish reversal pattern. This is definitely a warning for the bulls that this group isn't quite as strong as they thought it was. We would use a bounce from here as a new bullish entry point. Please note that we are raising the stop loss to $73.85. More aggressive traders may want to leave their stop under support near $70.00. We have two targets for CNX. Our first target is the $84.50-85.00 range. Our second, more aggressive target is the $88.00-90.00 zone. The P&F chart has a brand new triple-top breakout buy signal with a $124 target.

Picked on February 10 at $ 77.54
Change since picked: - 0.56
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.3 million

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Monsanto - MON - cls: 115.05 change: +1.02 stop: 107.85

All the fertilizer stocks popped higher this morning thanks to news from MON. The company raised their earnings guidance from $2.50-2.60 per share to $2.70-2.80 per share compared to Wall Street estimates of $2.81 a share. There appeared to be a mix of analysts comments. Some analysts were bullish on MON's herbicide sales and the company's international business. While another analyst worried that the rising cost of wheat will prompt more farmers to plant wheat instead of corn, which will negatively impact MON who makes more on farmers planting corn (see note below). Shares of MON gapped open at $118.09 and traded to $119.95 before giving back most of its gains. We were suggesting a trigger to buy calls at $117.05 so we would have been triggered at the opening bell ($118.09). Look for signs of a bounce before jumping into new call positions. Short-term a dip into the $112.50-110 zone would look like a new bullish entry point. We have two targets. Our first target is the $127.00 level. Our second target is the $137.00-140.00 range. As we discussed earlier a move over $118 triggered a new P&F chart buy signal, which now forecasts a $157 price target. These have been very volatile stocks so readers should consider them aggressive, higher-risk plays. FYI: MON is presenting at the Morgan Stanley Basic Materials Conference 2008 on February 21st.

Note: We have heard some chatter today about the USDA agricultural projections for 2008/2009 and how U.S. farmers are planting less corn and more wheat. This is a potential negative for the fertilizer companies since wheat requires significantly less fertilizer than corn. However, these fertilizer companies are seeing huge business overseas and many of the phosphates and similar materials are still sold out or seeing shortages here in the U.S.

Picked on February 12 at $118.09 *gap higher entry
Change since picked: - 3.04
Earnings Date 04/03/08 (unconfirmed)
Average Daily Volume = 7.1 million

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Mosaic - MOS - close: 100.41 change: +0.88 stop: 89.45

Shares of MOS gapped open higher thanks to the bullish earnings guidance from rival MON this morning. This positive trend was further fueled by bullish comments from MOS at their investor presentation at the AgForum this morning. We were suggesting a trigger to buy calls at $101 so this morning's open at $101.83 is our new entry point. The afternoon sell-off looks like a new bullish entry point. Broken resistance in the $100-101 zone should be new support. If you prefer then wait for signs of a bounce first. If MOS surprises us and turns lower tomorrow then look for a dip or bounce in the $97-98 region as a potential entry point to buy calls. We have two targets. The first target is $109.75, just under the January highs. Our second, more aggressive target is the $118.00-120 zone. These are very volatile stocks with a lot of intraday spikes so we're playing with a very wide stop loss. More conservative traders may want to use a tighter stop in the $94-95-96 zone. We would consider this a more aggressive, higher-risk play.

Note: We have heard some chatter today about the USDA agricultural projections for 2008/2009 and how U.S. farmers are planting less corn and more wheat. This is a potential negative for the fertilizer companies since wheat requires significantly less fertilizer than corn. However, these fertilizer companies are seeing huge business overseas and many of the phosphates and similar materials are still sold out or seeing shortages here in the U.S.

Picked on February 12 at $101.83 *gap higher entry
Change since picked: - 1.42
Earnings Date 04/09/08 (unconfirmed)
Average Daily Volume = 5.8 million

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Petroleo Brasileiro - PBR - cls: 113.75 chg: -1.35 stop: 104.95

An intraday breakout over resistance near $116 was enough to trigger our bullish call play on PBR. Unfortunately, the market's rally faded and PBR faded with it. Shares gave back all of their gains and lost 1.1% on the day. A rebound from here would look like a new bullish entry point but we would prefer to wait and see if shares dip and bounce near $110, which would be a more attractive entry point at this time. Our target is the $128.00-130.00 range. The move over $116 has produced a new Point & Figure chart buy signal. Actually it is a quadruple-top bullish breakout buy signal with a $138 target. FYI: Another risk is PBR's earnings report. We can't find an earnings date and they normally report in mid February. That is a risk because we do not like to hold over an earnings report.

Picked on February 12 at $116.00 *triggered
Change since picked: - 2.25
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 7.6 million

---

Potash - POT - close: 149.28 change: +5.20 stop: 136.99

It was another strong day for POT. The stock gapped open higher at $147.00 thanks to bullish earnings comments from rival MON. We were suggesting a trigger to buy calls at $147.50 so the play is now open. POT hit $154.63, a new all-time high, before paring its gains this afternoon. We are going to go ahead and list two targets. Our first target is the $158.00-160.00 range. Our second, more aggressive target is the $168.00-170.00 zone. More aggressive traders may want to aim significantly higher. The Point & Figure chart is forecasting a $222 target. Again, this is a very volatile stock. Readers should consider it an aggressive, higher-risk trade. Aggressive traders could put their stop under the 50-dma. We're going to try and get away with a stop loss under Monday's low.

Note: We have heard some chatter today about the USDA agricultural projections for 2008/2009 and how U.S. farmers are planting less corn and more wheat. This is a potential negative for the fertilizer companies since wheat requires significantly less fertilizer than corn. However, these fertilizer companies are seeing huge business overseas and many of the phosphates and similar materials are still sold out or seeing shortages here in the U.S.

Picked on February 12 at $147.50 *triggered
Change since picked: + 1.78
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 5.9 million
 

Put Updates

Ambac Fincl. - ABK - cls: 8.90 change: -1.58 stop: n/a

News that Warren Buffett was willing to buy the municipal bond businesses from the bond insurers may have fueled the market rally but it did not help stocks like ABK and MBI. Shares of ABK slipped 15% and broke down under support near $10.00. If you were looking for the stock to make a move out of its recent sideways consolidation this looks like the signal. Currently we are suggesting the May puts and a speculative out of the money March call as a hedge to protect us if a bailout deal does get done. Many on Wall Street expect something to occur this week but it could drag out to next week. The options we suggested were the May $5 or $2.50 puts and the March $20 call.

Picked on January 27 at $ 11.54
Change since picked: - 2.64
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

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Avalonbay - AVB - close: 93.70 change: +4.64 stop: 95.05

The volatile REIT stocks continued to produce some big swings. Yesterday AVB broke down under support. Today the stock completely reversed higher with a 5.2% move, fueled initially by some short covering. The Buffett bid for the municipal bond business sparked a rally in financials and shorts panicked in the REITs. We warned readers that AVB had above average short interest. If you did open positions this morning you may want to close them given today's rally past its 50-dma. We are not suggesting new positions at this time unless AVB reverses back under $90 again. Our target is the $81.50-80.00 zone. A big risk with AVB is the above average short interest. The most recent data puts short interest at 12% of the 70 million-share float. Depending on which figure you use for "average" volume this equates to about 6.5 to 9.0 days of short interest and raises the risk of a short squeeze.

Picked on February 11 at $ 89.06
Change since picked: + 4.64
Earnings Date 02/06/08 (confirmed)
Average Daily Volume = 1.2 million

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Bear Stearns - BSC - cls: 78.93 chg: -0.83 stop: 84.31

BSC also reacted negatively today and the stock continued to slip lower under support near $80.00. The initial pop this morning failed at $82.00. Our target is the $71.00-70.00 zone. Our biggest risk is that a bailout plan for the bond insurers does get done (and probably this coming week). If plan is announced and the street thinks it has a good chance of actually coming to pass then shares of BSC are bound to rally sharply due to its exposure to the sub-prime mess.

Picked on February 11 at $ 79.49 *triggered
Change since picked: - 0.56
Earnings Date 03/13/08 (unconfirmed)
Average Daily Volume = 7.4 million

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FedEx - FDX - close: 88.10 change: -0.35 stop: 92.05

Shares of FDX tried to rally again today but produced a mini-double top, which is bearish, near $89.65 today. This looks like another entry point to buy puts. Of course FDX and the transports might rally tomorrow morning if the weekly oil numbers show another strong build up of inventories. We would expect any bounce to be temporary. There is potential support at $86 but our target is the $81.00-80.00 zone.

Picked on February 10 at $ 88.00
Change since picked: + 0.10
Earnings Date 03/20/08 (unconfirmed)
Average Daily Volume = 3.2 million

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W.W.Grainger - GWW - close: 75.85 chg: -0.52 stop: 80.05

This morning before the opening bell GWW reported that January 2008 sales were up 8% versus 2007. This sounds like good news but the stock failed to react on it. The trend continues to look bearish. We would expect any rebound to roll over in the $77.50-80.00 zone so look for a failed rally as a new entry point to buy puts. Another alternative would be to wait for a breakdown under support at $75.00. Our target is the $70.75-70.00 zone.

Picked on February 10 at $ 76.65
Change since picked: - 0.80
Earnings Date 04/16/08 (unconfirmed)
Average Daily Volume = 1.0 million

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iShares DJ Financial - IYF - cls: 87.73 chg: +1.02 stop: 93.01

The IYF managed a bounce fueled by the Buffett-driven rally in financials. However, it is worth noting that the bulls struggled with the $89 level twice today. We remain bearish and another failed rally in the $89-90 zone could be used as a new entry point. We're aiming for a test of the $80.00 region. Our official target is the $81.00-80.00 zone.

Picked on February 06 at $ 88.62
Change since picked: - 0.89
Earnings Date 00/00/00
Average Daily Volume = 1.1 million

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MBIA Inc. - MBI - close: 11.50 change: -2.08 stop: n/a

MBI also got hammered for a 15% decline. The offer by Warren Buffett to buy the best part of the bond insurers, the municipal bond business, was not received well by shareholders. Shares of MBI definitely look like they are headed lower. Currently we are suggesting the May puts and a speculative out of the money March call as a hedge to protect us if a bailout deal does get done. Many on Wall Street expect something to occur this week but it could drag out to next week. The options we suggested were the May $7.50, $5.00 or $2.50 puts. We recently added a deep out of the money call, the March $22.50 call, as a hedge in case a rescue plan does get announced and the stocks react to it.

Picked on January 27 at $ 14.20
Change since picked: - 2.70
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 15.2 million

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Myriad Genetics - MYGN - cls: 38.30 chg: -0.35 stop: 43.01

We don't see any changes from our previous comments. MYGN continues to look bearish here. The stock did not move on the strength in the DRG drug index and the BTK biotech index is still languishing near its lows. Our target is the $36.00-35.00 range. More aggressive traders may want to aim lower. The Point & Figure chart is bearish with a $34 target. FYI: We always consider a biotech stocks to be a more aggressive, higher risk play because you never know when an FDA decision will be released or some clinical trial info will come out that could send the stock moving sharply either direction.

Picked on February 07 at $ 39.75 *triggered
Change since picked: - 1.45
Earnings Date 02/05/08 (confirmed)
Average Daily Volume = 801 thousand

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Sears Holding - SHLD - cls: 99.07 chg: -2.00 stop: 100.25

We seriously considered new put positions in SHLD right here. The stock under performed the market and its peers and gave back most of yesterday's gains. However, the company is due to present tomorrow at an investor conference. While we don't expect any surprises we're going to wait. Currently our official entry point to buy puts is at $94.75. If triggered at $94.75 our target is the $86.00-85.00 range. We do not want to hold over the end of February (unconfirmed) earnings report.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/28/08 (unconfirmed)
Average Daily Volume = 3.0 million

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Simon Properties - SPG - cls: 86.07 chg: +2.47 stop: 90.61

The REIT stocks popped higher with the market this morning but the rally in SPG stalled near $86.50 multiple times. That doesn't mean it's not going higher tomorrow but the bulls have their work cut out for them. Look for a failed rally near its 50-dma (88.25) or the $90 level as a new bearish entry point to buy puts. Our target is the $76.00-75.00 range.

Picked on February 07 at $ 84.39 *triggered
Change since picked: + 1.68
Earnings Date 02/01/08 (confirmed)
Average Daily Volume = 2.7 million
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

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DJIA 1/100 Index - $DJX - cls: 123.73 chg: +1.33 stop: n/a

We are down to our last three days before February options expire. Due to this time frame we are now adjusting our suggested sell target to $4.00. Keep an eye on those puts. We are not suggesting new strangle positions at this time. The options we suggested were the February $127 calls (DJW-BW) and the February $122 puts (DJW-NR). Our estimated cost was $3.36.

Picked on January 29 at $124.80
Change since picked: - 1.07
Earnings Date 00/00/00
Average Daily Volume = million

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Google - GOOG - close: 518.09 chg: - 3.07 stop: n/a

It looks like the rebound in GOOG is running out of steam. Shares plunged from the high near $530 to an intraday low of $513 before bouncing back. We're still in trouble here with just three days to go and option expiration on Friday. Even if GOOG started trading lower again odds are pretty good that it would be pegged at the $500 strike price for expiration on Friday. We need to start selling on any dips into the $510-500 zone. We are not suggesting new positions. The options we suggested were the February $600 calls (GOO-BT) and the February $500 puts (GOP-NO). Our estimated cost was $17.00. We want to sell if either option hits $24.00 or more.

Picked on January 30 at $548.27
Change since picked: -30.18
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 5.6 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.

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