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Daily Newsletter, Wednesday, 04/09/2008

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Table of Contents

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

Market Wrap

Market Wrap

Wednesday, April 9, 2008

Three-Step Pattern


Overview--Today's Numbers


1.0 Markets at a Glance


2.0 Hop Topic--Where to Park Your Money


3.0 Economic Reports


4.0 Equities

4.1 S&P 500 Index (SPX)
4.2 Dow Jones Industrial Average (INDU)
4.3 Nasdaq-100 Index (NDX)
4.4 Russell 2000 Index (RUT)

5.0 Featured Industry Groups

5.1 Banking Index (BIX)
5.2 U.S. Home Construction Index (DJUSHB)
5.3 Transportation Index chart (TRAN)

6.0 Currencies

6.1 U.S. Dollar (DXY)

7.0 Commodities

7.1 Oil Fund and Index (USO and OIX)
7.2 Gold Fund (GLD)

9.0 Summary and Key Trading Levels

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1.0 Overview--Today's Numbers


1.0 Markets at a Glance

I titled this report the Three-Step Pattern because when you look at the "rally" off the March lows that's what it seems we're doing--two steps up and then one step back. The highs and lows within the rally off the March lows are overlapping and that gives it a corrective look. A corrective pattern to the upside suggests the downtrend will resume once the correction is finished. Whether that leads to only a pullback and then another leg higher for a larger upward correction or instead heads immediately for new lows for the year is the big question.

There's an even bigger debate as to whether or not we've seen the market lows for the year but in my analysis it's not a valid argument. We're in a bear market and we will see new lows below the January-March lows. For me it's a matter of identifying where the top of the bounce might occur and this choppy price action is making it incredibly difficult to figure out what the larger corrective bounce is forming but that's why I include key levels on the charts and then let price tell me what's likely happening. We can all argue until we're blue in the face about what the market should do but in the end it is of course price that is the final arbiter.

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So far we could say the February 1st highs are holding and that means we could stay trapped in a large trading range for another couple of months (between the January-March lows and the February-April highs. That would make it very difficult if you're a directional trader and looking for at least a trend that lasts a few days for a decent trade. If you're a market neutral trader, such as one who sells credit spreads above and below resistance and support then this has been, and could remain for a while, the market for you.

But as I've said more than once, be careful if you're selling bull put spreads since the kind of consolidation we're seeing here could suddenly let go to the downside (usually without warning and the reason it scares the pants off the bulls) and the next leg down, from an EW (Elliott Wave) perspective, could be a very fast and strong move down.

2.0 Hot Topic--Where to Park Your Money

I'll answer that question at the end of this section. First I wanted to get into earnings (since we're into earnings season) and what they could mean for the market. Part of the disagreement about whether or not the market has made a significant bottom for the year has to do with earnings. The estimates for earnings have not been downgraded that much and many believe a recession could soon be over (even before it's officially declared). The earnings/stock market argument can be thought of as a chicken and egg thing. I suspect most believe that earnings expectations drive the stock market's ups and downs. I argue the stock market reflects changing social moods which in turn affects businesses which in turn affects their earnings. In other words the ups and downs in the stock market drives earnings and not the other way around.

When surveys are taken of company management the results have shown that they tend to be an optimistic sort. Very rarely does management see a slowdown in their earnings which subsequently shows up. In fact even if they see an overall slowing in the economy, and a slowdown in corporate earnings for other companies, they see themselves as more immune and expect to do better than the rest. The data shows they're usually incorrect in their assessment. That raises a question about the value of insider trading when we hear about the number of insiders buying their own stock, which is supposedly a bullish sign, but that's a different topic.

Analysts who follow particular stocks have shown a tendency to follow management's assessment of earnings rather than doing their own research. The data shows that analysts typically lag the market in their earnings estimates. After earnings have convincingly changed is when the analysts then revise their estimates. It makes one wonder what is the value of analysts. That also is a different topic. The following chart shows earnings (in red) vs. analysts' forecasts (chart courtesy SG Equity Research):

The chart shows that analysts are consistently another lagging indicator and more or less follow actual earnings up and down when they report their forecast. These estimates are then used to evaluate stock values (with buy and sell recommendations, mostly buy). You can see by the chart that analysts' estimates have not yet reflected the actual drop into this year. The coming earnings season will likely start the analysts on their downward revisions and stock valuation downgrades. Prepare for it. To expect a bull market rally in light of this is simply hard to imagine. We also still have a huge credit problem out there (does anyone honestly believe Bear Stearns is the only major player in trouble?), continuing housing contraction and a slowdown in consumer spending.

So back to the heading for this section of the report--where is a good place to park your money? You know, that fabulous stash of cash you've earned by following the trade recommendations from OptionInvestor (wink). I've just been through a lot of this with some family members and tried to make the argument that it's better to be in bonds right now. That suggestion of course immediately drew sneers and other obscene gestures from some. Everyone knows stocks outperform bonds in any (pick one) 5, 10, 15 or 20-year period. Right? It depends.

When earnings have been historically high, as well as P/E ratios, as they have been, the stock market tends to do poorly over the next 10-15 years and that's the period we've been in since 2000. Therefore from a historical perspective, now is not a good time to be in stocks. But there's a relatively easy way to determine when the timing is right to be invested heavily in stocks vs. bonds and when it's time to switch sides.

John Murphy practically wrote the book on technical analysis and one of his real strengths is in relative strength analysis. A very good book, and highly recommended, is his "Intermarket Analysis" where he describes relationships between all kinds of markets. Back in February he highlighted an opportunity to rotate out of stocks and into bonds. By looking at the long term relationship between bonds and stocks, and the relative strength of bonds to stocks, you can see from the following chart (courtesy John Murphy and stockcharts.com) that the period of 1980-2000 clearly favored stocks over bonds:

This chart shows the ratio of the price of the 30-year Treasury Bond divided by the S&P 500 index price. As long as the ratio is dropping it favors stocks and then when the ratio starts rising and breaks its downtrend then it favors bonds (bonds start to outperform stocks). Remember, this is a ratio--both could be dropping or rising together but it's the relationship of bonds to stocks. Most investors today do not know what a secular bear market is and therefore have only heard that the only surefire way to make money is to be invested in stocks. From 1980 to 2000 that's definitely been true. But from the 2000 bottom on the above chart, and especially once the ratio broke the downtrend line in 2002, it told us there was a fundamental shift going on.

The period of 2002-2007 showed stocks doing better than bonds but the ratio finally bounced off the broken downtrend line, at a higher low, and has been rallying since, as shown in the next chart (also courtesy of John Murphy):

After breaking the downtrend line from 2003 in July 2007 (which is when the stock market was topping out) the ratio started rally again off that trend line and it shows bonds have been the better investment, and continue to be.

So if you're looking for a convenient way to "time the market" between bonds and stocks, here's a relatively simple tool to use.

3.0 Economic Reports

Not much to report on for the economic reports this week and very little to move the market.

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4.0 Equities

4.1 S&P 500 Index (SPX)

SPX chart, Daily

The dark red price path is the one that calls for a continuation of the sideways trading range we've been in since the January low, and could continue into June before it starts the next leg down in the bear market decline. There remains the potential to rally a little higher to about 1415-1430 before starting back down (for either a pullback (green) or a new leg down (pink).

Key Levels for SPX:
- cautiously bullish above 1387 (target 1415)
- cautiously bearish below 1312 (target 1275)

SPX chart, 120-min

There are a couple of Fibs near 1340 that have me thinking we could see a little more downside on Thursday before potentially heading higher again. The Thursday before opex week is known as the "head-fake" day and an early low Thursday morning could set a bear trap so be careful about that possibility. Much below 1340 would turn the price pattern more bearish and could indicate we're in the early part of a leg down to the bottom of the trading range (1275). But another rally leg into next week could target the confluence of trend lines and Fibs near 1415 by the end of opex week.

4.2 Dow Jones Industrial Average (DOW)

DOW chart, Daily

Between trend lines and Fibs I have an upside target zone of 12860-13040 by next week. If it rallies much higher than that I can see the potential for a rally up to a Fib projection at 13565 (if it can first get through the 200-dma currently at 13123). I haven't drawn in all the potential wave counts on the DOW chart and the one I'm showing is in my estimation the most likely scenario. It calls for another strong decline once the current correction to the October-January decline is finished. If it plays out the way I'm showing, two equal legs down from October gives us a downside projection to the 10500 area. Much lower potential exists.

Key Levels for DOW:
- cautiously bullish above 12733
- cautiously bearish below 12166

DOW chart, 120-min

A parallel up-channel for price action off the March lows shows the DOW could be ready to rally right from here. But the lower line is more of a guide than an actual trend line (it's parallel to the trend line along the early highs of the bounce) therefore we could see an early decline Thursday morning before another rally leg gets started. A break much below 12400 would look more bearish.

4.3 Nasdaq-100 Index (NDX)

Nasdaq-100 (NDX) chart, Daily

The downtrend line from October crosses a Fib projection at 1945 next week and the coincidence with opex makes for a compelling argument that we're going to get the rally up to there. The 200-dma is not further above that level. I would look for some longer term short plays if and when that level gets tagged since the potential is for another leg down to a new yearly low. It could just pullback and then rally again (green) but that can't be known yet.

Key Levels for NDX:
- cautiously bullish above 1886 (target 1945 by mid April)
- cautiously bearish below 1764 (target 1627 by the end April)

Nasdaq-100 (NDX) chart, 120-min

Like the others, I see the possibility for an early decline Thursday morning to about 1790-1800 to the bottom of its parallel up-channel from March. Much below 1790 would look more bearish. Another rally leg should target 1925-1945 next week.

4.4 Russell 2000 Index (RUT)

Russell-2000 (RUT) chart, Daily

From a Fib and trend line perspective it looks like the RUT could be closer to a top for the leg up from March (if it hasn't already topped)--725 looks like a good upside target. If it makes it much above 725 then the upside potential is to near 775. A break below 681 would be more immediately bearish.

Key Levels for RUT:
- bullish above 725
- bearish below 681

Russell-2000 (RUT) chart, 60-min

The lower line of its parallel up-channel was nearly tagged so it too could see a brief move lower on Thursday before rallying again. Much below 670 would have me thinking more bearishly.

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5.0 Featured Industry Groups

5.1 Banking Index (BIX), Daily chart

After the sharp poke above the top of its down-channel on March 24th the banks rolled back over and the index is back inside the down-channel and appears to be heading lower. The price pattern has me thinking it's an ending pattern (the 3-wave move down from February 1st is what started me thinking it). This pattern typically sets up a descending wedge which is what I've drawn in. Until I see evidence to the contrary I'm expecting it to chop its way lower into June before finding a meaningful bottom (which could mean the banks will find a bottom long before the broader market which is typical). It takes a rally above 275 to suggest a move at least back up to the February 1st high near 300.

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

The home builders fought hard to get through the 200-dma and downtrend line from February 2007. Today's drop has the index back below both. The final rally leg from the March low looks like a good finish (5-wave move) to the bounce so it's entirely possible we'll see a move down to at least a minor new yearly low. I'm depicting a move down to the 216 area in May. Hard to believe, after the amount this index has dropped already, that it would be a 50% haircut from the April high. Assuming for now that this index will drop a little further, there remains the possibility that we'll get another bounce leg up to 500 in May instead. We won't know that until it tests its uptrend line from January.

5.3 Transportation Index (TRAN), Daily chart

I bolded the 200-dma on the chart to show where the pullback stopped today. The bulls would like to see this hold and drive back up in which case I continue to like the Fib and trend line at 5147 for a top to the corrective rally off the January low. It would be an excellent short play up there. A drop back below 4700 would likely spell trouble for the bulls (and likely have bearish implications for the broader market, at least into May).

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6.0 Currencies

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

The US dollar appears to still be consolidating and potentially in a sideways triangle pattern. No change to my expectations for another, and should be final, leg down into May.

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7.0 Commodities

7.1 Oil Fund and Index (USO and OIX)

Oil Fund (USO), Daily chart

New highs for oil. USO is getting closer to the top of its parallel up-channel (didn't quite make it in March) so watch for potential resistance around 92. This could be the last leg up for its rally. There is the potential for a small consolidation before proceeding higher into the end of the month (green).

Oil Index (OIX), Daily chart

All those little white candles shows steady accumulation which obviously looks bullish. Like oil I'm thinking we'll see a small consolidation before pressing higher and I'm thinking it could make it up to the 900 area before potentially topping out. There would be a lot more bullish potential if it can rally higher than 900 (and its previous high in January).

7.2 Gold Fund (GLD), Daily chart

Gold is clearly not as bullish as oil and that has me wondering whether the oil rally is more a sign of an expected longer-term shortage in oil (peak oil and all that) or is instead more speculation going on. There's currently not a shortage since inventory levels are high and demand is down but there could be a lot of hedging by major organizations to lock in current prices (by buying futures contracts) in case oil continues to press higher.

On the gold chart I made the 50-dma bold since that could cause trouble on Thursday for gold bulls so be careful if long the metal here. The price pattern still supports the idea we've seen a major high in gold for a while so a continuation lower, in a very swift decline, is the bearish potential here.

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9.0 Summary and Key Trading Levels

If the market is in one big treading-water pattern here, since the January low, there is going to continue to be some very ugly trading. All the choppy and whipsaw price action we've seen since January could continue into late May/early June. Keep your powder dry if you haven't done well in this environment--maintain your capital base for better trading days. You'll have plenty of opportunities to trade a trend once one reestablishes itself.

If you like to play the short side I see some potential setups next week if the market can rally a little further into opex. If it instead drops lower from here, and breaks the key levels to the downside, I'm not sure yet whether it will continue to be a very choppy move or instead will be the signal that we've started the next big leg down. I'm not ready yet to jump on the idea of the start of a big leg down from here so hold your fire on that.

Long-only players in my opinion have a tough market here (actually both sides do). If the market continues higher from here, or after a morning dip on Thursday, I would look to buy the dips but only if you can watch the market intraday. I still believe surprises will be of the nasty variety and this market has shown the ability to move several hundred DOW points in the blink of an eye. Remember, we have no up-tick rule so selling can get carried away very quickly.

One bearish signal I see is from what the VIX chart is now showing:

Volatility Index (VIX), Daily chart

I mentioned last week that we could see the VIX drop down to its uptrend line from last June, near 21.30 and it did that on Monday. A bounce in the VIX from here would obviously mean bearish things for the stock market.

We're approaching opex week and as mentioned earlier, the Thursday prior to opex week is often a head-fake day and usually the head fake has been to the downside. This has typically been followed by a rally into opex. I've got Fibs and trend lines that support this expectation. If only that VIX weren't bouncing...

Good luck in this market and I'll be back with you next Wednesday.

Key Levels for SPX:
- cautiously bullish above 1387 (target 1415)
- cautiously bearish below 1312 (target 1275)

Key Levels for DOW:
- cautiously bullish above 12733
- cautiously bearish below 12166

Key Levels for NDX:
- cautiously bullish above 1886 (target 1945 by mid April)
- cautiously bearish below 1764 (target 1627 by the end April)

Key Levels for RUT:
- bullish above 725
- bearish below 681
 


New Plays

New Option Plays

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

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Aluminum Corp. of China - ACH - cls: 41.06 chg: -2.54 stop: 39.85

Shares of ACH were hammered on Wednesday. The Shanghai exchange plunged more than 5% and when trading opened up here in the U.S. shares of ACH gapped down to catch up with overseas markets. ACH ended the session down 5.8%. The stock has clearly broken its two-week up trend and is nearing a 50% retracement of the two-week rally. A bounce from round-number support at $40.00 could be used as a new entry point for bullish positions. Unfortunately, many of the short-term technicals have naturally turned bearish. ACH has already exceeded our initial target at $44.85. Our second, more aggressive target is the $47.75-50.00 zone.

Picked on March 30 at $ 40.80 /1st target exceeded (44.85))
Change since picked: + 0.26
Earnings Date 03/18/08 (unconfirmed)
Average Daily Volume = 1.8 million

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Ashland Inc. - ASH - close: 51.16 change: -1.08 stop: 47.95 *new*

ASH closed the day with a 2% decline. More importantly we see a short-term bearish engulfing (reversal) candlestick pattern (try saying that five times fast). We have been suggesting that readers consider waiting for a dip to $50 as their bullish entry point and it looks like we could see that dip pretty soon. We have decided to try and reduce our exposure some by inching up the stop loss to $47.95. 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.

Picked on April 06 at $ 51.25
Change since picked: - 0.09
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 774 thousand

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Core Labs - CLB - close: 133.06 chg: +2.56 stop: 118.99

Another record high for crude oil lifted the oil stocks and CLB rose almost 2%. We don't see any changes from our previous comments. The stock looks very short-term overbought here having gone almost straight up for close to two weeks in a row. We want to wait for the dip. Currently our suggested entry point to buy calls is the $123.50-120.00 zone. We're sticking with that entry zone for now but we might raise it toward the $125 region. 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. FYI: Truly nimble traders could try and scalp a few points with a put play on the expected pull back (maybe to $125).

PPicked 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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CONSOL Energy - CNX - cls: 76.77 chg: -1.44 stop: 69.49

Negative comments from an HSBC analyst let some air out of the coal rally today. Overall we don't see any changes from our prior comments. We're going to stick to our plan for now and suggest readers buy dips in the $73.50-72.50 zone. 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.

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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Fluor - FLR - close: 151.13 chg: -1.34 stop: 143.45

FLR slipped about 0.8% on Wednesday. Given this market environment readers may want to wait for another dip in the $146-145 zone before considering new bullish positions. 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.

Picked on April 01 at $146.50 *triggered
Change since picked: + 4.63
Earnings Date 05/07/08 (unconfirmed)
Average Daily Volume = 2.3 million

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Hovnanian - HOV - close: 10.96 chg: -1.00 stop: *varies*

Homebuilders got clobbered again. The DJUSHB index lost 4.7%. Shares of HOV plunged more than 8.3% and stalled right at the 200-dma. The stock is nearing our suggested entry point in the $10.50-10.00 zone. Our readers might want to narrow that to $10.20-10.00 or $10.15-10.00. We are going to adjust our stop from 9.49 to $9.64. 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 $9.64. 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.

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: 69.99 chg: -0.91 stop: 67.90

LECO could not avoid the market weakness but shares are still holding on to support near $70.00 and its 200-dma. We are still suggesting that readers might want to wait for a dip near $69.50 so LECO can "fill the gap" as a new bullish entry point. 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.

Picked on April 07 at $ 73.73 *triggered/gap higherr
Change since picked: - 3.74
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 233 thousand

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3M Co. - MMM - close: 79.59 chg: -0.29 stop: 78.45

MMM continues to oscillate sideways. We're still waiting for a breakout over resistance. We are suggesting readers use a trigger to buy calls at $81.75. 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.

PPicked 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: 85.33 chg: -0.12 stop: 78.24

We would consider MT's minor 12-cent loss today as a sign of relative strength. The stock actually hit another all-time high this morning. 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.

Picked on March 31 at $ 82.03 *triggered/gap open
Change since picked: + 3.30
Earnings Date 05/15/08 (unconfirmed)
Average Daily Volume = 4.1 million

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Potash Corp. - POT - close: 175.89 chg: -0.26 stop: 149.75

Shares of POT continue to show relative strength. The stock actually hit a new high this morning at $179.29. We remain bullish on POT but want to wait for a pull back. More aggressive traders may want to buy dips near $170. We are suggesting readers buy calls on a dip in the $167.50-165.00 zone. 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.

Picked on April 03 at $ xx.xx <--see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 7.7 million

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Research In Motion - RIMM - cls: 118.16 chg: -2.82 stop: 116.49

Ouch! RIMM almost completely erased Tuesday's gains with a 2.3% decline today. A bounce from here would be another entry point but readers may want to wait for a move past today's high near $120.85 or yesterday's high near $121.00 before initiating positions. We're listing a short-term target at $125.00 and a secondary target in the $129.00-130.00 zone. FYI: The Point & Figure chart is bullish with a $130 target.

Picked on April 08 at $120.98
Change since picked: - 2.82
Earnings Date 06/26/08 (unconfirmed)
Average Daily Volume = 22.3 million

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United States Oil - USO - close: 88.90 chg: +1.71 stop: 82.45

The weekly oil inventory report came out this morning. Wall Street was expecting a build of 2.4 million barrels and the report came in with a drop of 3.2 million barrels. This surprise sent crude oil to new all-time highs. The USO responded with a 1.9% gain and a new all-time high. We don't see any changes from our previous comments. Our first target is the $92.50 mark. Our second, more aggressive target is the $97.50-100.00 zone.

Picked on April 07 at $ 86.49 *triggered/gap higher
Change since picked: + 2.41
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 5.4 million
 

Put Updates

Ambac Fincl. - ABK - cls: 5.65 change: -0.38 stop: n/a

Financials stocks were a significant portion of today's market weakness. ABK under performed its peers with a 6.3% decline. The stock has broken down to new multi-week lows and looks poised to test its multi-year lows near $5.00-4.50 soon. 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). FYI: After the closing bell tonight it was disclosed that J.P.Morgan (JPM) had significantly decreased its stake in shares of ABK.

Picked on January 27 at $ 11.54
Change since picked: - 5.89
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

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Fannie Mae - FNM - close: 28.12 chg: -0.88 stop: 32.31

FNM continues to sink and shares broke down under the 50-dma today. The stock posted a 3% decline albeit on very low volume. We do not see any changes from last night's comments. We are listing two targets. Our first target is the $25.25-25.00 zone. Our second target is the $21.00-20.00 zone.

Picked on April 08 at $ 29.00
Change since picked: - 0.88
Earnings Date 05/27/08 (unconfirmed)
Average Daily Volume = 26.5 million

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Humana Inc - HUM - cls: 42.76 chg: -2.44 stop: 46.21 *new*

The rally in HUM was short lived. The stock erased yesterday's rebound with a 5.4% sell-off today. We remain bearish on the stock. If you think HUM will breakdown under $40.00 then today's move looks like a new entry point and we'd consider a stop around $45.25. Speaking of stops we are going to adjust our stop loss to $46.21. 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).

Picked on March 30 at $ 45.20
Change since picked: - 2.44
Earnings Date 04/28/08 (unconfirmed)
Average Daily Volume = 4.4 million

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Juniper Networks - JNPR - cls: 22.97 chg: -0.46 stop: 24.55

JNPR continued to slip and the stock did hit our suggested entry point to buy puts at $22.95. The play is now open. Our target is the $20.15-20.00 zone. The move under $23.00 has reversed the P&F chart into a new sell signal with a $16.00 target. We do not want to hold over the late April earnings report.

Picked on April 09 at $ 22.95 triggered
Change since picked: + 0.02
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 11.5 million

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MBIA Inc. - MBI - close: 11.97 change: -1.02 stop: n/a

We were expecting some weakness in MBI and the stock plunged 7.8% today. We are 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).

Picked on January 27 at $ 14.20
Change since picked: - 2.23
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 15.2 million
 

Strangle Updates

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

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Goldman Sachs - GS - cls: 174.14 chg: -4.76 stop: n/a

Weakness in financials pushed shares of GS to a 2.6% loss and back under its 50-dma. The move back across the $175.00 mark was a great opportunity to open new strangle positions. Speaking of opening strangle positions we had a reader email ask us what we meant by this statement:

"We would still consider strangle positions in the $173.50-178.50 zone (more aggressive traders could widen that entry zone to $170-180)."

I want to apologize if that doesn't make sense. Your entry point in any options play is always crucial. When trying to open a strangle position your entry point might have a little more leeway but remains critical to your success. Normally we want to try and pick an entry near important support or resistance and strike price. However, stocks are seldom cooperative if we use a specific price like, "open strangle positions when GS hits $175.00" so we list a range where GS could trade, in this case $173.50-178.50, where we would consider opening strangle positions. GS could trade anywhere in that range and we would consider launching a strangle.

My comment about more aggressive traders using a $170-180 range to open positions has the same implications but we're moving farther away from the $175 area and traders opening strangles with the options we suggested are going to have a more challenging time trying to keep their investment neutral if GS is trading closer to $180 or $170 than $175. A strangle is a neutral strategy. We do not care what direction the stock goes as long as it moves far enough in one direction to make one side of the strangle profitable (after covering our entire initial investment).

When we listed this play, with GS near $175, the options we picked were trading about the same price so we could keep our investment balanced with relatively equal capital on both the call side and put side. As GS moves away from $175 the prices of the call and put options are no longer equal and a trader will have to do some juggling to try and keep their investment neutral with relatively equal amounts on both sides of the trade. If you're not equally balanced (we're talking capital not contracts) on both side of the trade then it starts to have a bullish or bearish bias. Maybe that's okay with you but we are trying to play this with a neutral bias. As always you could always modify any of our plays by picking your own options in a different month or at a different strike price.

The options we suggested for this strangle were the May $190 calls (GPY-ER) and the May $160 puts (GPY-QL). Our estimated cost was $8.70. We want to sell if either option trades at $14.50 or higher.

Picked on April 06 at $175.40
Change since picked: - 1.26
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume = 14.5 million
 

Dropped Calls

Essex Prop. Trust - ESS - cls: 112.55 chg: -3.35 stop: 114.45*new*

The volatile shares of REIT stock ESS have broken down through support near $115 and its four-week rising channel. Yesterday we raised our stop loss to reduce our risk with a stop at $114.45. ESS quickly tagged our stop loss this morning. We would keep an eye on potential support near $110 and its 200-dma.

Picked on March 24 at $115.50 *triggered /stopped 114.45
Change since picked: - 2.95
Earnings Date 05/05/08 (unconfirmed)
Average Daily Volume = 408 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

DISCLAIMER

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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