Option Investor

Daily Newsletter, Monday, 03/10/2008

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Table of Contents

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

Market Wrap

Financials Get Clocked

Many investors were expected to be grumpy this morning after losing an hour of sleep to daylight savings time, but a sharp decline in China's trade surplus and negative news flows regarding banks and brokers set a negative tone that accelerated into the close with a rise in U.S. wholesale inventories.

Asian markets set a negative tone when mainland China's Shanghia Composite ($SSEC) fell 154 points, or -3.59% to 4,146 after the country's government said its trade surplus plunged 63% in February, to a one-year low, as Chinese exporters experienced weaker demand from the United States and Europe.

China's General Administration of Customs said the country's trade surplus fell to $8.6 billion, about one-quarter of the $23.7 billion surplus recorded in February last year.

According to the breakdown released by the customs agency, China imported $78.8 billion worth of goods and services, 35% more than in the previous year. Exporters, however, only saw a 6.5% growth in shipments, to $87.4 billion.

Economists attributed the 63% drop in the trade surplus not only to evidence of a global economic slowdown, but unusually harsh snowstorms in China that caused shortfalls in electricity generation, forcing some factories to shut their production lines and postpone shipments.

China's trade surplus with the European Union, its biggest trading partner, narrowed by 15% to $10 billion year-on-year, while it surplus with the United States registered a 23% year-on-year decline to $9.4 billion.

Golman Sachs economists Yu Song and Hong Liang told clients they pay more attention to the combined January-February surplus, which remained significant at $28 billion.

Still, the news rocked parts of Asia with the iShares Malaysia (NYSE:IWM) suffering the most, falling $1.36, or -11.37% to $10.60 on heavy volume of 5.6 million shares.

Additional economic data out of China showed consumer inflation rose 7.1% in January, its highest level in 11 years.

The six-month old inflation spike has been limited mostly to food, which monetary policy has difficulty addressing, but wholesale price data released showed costs of industrial raw materials rose 6.6% in February, the fastest rate in more than three years.

Table- Global Equity Indices, Dollar Index, USO and GLD

From the major global equity indexes I follow on a week-to-week basis, and so far this year (2008 YTD) it would be difficult to say if a slowdown in the U.S. is dragging other benchmarks lower, or if we're simply seeing aversion to global equities.

The strong bid for oil persists and continues to perplex traders, investors and would-be economists that look for the black gold's price decline to confirm a global economic slowdown. Some continue to cite China's stocking of its Strategic Petroleum Reserve as bolstering oil's price.

Closing U.S. Market Watch -

Economic data released today had the Commerce Department saying total wholesale inventories for January rose 0.8% from December's 1.1% gain. January's rise was above economists' forecast for a 0.5% gain.

A look inside January's figures had inventories of furniture and home furnishings up 1.9% from December, while inventories of machinery, equipment and supplies rose 0.9%. End-of-month inventories of nondurable goods increased 1.2% from December and were up 14.9% compared to last January. Inventories of farm product raw materials were up 5.7% from last month and inventories of apparel, piece goods, and notions were up 2.1%.

January's inventory/sale ratio fell to 1.07 from a year-ago ratio of 1.16.

The Securities/Broker Dealer Index (XBD.X) 160.91 -4.65% was notably weak again today.

Bear Stearns (NYSE:BSC) $62.50 -10.81% lead the way lower and traded as low as $60.26 on rumors that the investment bank, a big underwriter of mortgage-backed securities, could be facing a liquidity crisis.

Bear Stearns (BSC) - $2 and $1 box chart

Ace Greenberg, chairman of Bear Stearns' executive committee, dismissed the speculation as "totally ridiculous". The ONLY reason I (Jeff Bailey) see a reason to BUY shares of BSC is if a trader/investor is SHORT the shares as it nears ANOTHER bearish vertical count of $60.00 (this time).

On February 21, a bar chart would show BSC traded up to $85 (see column of X from $80 to $85) and on February 22, traded as low as $80.21 (see column of O from $84 to $81) where after the "buy signal" at $85, that would have been a higher low, perhaps a signal that some demand was starting to return for the stock.

However, the eventual rise to $89, and long column of O from $88 to $75, where the sell signal at $80 generated another bearish vertical count continues to suggest to me that the rallies we're seeing in BSC, if not broader financials is formidable short-covering, and when the shorts have bought back some of their positions to lock in gains, and move to the sidelines, the demand from new bulls isn't there. Thus the "buy the dip and sell the rip" remains the mantra.

The S&P Banks Index (BIX.X) 223.87 -2.56% showed even the more regional banks remained under pressure and after closing just above their 01/22/08 intraday low of 228.54 on Friday, negative comments out of Citigroup (C) regarding further write-downs weighed on the group.

S&P Banks Index (BIX.X) - Weekly Intervals

Friday's close wasn't bullish by any means and the inability to hold a close, even on Monday, above 228.54 would have me assessing further downside to the March 2000 low of 212, which gets close to the mathematically derived MONTHLY S2 (support 2) at 213.82.

In this weekend's Market Monitor at OptionInvestor.com I was reviewing some charts of Treasury yields as well as the S&P Depository Receipts (SPY) and I must say I'm wasn't seeing too many signs of any type of "market bottom" developing at Friday's close.

One thing I did mention last week, which I'm showing in the BIX.X chart tonight is where I used conventional retracement on the BIX.X, not from the Oct'07 relative high, but from its all-time high.

Then as if to mark "the bottom" in the BIX.X at its 1/22/08 intraday low, a day where we saw intraday lows in the majors (except for NDX/QQQQ on 1/23/08), I now add a "-19.1%" fibonacci level. What that may reveal near-term is that the BIX.X has some correlative DOWNSIDE to the mathematically derived QUARTERLY S2 of 192.00.

One of the reasons I began using MONTHLY Pivot levels was in the event a stock, or index began violating to the upside, or downside as the case is with the BIX.X some of the more conventional 0% fibonacci levels.

We can see from the BIX.X that indeed some very "old" levels of historical lows like the October 2002 low does find some technical buying, I (Jeff Bailey) think it rather unlikely that there are "old bulls" using an October 2002 low to further liquidate positions they've held dating that far back in time.


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The more "technical nature" of support most likely comes from BEARISH short-covering. In essence ... "if found a bottom there before, and just in case that's the bottom again, I should take some profits."

Then, once that level gets violated on a closing basis, further liquidation comes as does shorting.

For now, I would have to say it would take a FRIDAY, or end of WEEK close back above 264 at a MINIMUM to think bullish the banks.

Now I want to touch on some observations I began making late Friday evening, Saturday morning in the OptionInvestor.com Market Monitor.

What I was actually doing was reviewing some things for MYSELF in order to try and grasp the technicals at hand. Not only for the equity markets, but the interest-rate sensitive markets like Treasury yields themselves.

Due to horizontal width limitations, I'm not able to show some of the charts I displayed in the Market Monitor, but I'll do my best with a MONTHLY Interval chart of the S&P Depository Receipts (SPY) $127.57 -1.64% to give a bar chart "big picture look."

S&P Depository Receipts (SPY) - Monthly Intervals

I was making some historical notes as to Fed rate cuts and then the eventual Fed rate hikes in order to get a feel and observation for how the SPY traded during the last recession and then expansion, and it was rather clear that the "Greenspan Fed" was certainly looking at the economic data and responding to that data as it eased and then hiked rates.

Not surprisingly though, the SPY itself, perhaps a depicter of the U.S. economy turned LOWER before the Fed started seeing sign of economic slowing, and the SPY turned HIGHER before the fed started seeing sign of economic strength, thus raising rates.

Now, even on a MONTHLY interval chart, with 21-pd (21-month), 50-pd (50-month) we see some SIMILARITY today as to the 2001 downturn.

On the above chart I'm only marking as "(A)" a relative low from October 2004 and the week of trade encompassing 09/11/2001, a day that may have changed the world as we knew it, to observe that how even during extreme times of stress and panic, buyers will look at a longer-term inflection point to buy weakness. But once that relative low is taken out, as was the case in July 2002, the break of the relative low can find notable selling declines.

The "dark purple" retracement from $157.52 to $126.00 would be the retracement that I've been showing in several market wraps as the "current near-term range" of decline from the recent October highs to the January 22, 2008 intra-day low.

One observation that I think is important as to the DARK PURPLE and the PINK retracement was the "overlapping" of retracement at the $132.00 level. In my technical opinion, that becomes a BIG HURDLE for bullishness. In essence, it represents a LEVEL OF SUPPORT that was holding for several WEEKS, where now it has been BROKEN TO THE DOWNSIDE, thus a level of FORMIDABLE RESISTANCE.

Now lets "zoom out" a bit and look at a WEEKLY Interval chart, which again, I'm limited by horizontal width, so I'll show a "that was then" chart of the SPY during the last recession, and eventual expansion.

SPY 3/19/2000 to 5/16/2004 - Weekly Intervals

There are several observations a technician can make, but a rather obvious one to me was how the 21-pd and 50-pd "cross-over" points really seemed to mark turning points for decline/contraction and advance/expansion.

What was also notable was that as the SPY fell from "the high" of $155.75 to that 09/16/01 low of $93.80 (PINK retracement), the rally stalled at 38.2% retracement.

Now here's what I'm looking at in the SPY, where the last several weeks we observed some consolidation, where the RESOLUTION to that congestion and attempted base building is to the downside.

SPY - Weekly Intervals

Long-time subscribers would know that if the financials were breaking out to the UPSIDE I'd be saying "buy the SPY" as the financials are probably the "most key" equity sector for the SPY.

However, the financials and BIX.X specifically are BREAKING DOWN further.

And the SPY certainly looks to be FOLLOWING.

With Dorsey/Wright & Associates' S&P 500 Bullish (BPSPX) in "bear confirmed" status at 24.10%, this indicator tells us that only 24.10%, or roughly 120 of the 500 stocks comprising the S&P 500 still show a point and figure buy signal associated with their charts.

In January, this widely followed indicator of internal supply/demand fell to a low measure of 14.00% on its chart and would currently suggest the SPY's PRICE lows will are vulnerable to being BROKEN to the DOWNSIDE and a DEFENSIVE market posture is warranted.

New Plays

New Option Plays

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

Play Editor's Note: If you missed my comments from the weekend, please go back and read them. My bias is bearish but I'm expecting a bounce near the January intraday lows on the DJIA and the S&P 500. The DJIA has about another 100 points to go while the S&P 500 is pretty much right there near its January lows. At the same time the VIX continues to inch higher and we're seeing more signs that the market could be very close to a short-term bottom. My biggest worry is that we are very close to another capitulation day where the volume is huge and volatility spikes. When this event occurs it is normally a great entry point for bullish positions and our puts are going to suffer! Think twice about opening new bearish positions. There is no guarantee the washout will happen soon but it's going to happen sooner rather than later.

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Ingersoll Rand - IR - close: 41.22 change: -1.65 stop: 39.74

The market continues to slide and investors are looking for stocks to sell where they can still lock in a gain. IR fit the bill after last week's relative strength. We cautioned readers over the weekend that they may have wanted to wait for a dip into the $42.00-41.00 region. IR actually gapped open lower at $41.94 not the $42.90 that many quote services are listing. IR is now testing short-term support near $41.00 but we don't expect it to hold. Wait for the stock to slip to its 50-dma around $40.50 or dip to the $40.00 region before considering call positions. Better yet wait for the bounce to start before considering call positions. There is potential resistance near $45.00 and its 100-dma but our target is the 47.00-47.50 zone.

Picked on March 09 at $ 42.87
Change since picked: - 1.65
Earnings Date 04/28/08 (unconfirmed)
Average Daily Volume = 5.5 million


Yahoo! Inc. - YHOO - close: 28.51 change: -0.52 stop: n/a

Last week one of the rumors was that YHOO was talking with News Corp. as an alternative to merging with Microsoft (MSFT). That dream was shattered today as News Corp. management said they were not going to get into a bidding war with MSFT. Shares of YHOO traded lower on the session. We need to see a higher bid from MSFT before March expiration (unless you've bought the April calls). This remains a very risky, aggressive bet. Our suggested calls were the March $30 or March $32.50 strikes. If you want to speculate now we would choose the April strikes. MSFT's current bid is $31 a share and the street expects that they will raise their bid into the $33-35 zone.

Picked on February 17 at $ 29.66
Change since picked: - 1.15
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 54 million

Put Updates

Ambac Fincl. - ABK - cls: 7.29 change: -2.21 stop: n/a

What the market giveth the market can taketh away! Yes, the +20% move that was widely reported in ABK on Friday has been reversed with a sharp drop lower again. Our readers know that the trade at $9.50 was actually after hours on Friday. Financials continue to poison the markets and investor psychology. ABK helped lead the group lower after a Citigroup analyst issued negative comments on last week's $1.5 billion sale by ABK to raise funds. We are not suggesting new positions at this time. This remains a very speculative play. We will definitely hold over the April earnings if we get the chance. Previously we had been suggesting the May out-of-the money puts ($5.00 and $2.50 strikes) and an optional speculative out-of-the money March ($20) call as a hedge should a bailout plan come to pass.

Picked on January 27 at $ 11.54
Change since picked: - 4.25
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million


Cytec Ind. - CYT - close: 53.94 chg: -0.78 stop: 58.15

CYT continues to slip following Friday's breakdown. We don't see any changes from our weekend comments. The P&F chart is bearish with a $48 target. We don't have the best risk:reward ratio with our wide stop loss but $58 is the nearest resistance. The $50.00 level looks like nearest support so we are targeting a drop into the $50.25-50.00 zone.

Picked on March 09 at $ 54.72
Change since picked: - 0.78
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 601 million


Express Scripts - ESRX - cls: 58.78 chg: +0.27 stop: 63.55

ESRX displayed some relative strength today. Shares actually closed higher amidst a sea of red. The trend is still bearish. We would still consider new put positions (only after you have considered the play editor's notes) here or on a failed rally near $60.00. It looks like it's time for another leg lower. We are listing two targets. Our first, short-term target is the $55.50-55.00 zone. Our second, more aggressive target is the $51.50-50.00 zone. Currently the P&F chart is bearish with a $54 target. FYI: The most recent data listed short interest at 3.8% of the 251 million-share float, which is about 3.4 days worth of short interest.

Picked on March 09 at $ 58.51
Change since picked: + 0.27
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 3.7 million


FedEx - FDX - close: 84.97 change: -1.73 stop: 90.05

FDX has now broken support at $86.00 and shares hit our suggested trigger to buy puts at $85.95. The play is open. Our target is the $80.50-80.00 zone. We are playing with a relatively wide (aggressive) stop loss at $90.05. You may want to use a tighter stop. Currently the P&F chart is bearish with an $82 target. FYI: The most recent data lists short interest at 3% of the 289 million-share float.

Picked on March 10 at $ 85.95 *triggered
Change since picked: - 0.98
Earnings Date 03/20/08 (unconfirmed)
Average Daily Volume = 3.1 million


Harley-Davidson - HOG - close: 34.68 chg: -0.37 stop: 40.26

HOG has now broken support near $35.00 and hit new multi-year lows. Our suggested entry point to buy puts was at $34.69. The play is open. Our target is the $30.50-30.00 zone although it wouldn't surprise me to see a drop closer to $25. The P&F chart is bearish with a bearish triangle breakdown sell signal. FYI: The most recent data lists short interest at 9.6% of the 236 million-share float. That is an above average amount of short interest and raises our risk of a short squeeze.

Picked on March 10 at $ 34.69 *triggered
Change since picked: - 0.01
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 3.1 million


iShares Transportation - IYT - cls: 79.08 chg: -1.47 stop: 82.55

Another big move higher in crude oil (to $108/bbl) is pushing transports lower. The IYT confirmed its breakdown under $80.00 and reinforced the move with a failed rally at its 50-dma. Our suggested entry point to buy puts was at $79.25. The play is open. Our target is the $75.00-74.00 zone. The IYT might find short-term support near $77.50 but it should only be temporary. The Point & Figure chart is bearish with a catapult breakdown sell signal and a $75 target.

Picked on March 10 at $ 79.25 *triggered
Change since picked: - 0.17
Earnings Date 00/00/00
Average Daily Volume = 1.7 million


MBIA Inc. - MBI - close: 10.77 change: -1.22 stop: n/a

MBI lost more than 10% on Monday. We're surprised the stock wasn't lower given the shenanigan MBI tried to pull after the closing bell on Friday. MBI asked ratings agency Fitch to stop rating some of MBI's businesses. MBI appears to be on the verge of breaking under the $10 level. We're not suggesting new bearish positions at this time. We had been suggesting the out-of-the-money May puts (7.50, 5.00 and 2.50 strikes) and an optional March $22.50 (or $20.00) call as a hedge in case a bailout plan for the bond insurers does get done. We will definitely hold over the April earnings if we get the chance.

Picked on January 27 at $ 14.20
Change since picked: - 3.43
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 15.2 million


3M Co. - MMM - close: 75.48 change: -1.03 stop: 80.25

The weakness in MMM continues. The stock is nearing potential round-number support at $75.00. Readers should expect a bounce but a failed rally in the $77.00-79.00 zone can be used as a new entry point for puts. We have set two targets. The first target is the $72.25 level, just above the January 2008 lows. Our second target is the $68.00 level, which should be closer to the bottom edge of MMM's bearish channel. The P&F chart is currently bearish with a $62 target. FYI: The most recent data lists short interest at just 1.5% of the 707 million-share float.

Picked on March 09 at $ 76.51
Change since picked: - 1.03
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 4.3 million


NII Holdings - NIHD - close: 34.40 change: -2.57 stop: 40.05*new*

Target exceeded! Shares of NIHD got clobbered today. The stock sank to new multi-year lows and ended with a 6.9% loss. Our first target was the $35.50-35.00 range. Our second, more aggressive target is the $31.00-30.00 zone. We are adjusting our stop loss to $40.05. The Point & Figure chart is bearish with a $19 target. FYI: The latest data lists short interest at 3.8% of the 171.7 million-share float, which is only about 1.5 days worth of short interest.

Picked on March 04 at $ 38.95 *triggered
Change since picked: - 4.55
Earnings Date 02/27/08 (confirmed)
Average Daily Volume = 3.3 million


Praxair Inc. - PX - close: 77.74 chg: -1.36 stop: 81.05

Shares of PX were actually upgraded today but the news did not stop the weakness. Shares continued lower and broke down under the $78.00 level of support. Our suggested entry point to buy puts was $77.90 so the play is now open. Our target is the $73.00-72.50 zone. More aggressive traders could aim for $70.00 near its January lows. The P&F chart is bearish with a $73 target. FYI: The most recent data lists short interest at just 1% of the 312 million-share float.

Picked on March 10 at $ 77.90 *triggered
Change since picked: - 0.16
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 2.4 million


Everest Re Group - RE - close: 93.14 chg: -0.71 stop: 100.35

RE actually tried to rally midday but the rebound faded near $95.00. If shares weren't already so close to our targets this would look like a new entry point for puts. We are adjusting our stop loss to $98.26. The stock has already hit our first target at $93.50. The intraday low on Friday was $92.50. Our second, more aggressive target is the $91.00-90.00 zone. FYI: The P&F chart is bearish with a $74 target.

Picked on February 28 at $ 97.93 /1st target surpassed 92.66
Change since picked: - 4.79
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 487 thousand


Sears Holding - SHLD - close: 91.00 change: -1.36 stop: 100.51

SHLD is still sinking. The stock lost another 1.4% today. We don't see any changes from our previous comments. The stock could bounce near round-number support at $90.00 but we would expect it to be temporary. Our target is the $85.50-85.00 zone. There are a lot of investors who believe SHLD is going lower. The most recent data puts short interest at more than 19% of the 65 million-share float. That is almost 7 days worth of short interest. Naturally that raises our risk of a short squeeze.

Picked on March 06 at $ 94.00 *triggered
Change since picked: - 3.00
Earnings Date 02/28/08 (confirmed)
Average Daily Volume = 2.8 million


Wynn Resorts - WYNN - close: 91.41 chg: -1.41 stop: 100.51

We don't see any changes from our weekend comments. WYNN continues to look vulnerable here. The June 2006 low is near $85.50. We are listing a target in the $86.50-85.00 zone. Traders need to be prepared for a bounce near round-number support at $90 but we would expect it to be temporary. Now that most market participants agree that we're in a recession shares of WYNN could see increased selling pressure. Another failed rally in the $95-97 zone can be used as a new entry point for puts. Note our stop loss, which is a little aggressive, at $100.51. The P&F chart is bearish with a $64 target.

Picked on March 04 at $ 94.27 *gap down
Change since picked: - 3.69
Earnings Date 02/26/08 (unconfirmed)
Average Daily Volume = 2.2 million

Strangle Updates


Dropped Calls


Dropped Puts

Precision Castparts - PCP - cls: 99.90 chg: -4.10 stop: 110.51

Target exceeded! PCP's sell-off continued into Monday. The stock lost about 4% and actually closed under what could have been round-number, psychological support at the $100 level. Our target was the $101.00-100.00 zone. More aggressive traders may want to aim for the $95 region. The Point & Figure chart is forecasting an $80 target (was $88).

Picked on March 03 at $109.49 *triggered/target exceeded
Change since picked: - 9.59
Earnings Date 05/08/08 (unconfirmed)
Average Daily Volume = 1.9 million

Dropped Strangles


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


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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