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Daily Newsletter, Saturday, 04/05/2008

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

The Tractor Tire And The Bottom

As I sit down to write this weekend's market wrap, I've had some flashbacks to my youth, which I think may be pertinent to recent economic events and current market technicals.

To this day, I'll still argue the point with my parents and siblings at various family gatherings, that it wasn't I that gave my mother her first gray hairs. Her gray hair was an inevitable sign of aging. Still, my father, older brother and younger sister, friends, neighbors, and a few city employees would likely single me out as the child most likely to have been the instigator of mischief and a primary accelerator of my parent's aging process.

Some 30-years later, those that have known me since childhood will chuckle over some of my youthful misgivings, but when the dirt was hitting the fan, I was usually the one standing by that proverbial fan, and my bucket was empty of dirt.

I paid many a penalty for various childhood wrongdoings. In my youth, there was no such thing as "time out," but instead it was my mom's Pi Beta Phi fraternity paddle provide me with some painful reminders that what I had done was wrong.

By the age of 13, I had become very familiar with several corners in the family home. I swear to this day that mom wouldn't situate any furniture in the living room corner, as at some point it would need to be occupied by me and my head. If I'd have grown up in Wisconsin, by the age of 13, I could have painted my head yellow and been the first "Cheddar Head" at a Green Bay Packer's game due to its triangular shape.

As an example, and I'll tie this into what we're seeing for stocks here in the U.S. and perhaps the fall-out of the housing "bubble," I was singled out as to having rolled a 10-foot tall tractor tire down the elementary school bus driveway, across the street and careening into some poor fellow's car.

Ok, it may have been my idea to hoist this behemoth sized tire and roll it into the FENCE, but not into his car!

It was a sunny Saturday morning, and the entire community had been invited to the school's playground that day for bicycle safety day. Parents brought their children to the school grounds that day with bicycles in tow. Police officers and firemen were on hand to inspect bicycles for free, register them in case they were ever stolen so they could be returned to the owner, inspect breaks, tires and reflectors to make sure our bikes were safe and in good working condition.

Now, about a week before the bicycle fair, our elementary school had just brought in some used tractor tires. It was perhaps the early days of "recycling." They had not yet been filled with sand for an above ground level sandbox. Still, they were heavy, and there was no way that I by myself (4' tall, maybe 85lbs soaking wet) could hoist the massive ball of rubber alone. I needed help, and I knew several friends would be needed help participate in the fun I had planned.

Eventually, I rounded up four of my so-called "friends" attending the bicycle safety fair, and with blood-flushed faces, and many grunts and groans, we somehow we got that tire upright where we could roll it.

All of this was taking place about 100-yards north of the epicenter of the fair. There had to have been at least one, or two parents with a watchful eye that witnessed what we were doing, but were more focused on the instructions being received on bicycle safety to warrant their immediate interference. After all, we were only a bunch of kids. How much damage could we do?

Long story short, we rolled the huge tire over to the school bus driveway, which provided a nice downhill grade (at some point we'd all learned the law of gravity), where if properly directed, the tire would careen about halfway down that driveway, but eventually veer to the left and into the schools boundary fence.

Push! And off the tire rolled. It was on course!

Until ... my "friend" Steve Kerns (he was a classmate, but not really one of my after-school pals) decided to demonstrate for us his recently learned Karate kicks into the sidewall of the tire, which then redirected the tire just enough, that it missed the fence's corner post, thus rolling further across the street, and smack into the side of a green Chevy Nova parked along-side the apartment complex.

Neither I, nor my 4 friends will ever know for certain what would have happened had the tire actually hit the fence. The size of the massive dent that creased the poor guy's car from floor-board to roof that Saturday, begs the question if the wooden picket fence wouldn't have just splintered like toothpicks, hardly impeding the velocity of the black-treaded monster.

From a look of great achievement as the tire first began to roll, it was seconds before the 10 eye-popping and 5 jaw dropping faces could describe what had happened. Oh sheeeeoooot! We scattered like rats. Perhaps a normal, yet fearful reaction for a bunch a 9 and 10-year olds that were shocked by what had just unfolded.

Well, my friends and I jumped on our recently inspected bicycles and left the scene of the crime. I rode my bike as quickly as I could to the south-end of the schools property corner, and with bicycle safety in mind, dismounted in order to cross the street safely at the designated crosswalk. If I could only make it back home, then all would be well.

As I looked both ways for any oncoming cars in the usually quiet and tranquil neighborhood, one of the apartment inhabitants that was watching the tire rolling event as it turns out, grabbed me firmly by my arm and marched me back to the school's bicycle fair and introduced me to one of the bicycle-inspecting police officers on duty. How that guy caught up with me, I still haven't a clue.

I don't remember much from that point on, other than some finger pointing from my "friends" and my mother coming over to see why I was crying while explaining to the police officer my version of what had just happened.

Yes! I was the one that decided it would be fun to roll the tire down the hill. Yes, I was the one that gathered a group of children together to hoist the tire from its side. Yes, I was pushing the tire down the hill with the help of my friends. But, it wasn't my fault that school officials left tractor tires unfilled with sand so kids might decide to roll them down driveways. Most important in my opinion at the time was that I did not kick the tire, or wasn't the last one to touch the tire, thus redirecting it into the car across the street.

Well, who left the tires unfilled with sand, or who kicked the tire didn't seem to matter to the car owner, or the police officer, or my parents. Less the insurance deductible, mom and dad's insurance, as well as my bottom, ended up paying for that day's fun.

That Monday, I noticed all of the tractor tires had been filled with sand. That was notable, as they'd been sitting on their empty sides for several days prior.

Weeks afterward, during recess, my friends and I noticed the guy's car had been fixed. We also noticed the remainder of the school year that it was NEVER parked where it had been that fateful Saturday of past.

Conclusions: As a 9-year old child, I didn't always think of the potential negative outcomes of my actions. Oh, I knew there might be some downside to my actions, but the potential negatives usually seemed to be worth the risk. Sometimes, I would catch myself remembering the past and the consequences of a negative outcome. I can only imagine how many paddlings I avoided as I learned more about the action/outcome philosophy the Pi Phi's had been implanting on my behind over the years.

To lift an object nearly 5-times your size, you need a lot of help. While neither I, nor my friends had to roll the tire back UP the driveway (we'd done enough damage that day), I'm certain it was easier to roll the tire DOWN the driveway than it was to push the tire back up, and it probably took at least 5 adults, maybe more, to roll the tire back up the driveway.

Don't always count on your "friends" to bail you out, or explain what really happened. Everyone saw Steve kick the tire. Yeah, Steve was somewhat of a school bully and that may have had some influence why the fingers were all being pointed at me. Hey, it was Jeff's idea. If it had only been Steve's idea to hoist, then roll the tire; I'd have been more than upset if my parents paddled me. Knowing my parents, I would have still gotten a paddling for having been involved in such mischief.

You can run, but you can't hide. In some form, a wrongdoing catches up with me. For me, even if I did ever "get away" with something, it ate at my conscience. I never did get tell Mr. Baird, nor my parents until many years later, that it was I that accidentally shot out the back passenger-side window of his car with my BB gun whilst aiming at his hubcap that otherwise boring summer day. There are few sounds as enjoyable as a BB's "ting" against a hubcap. I never could bring myself to ask his daughter to the Junior High school dances despite my crush on her. My conscience wouldn't let me. Besides, the relationship would be doomed to start with. Once I confessed to her my misdeed, I would be shunned of her affections.

A 9-year old can't pay for their mistakes, except in the form of what my parents would call "cruel, yet usual punishment." No, they and OTHER INSURANCE POLICY HOLDERS, in the form of higher insurance premiums, ended up paying for my mistake that Saturday. Most 9-year olds may not understand that $700.00 damage to a guy's car isn't going to have everyone's premiums rising, but the way my dad explained it to me, it did. The bad things I did didn't just affect my family and me. They affected all of society in some form or another.

And finally, if your child ever does roll a tractor tire into the driver's side of somebody's car, make sure when the bill comes that you, or your insurance company isn't being billed for hood ornaments that were by no means "damaged" during side impact.

And now to the markets!


Despite a very weak jobs report that showed employers slashed 80,000 workers from their payrolls in March, the largest monthly amount in more than 5-years, stocks managed to put in a mixed-to-higher trade on Friday.

The number of job cuts had the national unemployment rate rising three-tenths of a percentage point to 5.1%.

We're also starting to see some sign from the new 52-week high and new 52-week low ratios (NH/NL) that the number of new lows have abated, while the number of new highs have been expanding again. However, I'm not seeing what I feel would be "V-bottom" like measures, where new highs are accelerating at a feverish pace. Even at the NYSE, which is full of energy and commodity-related names.

What I did late last week, which I don't post in a market internals spreadsheet like that above, is the NH and NL measures of the small-cap Russell 2000 ($RUT.X).

On March 26, I had profiled a 1/2 position short for the iShares Russell 2000 (IWM) at $69.82, as the RUT's NH/NL measures were running just about even at 17:16 having just reached a more near-term "overbought" 32:18 and 22:5 days before.

While I was targeting an eventual decline for the IWM back down to $66, I was rather "aggressive" with the lowering of a stop from 03/26/08 on, as the number of new lows were not building at a rate that suggested a more forceful move to the downside was in the making. On Monday (03/31/08) the most recent inflection PRICE low for the small-caps, only 40 stocks managed to trade a new 52-week low.

While the RUT.X will contain many stocks listed at both the NYSE and NASDAQ, this more "no weaker dollar benefit" group of stocks sees its 5-day NH/NL ratio at 55.3%, while its more intermediate-term 10-day NH/NL ratio is at 55.2%. I have not seen a 55.2% measure for the RUT's 10-day NH/NL ratio since it was in a column of O (bullish leadership falling, bearish leadership taking hold) on 10/19/07.

Just as in October, the WEAKNESS in the small-cap's 10-day NH/NL ratio from a very high level measure of 78.4% became an alert to some pending weakness, then I would have to say that some of the strength, or ability for the RUT's 10-day NH/NL ratio to reach these levels, from some very "oversold" measures of 4% on 1/23/08, but a slightly higher measure of 8% on 3/18/08 suggests firming support among buyers at IWM $64.00 and RUT.X 650.

Another note I'd make regarding the Russell 2000 (RUT.X) is one I noted late Friday evening as I was updating the WEEKLY Pivot levels. For the first time since mid-October, the RUT.X has now gone three (3) consecutive weeks without seeing a trade at a WKLY S1.

For those not familiar with a "Pivot Level," a LEVEL for next week be it S2 (support 2), or S1 (support 1, very close to prior week's low), or the actual Pivot (mid-point of prior week's range), or an R1 (resistance 1, very close to prior week's high) or an R2 is a mathematical equation that allows for institutional computers to manage an inventory, or basket of stocks. Pivot analysis traders like myself will look for "changes" in patterns..

You only need to "envision" in your mind's eye that a rather "repeatable" pattern of seeing the RUT.X trade its WKLY S1 each week, or at least once every other weak was broken this week. This would signal some type of alertness that a "pattern of weakness" has been broken.

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And what about a pattern of "lack of strength" where a good test is to see if a security, or an index can seen enough buying to trade a WEEKLY R2? The RUT.X did that this week at 714.04. It was the first time since the week of 10/01/07-10/05/07 the RUT.X was able to trade a weekly R2. At that time, the RUT.X's WEEKLY R2 was 823.88.

Now, I don't know if it was my age, or if I finally learned the lesson's of the Pi Phi paddle, but at about the age of 14, my mother no longer swatted me with a paddle. Something changed.

I'm observing a "change" in past behavior dating back to October in the RUT.X.

What an "economic recovery" analyst DOESN'T want to see is the RUT.X begin developing a PATTERN of negative behavior. This week's WEEKLY Pivot Levels for the RUT.X are S2= 667, S1= 690 (if traded and RUT.X looks to bounce, then buy it, but it BETTER NOT trade WKLY S2), Pivot= 705, R1= 729, R2= 744.

In a sign that market participants may still be leaning in the direction for further Fed easing, the dollar was mostly weaker against a weighted basket of foreign currencies with the U.S. Dollar Index (DXY) giving back the bulk of Tuesday's gains.

Later in tonight's market wrap, I'll once again review some "fundamental" reasons why the dollar index remains weak.

The shorter-dated 5-year Treasury Yield ($FVX.X), which in mid-March fell to as low as 2.164%, then rose (yields move INVERSE of a bond's price) to close as high as 2.765% on Thursday, fell 12 basis point to close at 2.633%, just more than 25 basis points above the current fed funds target of 2.25%.

I think it important to pause and take some notes here that this shorter-dated maturity found enough selling into Thursday's close, to have its yield just more than 50 basis points above the current fed funds target of 2.25%.

At this point of the Fed loosening cycle, recent history may suggest it is too early to analyze the market "saying" the Fed is done. Here's why, using the 5-year yield as one guide.

5-year Treasury Yield ($FVX.X) - Monthly Intervals

I'm showing a monthly interval chart of the shorter-dated 5-year yield, as another review of past history and Fed monetary policy, as well as the bond market's sensitivity to that policy. But I would also want us to think about the "aversion to RISK" that comes with a Treasury's yield.

On 09/11/2001 the world changed as terrorist struck various U.S. targets and when markets opened for trading days later, we noted how investors came in with buying of the perceived safety of the 5-year Treasury bond.

One point, or observation I could make as it relates to the June'03 low was that the 5-year Yield only fell to 1.997% (let's call it 2.00%) when on 6/25/03, the Fed continued to ease, lowering its fed funds target to 1.00%.

Some quick math here would equate to a 100 basis point differential, where bond market participants simply "said," that's it. I see no further attractive return given the current state of the economy, or RISKS to be dealt with.

We can fallow further that the 5-year Treasury Yield ($FVX.X) showed a notable "jump" in yield in July'03.

A daily interval bar chart of the 5-year yield would show that on 06/25/03, the 5-year yield did "pop" higher that very day, the same day the FOMC lowered its target. I also see that on 07/15/03, the 5-year yield "popped" again, from 2.50% to close at 2.737%. That was NOT a Fed policy meeting date.

I went back to check the OptionInvestor.com archives, to try and see if there was any particular "news" that day that might hint at what drove bond market action, but the archives end at 1/23/2005. I think I may have some of my old articles/updates from that time, but I can't find them at the time of this writing. I'll look for them tomorrow and if I can find an answer to explain the action, I'll update that observation in Monday's wrap.

It wasn't until a year later, on 06/30/04 that the FOMC began a tightening cycle, somewhat of a "the economy is recovering" message.

Now, just like I've told my mother that her gray hair was simply a signal of her natural aging process, we can perhaps understand that any economy, or economies go through a process of expansion and contraction/recession.

The 5-year Treasury Yield, or any of the Treasury yields will mirror these cycles.

Only today, at the time of this writing do I see something I haven't noted before.

The Bear Stearns failure took place three (3) weekends ago.

And I begin to ask myself "why didn't the 5-year YIELD fall below the January'08 lows?" "Does the bond market see no further reward given the current economic risks?" "Has fear subsided?"

More importantly "Is the market now beginning to see economic recovery?"

You're familiar with the "Housing prices plunge in latest month!" "Foreclosure rise!" "JP Morgan rescues Bear Stearns!"

U.S. Market Watch - 04/04/08 Close

Friday wraps are fantastic for the U.S. Market Watch, as the 5DyNet% accurately reflects what took place the last 5 calendar days. Suffice it to say, the second quarter has gotten off to an upside "bang" for the major equity averages and just about every equity index displayed. Just the opposite of what took place early in the first quarter.

While impressive, let's remember what direction that market participants are trying to push a very massive sized tractor tire. While "gravity" isn't scientifically applicable to stock price movement, nor economic trends, there's a lot of overhead supply to eat through.

The 20DyNet% takes us back to Friday, March 14. That day, Bear Stearns had fallen sharply from its 03/13/08 close of $57.00 to finish at $30.00. The following Monday, Bear opened at $3.17/share on the then purchase price of $2.00 by JP Morgan, which has since been upped to $10.00.

It's like that big tractor tire that elementary school officials left unfilled with sand the week before, got rolled down a hill and crashed into the side of a parked car.

On Monday morning, JP Morgan, with some Fed assurances filled the void that may have had investor confidence coming further unraveled, if not the financial system, the U.S. economic outlook, and thus the global economic outlook.

What I'm building to at this writing is that I am seeing some signs that the market, and the U.S. economy have made a MAJOR bottom.

But there is still some "problems," but these problems have been with us for years now. It is called the BUDGET DEFICIT, and there are some things on the table that continue to suggest that there are some people in Washington, DC, and it doesn't matter if they're Republicans, or Democrats, that just don't get it.

Here's a screen capture of some postings noted in Friday's OptionInvestor.com Market Monitor. At the time, I almost couldn't believe what I was reading via the DowJones newswire.

OptionInvestor.com MM - 04/04/2008

I used to "proudly" disclose to subscribers that I am a registered Republican. Mostly to disclose that my comments/analysis were from a more "conservative, and free market" point of view.

With some of the "programs" and spending I've seen approved the last couple of years, I disclose my party affiliation with some shyness and confusion.

Folks, Senator Dodd seems to "get it" as I see it relating to a HOUSING bill. There are so many different bills that have been passed that have amendments to them, where those amendments have NOTHING in common with the bill, that it becomes REDICULOUS. I see "housing," and I see broader "economic stimulus" and I see "energy" as three.

How tough is it to comprehend that a COMPANY that isn't making money can't utilize a "tax break?" For a free market "thinker" like myself, I'm more of a "if it doesn't mean the collapse of the economy, or national security," then saving anything that isn't profitable, is analogous to socialism, or communism. It will simply propagate the belief that inefficiency and mediocrity are welcome.

No? Then what happened to those that manufactured buggies (horse and buggy)? Shouldn't they still be plentiful, drawing on government subsidies?

I've agreed with President Bush on more things than I've disagreed with him on. But when Federal taxpayers are asked to belly up to rebuild a city, that resides in a STATE, where that city resides BELOW sea level, and after a hurricane that city floods, I, like my father, question a free market economy should risk their capital to build again, when many insurers will no longer insure such an area.

The bottom line as I see it is let's not add something that should go into an ENERGY bill into a HOUSING bill.

A can of worms could be opened up as to why taxpayers are being asked in a roundabout way to "bail out" individual homeowners with adjustable rate mortgages originated, oh let's say June'03 that are about to reset.

Look at the 5-year yield chart above and at an extreme low of 2.00%, what was the "likely" direction of rates? Maybe 6.83%?

If anyone thinks that a rise to 5.0% was bad as the economy recovered and expanded, then thank goodness it didn't recover, or "heat up" to a frothy 5-year yield rate of 6.8%!

The "can of worms" is what doing nothing could result in. That is, to the neighbor next door that may have a fixed rate mortgage, that hasn't ballooned on him/her. With the adjustable rates around him, some going into foreclosure and bringing down the price of his/her house. A house goes into foreclosure, the bank, or mortgage insurer just want to sell it and get it off the books for what their liability is.

You see? That's my dad talking. SOCIETY ends up paying in some form or another for the "mistakes" of another. Thus the dollar's weakness.

In my opinion, I hate bailouts. It is a way of "rewarding" inefficiency and mediocrity. At most it is a slap on the hand instead of a good whack on the behind with a Pi Phi paddle.

We could argue that utilizing an ARM was a "mistake," but we could also argue that utilizing an ARM with some teasers attached was a way to BUY MORE than one could AFFORD to begin with.

There are some ideas being passed around in Washington that the banks should be left on the hook entirely, and that the homeowner with the ARM from four (4) or five (5) years ago be allowed to now only owe $200,000.00 instead of the $300,000.00 he/she originally took a loan on.

Heck, if I had known that was going to be an option, I should have thrown caution to the wind, perhaps all future homeowners should to, and take the "cheap" route, yet the RISKIER route, and we should all have signed up for these types of mortgages.

Let's all count on somebody to bail us out!

The citizen that should really be irate is the investor that sold all their houses, likely paid capital gains on some of them, then moved into an apartment to wait all of this out.

Not only did he/she pay taxes on their gains, but now they, or their children will get the added deficit burden!

Maybe I'm on a soapbox here, but I think what we come to realize is that SOCIETY is going to pay in some form or another for this credit crunch.

The "lesser of two evils" seems to be that TAXPAYERS, in the form of budget deficit spending will take the hit, thus the weaker dollar.

If the Fed, or federal government does "nothing" and lets the Bear Stearns go bankrupt, which could domino the another bank, and another, then another, we'll pay in some form or another with that strategy. If there are no banks, then there are no loans. No loans would eventually equate to a lot less jobs. Less jobs equates to less tax revenue. Then less tax revenue leaves accelerating deficits. Then accelerating deficits equates to MUCH HIGHER taxes, for those that still have jobs.

These are some ECON 101 basics of capitalism. I've had the privilege of discussing a free market economy based on capitalism with individuals that have largely been exposed to either socialism, or communism their entire life. When they have come to the United States, to fulfill a dream, the most agreeable point is that "it's hard."

"It's hard" when you rely on yourself to put food in your mouth.

"It's hard" when you rely on yourself to put clothes on your back.

"It's hard" when you rely on yourself to put a roof over your head.

But it is capitalism that allows for such handsome rewards!

The negatives of the deficit spending, and HOUSING bills that have ENERGY and other government spending features added inside them has a growing negative impact.

It certainly begs the question of "at what point will they stop?"

It's the INVERSE, or growingly NEGATIVE impact of many COMMODITIES that are all denominated in U.S. dollars.

This I feel, based on observation, is a major component, or reason for oil's rise the past several months, though U.S. stockpiles have been relatively steady.

Ah, but the number of delinquencies, due largely to foreclosures has been happening for a couple of years now. That is why housing prices have been falling in most parts of the country, and the credit crunch has accelerated the declines, especially in Florida and parts of California and Nevada.

So what's up with this?

Dow Jones Home Construction Index (DJUSHB) - Weekly Intervals

Outside of Dow Transportation Average (TRAN), it is the homebuilding sector that is up for 2008. Now, from its 12/31/07 close of 324, it would be a bit one-sided to count this week's close of 406 as anything major. The DJUSHB was at these levels not more than 10-weeks ago, or the end of January.

I've highlighted a time period back in Oct'06 to Dec'06 where today we see some very SIMILAR technicals.

If there is one difference we may get from "benchmarking" off the 12/31/07 close, is that this group of stocks, that represent the VERY sector that has attributed to the problems that the Treasury Department, the Federal Reserve and now Congress begin to address, is at least showing some type of LEADERSHIP to the major averages, and not FOLLOWING broader market advances.

When a longer-term WEAKER group starts to show LEADERSHIP, that's an alert to change.

Now go back and review the 5-year Treasury Yield chart, where we're going to want to monitor what it has done versus past history.

Certainly we must be aware that the WEAKER DOLLAR is creating some commodity inflation, thus it could RISE simply under the backdrop that the Fed will have to raise rates in order to curtail that type of inflation.

More than a year ago, the Fed was rather worried about HOUSING price inflation. That's not much of a problem these days is it?

What the DJUSHB does at a MINIMUM, is address a very "troubled" part of the U.S. economy.

From the above chart, I could technically say "as long as the DJUSHB does NOT violate its 10-week (blue), or at a MAXIMUM its 30-week SMA (150-day), or the still rather short-term upward trend, then stability, or a rebound in housing may already be underway.

Dow Transports (TRAN) - Daily Intervals

The Dow Transportation Average (TRAN) is probably the most closely monitored of sectors, or sub-indexes these days. And with very good reason. This group of stocks says "so much" about economic activity, or at least market participants view of economic activity on a looking-forward basis.

Think, or observe the time differential here. In July of last year, the TRAN is rocketing higher to all-time highs. It wasn't just rails and truckers, but the commercial airliners too. Remember how "low" fuel prices were then compared to today? Remember how strong the economic data was the latter part of 2007?

The key technical level right now, today is being tested. The TRAN 10/05/07 relative high.

That's when the major U.S. equity averages found their highs. When the TRAN failed to regain its 150-day SMA (dark purple), that when "Dow Transport Theory" likely took hold and market participants scaled back on their buying of broader equities, and began moving more toward the sell side of things.

Believe me when I tell you that I found great disagreement with my thoughts that this year we would see "modest recession." In early January, some were predicting a very bullish 1st quarter.

Believe me when I tell you that as the major averages "plunged" lower in the 1st quarter, a "modest recession" was going to be a "depression that makes the 1930's look like a cakewalk."

Believe me when I tell you, that there weren't a couple of days in January and just a couple of weeks ago, I didn't begin to contemplate my "modest recession" thoughts from earlier this year.

Bottom line here is that I can't see a "severe recession" with the TRAN trading above 4,400, let alone its 12/31/07 close, and that's with the TRAN getting NO HELP whatsoever from some of its commercial airline components. The more "regional" carries and discounters are certainly struggling with fuel prices. Jim said "Aloha" (means goodbye and hello in Hawaiian) as they filed for bankruptcy last week.

Friday evening, there were reports that lows cost carrier Skybus Arilines is set to fold its wings. Today (Saturday), the company confirmed the reports, saying the struggle to overcome the combination of rising jet fuel costs and a slowing economic environment has proved insurmountable for the carrier.

If the TRAN is equal to the transportation of PRODUCTS + PEOPLE regardless of fuel prices, then the AMEX Airline Index (XAL.X) 26.73 +0.14% trading BELOW its 12/31/07 close of 34.33 (-22%) tells me that there some type of bullish interest in the transportation of things that aren't human.

What is also notable is the BUYING, or sharp price rise on Tuesday April 1. The BEGINNING of the new quarter. A chasing of bullish returns, or relative PRICE strength from Q1? Perhaps, but if that's where some institutional capital is going to stick this quarter, its a place worth exploring.

Now, I've profiled a BULLISH trade with a 1/2 position in trucker YRC Worldwide (NASDAQ:YRCW) $14.04 -3.37%. It's technicals are NOTHING to write home about, but the IN THE MONEY call options seek some BULLISH exposure to the transports. One "kicker" to the upside is some talk among INDEPENDENT truckers (those that own their own rigs) that haul freight, that they may go on strike as they have found great resistance of being able to raise their rates to compensate for higher diesel prices at the pump.

The "kicker" for YRCW, or a JB Hunt (JBHT) $32.28 -1.01% could be some supply being taken from the market in the form of independent truckers near-term. Again, this could be a near-term reason to nip away at a trucking stock, but the PRIMARY reason is that the TRAN is at least giving some bullish signs for transportation names.

In tonight's wrap, I mentioned that there are several signs that a major market bottom has been found.

Let's take a look at some sector analysis using Dorsey/Wright & Assoc. sector bell curve. A very broad market average like the Wilshire 5000 (DWC) 13,823.80 +0.15% (which the sector bell curve encompasses), or the even the broad S&P 500 Index (SPX.X) 1,370.40 +0.08% can have us looking at the INTERNALS from a myriad of ways.

The primary point I'd made with the following 12/31/07 and the 04/04/08 sector bell curve captures, is that on a broader scale, demand (measured with Average Level) is relatively UNCHANGED.

Sector Bell Curve Comparisons - 12/31/07 and 04/04/08

Now, for some, three (3) months is an ETERNITY! But for institutional money flows, it a split second in time.

Sure, I've shown intra-day money flow tables as to where money is flowing OUT of, or IN to a specific sector, or stock on any given day. Some days there's a "theme" among individual stocks that money is flowing OUT of RETAilers, or CHEMicals.

An "outlier" sector in the above time comparison would show that even though the Wilshire 5000 is still down 6.7% this year (2008) having fallen as low as 12,650 in mid-January, then again tested that level in mid-March, the STEEl stocks are a group the buyers favor over sellers.

I'll go back to how much "easier" it is to roll a tractor tire down a driveway than it is to push it back up the driveway.

Here's the sector bell curve over the last two (2) weeks.

Sector Bell Curve Comparisons - 3/20/07 and 04/04/08

The above caption gives some observations of what was/is unfavored, or receiving average favor, or favored among market participants.

Simply because STEEl stocks are an outlier, or a group that stands out, I noted in the 03/20/08 bell curve where the group was "way back" on 12/31/07. A couple of weeks ago they were gaining some favor having fallen as low as 34% about a week prior.

Certainly the group saw SOME SELLING during the broader decline in January. This group continue to be one that buyers will BUY ON PULLBACKS.

Current field position up at 65% bullish is nearing a more "overbought" level and in late February its sector bullish % rose to 68%. I'd expect some type of PROFIT taking in the group near-term, but other sectors like EUTI, HOUS, AUTO, CHEM and META still have good field position, where even under a broader market pullback, should hold up well.

Here's a description of the various sectors.

One note I would make regarding the sectors is how Dorsey/Wright groups some stocks we'd be more familiar with. AEROspace contains both commercial airliners, but also contains commercial airline builders like Boeing (BA), but also the defense contractors like Lockheed Martin (LMT).

And here's a supply (O) and demand chart (X) that would encompass the entire sector bell curve, and gives us an observation that indeed, there is some internal strength beginning to build on a VERY broad scale.

Bullish % for ALL (BPALL) - 2% box chart

We can't possible look at the 2000 stocks of the Russell 2000 each week, let alone each day, and it would be just as impossible to do it for the Wilshire 5000 components.

However, he BPALL, which is simply measure the number of stocks whose point and figure charts now show a "buy signal" (where demand has exceeded a prior level of meaningful resistance) shows a "higher low" conducive to a major near-term market bottom, and not only that, the number of stocks generating a reversing HIGHER point and figure buy signal exceeds the 36% found in mid-February (2=February, 3=March).

See the "sell signal" at 54% in July (7= July) as this VERY broad bullish % indicator fell below 56%, then plummeted to 32% by mid-August (8=August, 9= September)? Then bounced back up to 56% by early October (A= October, B=November, C=December)?

Now go back up and look at the bar chart of the Dow Transports (TRAN) and make the tie to "Dow Transport Theory" in July and the rebound back up to that 10/05/07 relative high.

The level that's being test to end this week!

Now let's try and tie some rather bullish looking market internals (BPALL) and the TRAN with the S&P 500 Index (SPX.X).

S&P 500 Index (SPX.X) - Daily Intervals

What the BPALL shows us is a HIGHER LOW, and a "buy signal," which suggests that demand is starting to build at a more meaningful level (38% is above 36%). That's not a "Katy bar the doors" level of bullishness at this point, but the internals are suggesting something the PRICE action of the SPX has not yet to confirm.

In technician circles, this is called BULLISH DIVERGENCE.

I've labeled three "levels" on the SPX with Think TRAN at 4,700. That is, if the TRAN were to see some selling (profit taking from buyers most likely) then I'd think SPX back towards 1,330.

"Think TRAN 5,025" is SPX near-term resistance until the TRAN can catch another bullish gear above its October relative high.

And if the TRAN can find another gear without profit taking this week, then I've got to "Start Thinking SPX 1,423" as TRAN elevates toward 5,200.

On the above SPX chart, I've also made some LONGER-TERM observations relative to the YEARLY pivot Levels (golden brown) and these levels, will be with us the entire year! Based on 2007's high/low and close, the YR Pivot of 1,470 was established at the close of trading on 12/31/07. So was the YR S1 as was the YR S2 of 1,259. Amazingly, some buyers were there the day Bear Stearns was bought by JP Morgan.

Still, INSTITUTIONAL computers that were buying the 1st quarter's S1 obviously got exhausted and sellers overtook their buying. Then the SPX fell to its 1st quarter's S2. Remember, each quarter's pivot levels are derived by the prior quarter's high/low and close.

If you and I ONLY thought like a computer, and we bought at a prior Quarter's S1, became overwhelmed with sellers, where we simply couldn't buy any more stock, and then saw some trade out or Quarterly S2, don't you think we'd want to sell SOME STOCK if we got a chance back at a QUARTERLY Pivot?

Starting this past Tuesday, we were able to derive "new" Quarterly Pivot Levels!

I'm not EVEN considering the possibility of a QTR R2 at this point. I think the ABILITY even early in the new quarter to be ABOVE this quarter's Pivot (1,350) is no small feat, and you can bet there's some bears that are a more than a bit surprised.

I think that ANY type of dip back to SPX 1,330 finds STRONG SUPPORT this quarter.

Not only because of some of the INTERNAL action I've noted, but the New York Stock Exchange reporting late Friday that short interest as of the March 31st close rose 4.2% to 16.1B shares.

Here are some other major benchmark MONTHLY (for April) and their Quarterly (Apr-June) QUARTERLY Pivot levels.

The most BASIC premise of the pivot levels are that under severe BEARISH conditions, a Pivot, or mid-point of a prior periods range should find SELLING. Considering we went "straight down" in January and saw trade at QUARTERLY S2s for most of the equity indices and sectors, we should FULLY EXPECT SELLING at this QUARTER's R1 (resistance 1).

The MONTH of April is still young. While the Dow Indu, DIA, SPX, SPY, BIX.X, 10-year YIELD ($TNX.X), Dollar Index (DXY) finished lower in March, so their Mar Close values are colored "red."

Still, the INDU, DIA, SPX, SPY began the MONTH ABOVE their respective Pivot Levels (roughly the mid-point of March's range) and buying has been strong enough that their pivots have not yet seen trade.

The OEX, NDX, QQQQ, SMH and RUT.X finished higher in March, so their Mar Close values are colored "green."

The OEX, NDX, QQQQ and RUT.X also began the month ABOVE their respective Pivot Levels and buying has been strong enough that their pivot levels have not yet seen trade.

While the Semiconductor HOLDRs (SMH) finished higher in March, selling late in the month had the SMH closing BELOW its Pivot (28.95), but not unlike the major averages, the SMH has seen enough buying that it has RECAPTURED its MONTHLY Pivot.

So monitor this SECTOR closely should we see a re-test of that PIVOT. If market participants start to "change their minds" about this group and become more bullish, then a test of a PIVOT should find solid support, and a more aggressive move higher.

Additional points I'd monitor closely Monday morning.

The S&P Banks Index (BIX.X) finishes Friday 2.81 points BELOW its QUARTERLY Pivot, and there will likely be SPX/OEX traders looking back over their shoulders at this group.

The DXY got a nice bid on April 1, in LARGE part on the dollar's strength against the yen. This has been a BULLISH relationship for equities here in the U.S. and Japan.

The euro, which is the most HEAVILY weighted currency in the DXY held rather steady this week and the 7 million barrel build in crude oil stockpiles ended up looking like a 7 barrel build when the euro hardly budged.

We looked at the shorter-dated 5-year Yield (FVX.X) this evening, but the 10-year Yield ($TNX.X) is still a good "pulse" as it relates to some market sentiment.

With the 10-year Yield still below its QUARTERLY Pivot, that suggests for now that there's still a great deal of market participants that find a QUARTERLY Pivot yield of 3.588% attractive. With the 10-year Yield sitting right at its MONTHLY Pivot, then at Friday's close, a great deal of market participants see a 3.474% annual yield as attractive.

Compare that to some of the 5DyNet% and 20DyNet% gains for the various equity averages, and we should be cognizant that either some money needs to flow out of Treasuries to bolster stock prices near-term, or there's going to be some profit taking among bulls.

The LATTER provides to more ideal situation for NEW BULL entries, and a chance for some "old bears" short below the 03/31 close to assess just why the internals are showing sign of strengthening from some very oversold levels, and why the Transports are so strong. Then add to that the home construction sector. The area of the economy that our friends in Washington D.C. are trying to put together some type of "Housing, Unprofitable Business, Energy Package" for.

Here's a daily interval chart of the SMH. I' showing a BLUE retracement that would be conventional at a SIMILAR high found in the TRAN. And a PINK retracement that would be conventional with the major averages.

Semiconductor HOLDRs (SMH) - Daily Intervals

What's compelling to a trader in the chips is that the group as a whole has started to move above a rather nice 3-month base of support. Not a lot of "excitement" or disagreement among market participants as volume trades rather stable with its 50-day average volume (blue line in my volume study).

This could be a "higher beta lovers" bullish trade in the making as you QUARTERLY Pivot for the SMH resides smack between both the PINK and BLUE 19.1% conventional retracement shown above.

Let's make the SMH and the TRAN our "away from the major" equity sub-sectors this week.

For a high beta trade, the SMH doesn't look too risky for a 1/2 position on any type of pullback into $29.50.

Intel's (INTC) $21.87 -0.27% is the big gun and a conventional retracement on it from the recent December high of $27.00 to the 01/22/08 low of $18.05 has the stock sitting right on its conventional 38.2%.

If I had my druthers, and saw the SMH at $29.50 and INTC anywhere close $20.80, I'd just as soon take bullish chances with it and the entire group. INTC's 19.1% is at $19.95.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ASH None GS
CNX    
HOV    
LECO    
USO    

Play Editor's Note: There was no shortage of bullish candidates to choose from. A few more stocks we're following are: MOS might be a good bullish candidate if we can catch a dip near $110. SGR would also be tempting as a bullish candidate on a dip near $53. Both PCU and FCX have rallied to resistance and both appear to have inverse head-and-shoulders patterns, which are bullish. A move over $120 for PCU and $110 for FCX would break the neckline of these H&S patterns but I'd prefer to wait and watch for a pull back instead of trying to chase them.


New Calls

Ashland Inc. - ASH - close: 51.25 change: +1.97 stop: 46.99

Company Description:
Ashland Inc., a diversified, global chemical company, provides quality products, services and solutions to customers in more than 100 countries. A FORTUNE 500 company, it operates through four divisions: Ashland Performance Materials, Ashland Distribution, Valvoline and Ashland Water Technologies. (source: company press release or website)

Why We Like It:
Shares of ASH have spent more than four months building a base and the stock just broke out over resistance near $50.00 on Friday. Volume has been surging on the recent rally, which is normally a bullish sign. The P&F chart is bullish and points to a $57 target. We are suggesting call positions now although in reality a better entry point would be on a dip near the $50 level again. We're suggesting a stop loss at $46.99 but you may want to use a stop closer to $48. There is potential resistance at its 200-dma in the $54-55 zone. Our target is the $57.00-58.00 range. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 50.00 ASH-EJ open interest= 58 current ask $3.20
BUY CALL MAY 55.00 ASH-EK open interest= 30 current ask $1.00

Picked on April 06 at $ 51.25
Change since picked: + 0.00
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 774 thousand

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CONSOL Energy - CNX - cls: 76.11 chg: +3.45 stop: 69.49

Company Description:
CONSOL Energy Inc., a high-Btu bituminous coal and coal bed methane company, is a member of the Standard & Poor's 500 Equity Index and has annual revenues of $3.8 billion. It has 17 bituminous coal mining complexes in six states and reports proven and probable coal reserves of 4.5 billion tons. (source: company press release or website)

Why We Like It:
News that Massey Energy had raised their price estimates on coal due to rising demand sparked a huge rally in the industry. Shares of CNX rose 4.7% and broke through its 50-dma. Volume soared on the rally. While the recent strength in CNX is bullish we don't want to chase it here. Instead we are suggesting readers buy a dip in the $73.50-72.00 zone. The closer to $72.50 the better but our official entry point for the newsletter is going to be $73.50. The Point & Figure chart is very bullish with a $95 target. We are listing two targets. Our first target is the $79.75-80.00 range. Our second target is the $84.00-85.00 zone. More aggressive traders might want to aim for $90. Remember, we do not want to hold over the late April earnings report.

Suggested Options:
Our suggested entry point is the $73.50-72.00 range. We're suggesting the May calls.

BUY CALL MAY 70.00 CNX-EN open interest=228 current ask $9.60
BUY CALL MAY 75.00 CNX-EO open interest=554 current ask $6.70
BUY CALL MAY 80.00 CNX-EP open interest=419 current ask $4.50

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.7 million

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Hovnanian - HOV - close: 12.33 chg: -0.08 stop: *varies*

Company Description:
Hovnanian Enterprises, Inc., founded in 1959 by Kevork S. Hovnanian, Chairman, is headquartered in Red Bank, New Jersey. The Company is one of the nation's largest homebuilders. (source: company press release or website)

Why We Like It:
The homebuilders had an exceptional week and we think there is still more room to run. The HGX homebuilding index is poised for a major breakout over resistance. Meanwhile HOV has already broken through technical resistance at its 200-dma and is set to rally past resistance near $12.50-13.00. This should be considered a higher-risk, more aggressive play since the homebuilding stocks have become more volatile and we are playing with a relatively wide stop loss. So why do we like HOV out of all the homebuilders? Probably because HOV looks like the biggest short squeeze candidate. The most recent data listed short interest at more than 74% of the 37.8 million-share float. That is a huge amount of short interest. Granted a lot of shorts could have covered since this short interest reading in March but HOV remains poised for another short squeeze. We are listing two potential entry points and stops for each entry. If HOV rallies from here we're suggesting readers buy calls at $13.25 with a wide stop loss at $10.99. If HOV pulls back from here then we suggest readers buy calls in the $10.50-10.00 zone with a stop loss at $9.49. If triggered at $13.25 our first target is the $16.90-17.00 range. Our second target is $19.85-20.00. If triggered near $10 our first target is $14.50-15.00 and our second target would be near $20. Remember, this is an aggressive play. The stocks have seen a lot of whipsaws over the last several weeks.

Suggested Options:
We have two different entry points listed. If triggered we are suggesting the May calls.

BUY CALL MAY 10.00 HOV-EB open interest=5100 current ask $3.10
BUY CALL MAY 12.50 HOV-EV open interest=6499 current ask $1.60
BUY CALL MAY 15.00 HOV-EC open interest=3227 current ask $0.65

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.1 million

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Lincoln Elec. - LECO - cls: 69.25 chg: +2.20 stop: 66.99

Company Description:
Lincoln Electric is the world leader in the design, development and manufacture of arc welding products, robotic arc-welding systems, plasma and oxyfuel cutting equipment and has a leading global position in the brazing and soldering alloys market. (source: company press release or website)

Why We Like It:
Both short-term and long-term technicals are suggesting that LECO has bottomed and is poised to breakout higher into a new bullish trend. The stock has been consolidating sideways under its 200-dma for more than a month. We want to catch a breakout with a trigger to buy calls at $70.75, which would clear the late February high. An alternative entry we'll be keeping an eye on would be another dip or bounce near the 50-dma near $65. If we are triggered at $70.75 we have two targets. Our first target is the $74.85-75.00 range. Our second target is the $78.00-80.00 zone. The Point & Figure chart is bullish with a $91 target. We do not want to hold over the late April earnings report.

Suggested Options:
If triggered at $70.75 we are suggesting the May calls.

BUY CALL MAY 65.00 HUF-EM open interest= 0 current ask $6.60
BUY CALL MAY 70.00 HUF-EN open interest= 5 current ask $3.70
BUY CALL MAY 75.00 HUF-EO open interest=30 current ask $1.70

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 233 thousand

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United States Oil - USO - close: 84.88 chg: +1.23 stop: varies

Company Description:
The USO is an exchange traded fund that reflects the price of West Texas Intermediate light, sweet crude oil.

Why We Like It:
I'm not going to get into details on whether or not oil or more specifically the USO should be trading at $85 at this time. Jim discusses oil enough in his wraps. However, that doesn't mean we can't trade the technicals on this commodity. Right now it looks like the USO is setting up for another leg higher. The challenge is picking the entry point. I'm listing two potential entries. If the USO breaks out higher we're suggesting calls at $86.05 and a stop loss at $82.45. If the USO turns lower I'm suggesting calls on a dip into the $80.50-80.00 zone with a stop loss at $79.25. If triggered at $86 our first target is the $92.50 mark and our second target is the $97.50-100.00 zone. If triggered near $80.00 our first target is the $87.50 mark and our second target is the 97.50-100 zone. We'd prefer to buy a dip near $80 but want to be ready if the USO breaks out higher.

Suggested Options:
We are suggesting the May calls. Strikes are available at $1.00 increments.

BUY CALL MAY 80.00 UNA-EB open interest=321 current ask $7.20
BUY CALL MAY 82.00 UNA-ED open interest=135 current ask $5.90
BUY CALL MAY 84.00 UNA-EF open interest=187 current ask $4.80
BUY CALL MAY 86.00 UNA-EH open interest=233 current ask $3.90
BUY CALL MAY 88.00 UNA-EJ open interest=297 current ask $3.10
BUY CALL MAY 90.00 UNA-EL open interest=550 current ask $2.45

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 5.4 million
 

New Puts

None today.
 

New Strangles

Goldman Sachs - GS - cls: 175.40 chg: -1.13 stop: n/a

Company Description:
Goldman Sachs is one of the largest and most respected investment banks and brokerages in the world.

Why We Like It:
Shares of GS are at an important inflection point. The stock has rallied to its long-term five-month trendline of lower highs (resistance). A breakout from here and the stock could soar. However, the trend, in spite of the stock's big bounce from its lows, is still lower. This situation sounds like a good spot for a strangle play. We are suggesting strangles in the $173.50-178.50 zone. If you really wanted to you could widen that to $170-180 but watch your investment and keep it neutral.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We are suggesting the May options below. Our estimated cost is $8.70. We want to sell if either option trades at $14.50 or higher.

BUY CALL MAY 190 GPY-ER open interest=2083 current ask $4.10
-and-
BUY PUT MAY 160 GPY-QL open interest=1616 current ask $4.60

Picked on April 06 at $175.40
Change since picked: + 0.00
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume = 14.5 million
 


Play Updates

In Play Updates and Reviews

Call Updates

Aluminum Corp. of China - ACH - cls: 43.95 chg: -0.30 stop: 39.85

ACH has been consistently moving (channeling) higher over the last two weeks. If you were looking for a new short-term bullish entry point a dip near $43.00 or $42.50 should work although you may want to consider a tighter stop loss than our suggested stop at $39.85. ACH's next level of overhead resistance is the 100-dma and exponential 200-dma near $46.75. Please note that we are adjusting our target to $47.75-50.00.

Suggested Options:
If ACH provides a new entry point we would suggest the May calls.

Picked on March 30 at $ 40.80
Change since picked: + 3.15
Earnings Date 03/18/08 (unconfirmed)
Average Daily Volume = 1.8 million

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Core Labs - CLB - close: 129.35 chg: +2.20 stop: 118.99 *new*

CLB has continued to run away from us. We have been suggesting readers buy a dip near $120 but CLB keeps posting gains. While the relative strength is great we don't want to chase it. The stock is up 8 out of the last 9 trading days and stocks don't normally moving in a straight line for very long. Furthermore CLB is now testing major resistance near $130. A breakout over $130 would be very bullish and if you squint hard enough at the chart a move over $130 looks like the break of its inverse head-and-shoulders pattern, which would also be bullish and suggests a $150+ target. CLB is up about 20 points in just the past couple of weeks so this spot, just under resistance at $130, is the logical place to see profit taking. We are going to adjust our suggested entry point to buy calls from $121-120 to $123.50-120.00. We are also inching up our stop loss to $118.99. If triggered at $123.50 our short-term target will remain $130 (actually 129.75) but we'll add a second target of $139-140. We still do not want to hold over earnings in late April.

Suggested Options:
If CLB hits our entry point to buy calls (123.50 to 120.00) we would suggest the May calls. The $120, $125 and $130 strikes look good.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 240 thousand

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Essex Prop. Trust - ESS - cls: 116.47 chg: -2.70 stop: 112.95*new*

Major REIT stocks under performed the market on Friday. We did not see any significant news in the industry to account for the weakness but did find one note from a JPMorgan analyst who suggested that REITs may have a harder time earnings fees this year compared to 2007. This dip in ESS near its rising 10-dma is probably another bullish entry point. The stock has also pulled back to the bottom edge of its four-week rising channel. We are adjusting our stop loss to $112.95. Truly conservative traders might want to adjust their stop even closer to the $115 region. Our target is the $124.50-125.00 range. The Point & Figure chart is bullish with a triple-top breakout buy signal and a $142 target.

Suggested Options:
We are suggesting the May calls.

Picked on March 24 at $115.50 *triggered
Change since picked: + 0.97
Earnings Date 05/05/08 (unconfirmed)
Average Daily Volume = 408 thousand

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Fluor - FLR - close: 152.89 chg: +0.23 stop: 139.90 *new*

Last week was very strong for FLR. The stock added close to 9% and broke through resistance near $145. After such a strong move it's probably time to look for a correction. A dip back into the $147.50-145.00 zone can be used as a new bullish entry point. We are adjusting our stop loss to $139.90. More conservative traders may want to consider a stop loss in the $142-144 region. We have two targets. Our first target is the $159.00-160.00 zone. Our second target is the $168.00-170.00 zone. We do not want to hold over earnings in early May. FYI: The P&F chart is bullish with a $184 target.

Suggested Options:
If FLR provides a new entry point we would suggest the May calls.

Picked on April 01 at $146.50 *triggered
Change since picked: + 6.39
Earnings Date 05/07/08 (unconfirmed)
Average Daily Volume = 2.3 million

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3M Co. - MMM - close: 80.52 chg: +0.35 stop: 78.45

We had a tough decision to make in MMM. The trading on Friday with the intraday bounce near $79.50 really looks like a short-term bullish entry point to buy calls. We seriously thought about changing our strategy to buy calls now. However, we decided to stick with our trading plan and wait for the breakout over resistance near $81.50. Our official entry point to buy calls is still at $81.75. More nimble and aggressive traders might want to consider buying calls now and if you do then consider a slightly tighter stop. There is potential resistance near $85.00 and its 200-dma but our target is the $87.00-87.50 zone. We do not want to hold over the late April earnings report.

Suggested Options:
If MMM hits our trigger at $81.75 we would suggest the May calls. We would use the $80 or $85 strikes.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.9 million

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Arcelor Mittal - MT - close: 85.17 chg: +2.69 stop: 78.24 *new*

Iron and steel stocks were market leaders on Friday. Shares of MT rose more than 3% to a new all-time high. Volume picked up to better than average levels, which is a positive sign for the bulls. If you don't want to chase MT here consider waiting for a dip back to the $82.50-82.00 zone. We are raising the stop loss to $78.24 and we're close to raising the stop near $80.00. Our target is the $89.00-90.00 zone. The P&F chart is very bullish and just saw its price target jump from $101 to $113 this past week.

Suggested Options:
We have been suggesting the May calls.

Picked on March 31 at $ 82.03 *triggered/gap open
Change since picked: + 3.14
Earnings Date 05/15/08 (unconfirmed)
Average Daily Volume = 4.1 million

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Potash Corp. - POT - close: 170.89 chg: +3.22 stop: 149.75

Believe it or not we're currently on the sidelines with POT. Our play from Thursday night stated that we do not want to open new positions if POT gapped open above $172 on Friday morning. Mosaic's earnings (MOS) were better than expected and this fueled another spike higher in the fertilizer names. POT opened at $173.01 and hit $175.46 before pulling back. We're still bullish on POT but we want to be more selective with the entry point. We are suggesting that readers buy a dip in the $167.50-165.00 zone. Broken resistance near $165.00 should be new support. POT is up about $20 from its April 1st low and shares probably need a rest. We are taking a risk that the stock just continues to run and we never get filled. We are playing with a wide stop loss because the stock can be so volatile. More conservative traders might want to try and play with a stop closer to $160 instead. Our first target is the $179.50-180.00 zone. Our second target is the $188.00-190.00 zone. More aggressive traders could aim for the $200 region. FYI: The P&F chart is bullish with a $218 target.

Suggested Options:
Our suggested entry point is the $167.50-165.00 zone. We like the May calls but plan to exit ahead of the late April earnings. May strikes between $160 and $185 should work.

Picked on April 03 at $167.67
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 7.7 million
 

Put Updates

Ambac Fincl. - ABK - cls: 5.99 change: -0.25 stop: n/a

ABK and MBI, the two biggest bond insurers, are back in the crosshairs of the ratings agencies. Of course you could argue they never left as most agencies have both on negative credit watch. ABK and MBI both traded down about 4% on Friday after Fitch cut its rating on MBI from AAA to AA. We are not suggesting new bearish positions in ABK. 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).

Suggested Options:
We're not suggesting new positions in ABK.

Picked on January 27 at $ 11.54
Change since picked: - 5.55
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

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Humana Inc - HUM - cls: 44.12 chg: -0.32 stop: 47.05 *new*

HUM is still looking weak as investors sell the intraday bounce attempts. We are adjusting our stop loss to $47.05. We would still consider new positions here but you might want to use a tighter stop loss if you're opening new plays. Our target is the $40.50-40.00 zone. More aggressive traders may want to aim lower. Currently the P&F chart is so bearish it points to a target of zero ($0.00).

Suggested Options:
We would use the May puts but remember we plan to exit ahead of the April earnings report.

Picked on March 30 at $ 45.20
Change since picked: - 1.08
Earnings Date 04/28/08 (unconfirmed)
Average Daily Volume = 4.4 million

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MBIA Inc. - MBI - close: 13.61 change: -0.68 stop: n/a

The big bond insurers could be in for another rocky period. Friday's big news in the industry was a report that the rating agency Fitch had downgraded MBI from AAA to AA. Fitch claims that MBI is more than $3 billion short of what they feel is needed to warrant a triple-A rating. This move by Fitch might embolden the other rating agencies to go ahead and downgrade the big bond insurers. Normally a bond insurer needs a AAA rating to garner new business so this could be a potential death knell for the company. I'm surprised MBI wasn't down more sharply on Friday. We have not been suggesting new bearish positions but if you wanted to speculate with puts here it might work if you place a stop loss above $14.50 or $15.00. We had been suggesting the out-of-the-money May puts (7.50, 5.00 and 2.50 strikes).

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

Picked on January 27 at $ 14.20
Change since picked: - 0.59
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 15.2 million
 

Strangle Updates

None
 

Dropped Calls

FPL Group - FPL - close: 65.95 chg: +0.17 stop: 61.45

Target achieved. Alternative energy stocks soared on Friday. Solar stocks lead the way but FPL hit an intraday high of $67.00 before paring its gains. Our target was the $67.00-67.50 zone. The play is closed for us but we would keep FPL on our watch list. A dip or bounce near $64.00 would still look like another bullish entry point.

Picked on March 27 at $ 63.55 *triggered
Change since picked: + 2.40
Earnings Date 04/30/08 (unconfirmed)
Average Daily Volume = 2.6 million
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Setting Targets for the A/D Line

If watching for turns in the advance/decline (A/D) line can help traders pinpoint when equities might also turn, then we need to go a step further. We need to predict how far the A/D line might go once it turns. Is it likely to roll over only to find potentially strong support right below? Is it likely to pop higher only to find strong resistance right above?

Previous articles in this series have explored whether it's appropriate to study the A/D line using technical analysis tools, where to look for resistance or support for the A/D line and how to judge whether support or resistance is strongest. If you haven't read those articles or are unfamiliar with the A/D line or Keltner channels, a quick review might be appropriate.

Annotated 15-Minute Chart of the A/D Line:

I chose this moment at random to snap a chart, before I saw how it would play out. When I scroll back on a chart, the scroll bar turns red. It's not red on that chart, so you can trust my statement that I hadn't yet seen what would unfold when that annotation was added.

So, how did the A/D set that downside target and what happened after it was set? As mentioned in last week's article, the A/D line tends to overrun targets a bit, but it mostly held below the widest (purple) channel's upper boundary on 7-minute closes that morning of 3/19. It had broken out to the upside the day before, but this day, that resistance appeared to be holding.

In addition, the A/D line then broke below the central basis line, the aqua-colored line, further confirming that resistance was holding. The downside target was set at the next lower channel boundary line, the one at -896.10 on that chart.

It's almost as simple as that. When resistance or support holds, the target is either the central basis line--already broken in this case--or the next outer channel line. Those targets can also serve as potential support or resistance.

This case proved a different than many cases, however, due to the fact that the black channel based on the 45-ema had swung all the way above the widest channel, something that happens only in times of extreme volatility. Generally a chartist who had nested several Keltner channels together would have set a new downside target at the next channel's lower boundary, the black channel's lower boundary, rather than at the lower boundary of the channel based on the 120-ema.

Only when that black channel's lower boundary was broken would a new target then be set at the widest channel's lower boundary. The targets would stair step down this way because in less volatile times most prices and the A/D line's values, too, are contained within the black channel.

However, in this case, the previous day's wild movements had caused that black channel to swoop all the way outside the boundary of the largest channel as it created a breakout situation. Later, we'll look at a more normal situation, but I first wanted you to see a real-life one as it played out so you could better judge whether you wanted to trust the whole setup.

So, what happened with the A/D line the rest of that day? The A/D line did hit that -900 target. In fact, it dropped to a low of -1289 that Wednesday 3/19, violating that lower Keltner channel and dropping into 15-minute and 30-minute targets.

If my premise is that we can use the A/D line's evidence to help us predict what might happen with the SPX, what unfolded the rest of that day with the SPX? Because I waited until the day unfolded and scrolled back, you'll see that the scroll bar is red on the next chart.

The A/D line's chart had been snapped at about 10:20 am ET that Wednesday morning of 3/19. What was the SPX doing at that time, and where did it subsequently go? The red arrow at the top of the chart points to the moment at which the A/D chart had been captured.

Annotated 7-Minute chart of the SPX:

Let's look at a more normal situation for the A/D line, one when extreme volatility hadn't swung one channel all the way out of another.

Annotated 15-Minute Chart of the A/D Line:

By late on the afternoon of Thursday, April 3, it was clear that the A/D line was threatening to fall toward -475 or so, although the downside target had not yet clearly been set. Experience watching the A/D line would have warned me that the target was likely to be met, as it was, but the Non-Farm Payrolls was due the next morning and that tentative evidence could have been undone.

As this chart was snapped late the morning of Friday, 4/4, the A/D line was again approaching that same resistance band. Knowing what you know about weighing the strength of resistance versus support, what would you have judged would happen next? And what would you have decided would happen with the SPX as a result? What would have proven your prediction wrong and where would you have believed the A/D line would go next?

Next week, we'll wrap up the series with a discussion of Keltner-style divergences.
 

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

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