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Daily Newsletter, Saturday, 04/12/2008

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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

GE, We Bring Good Things to Life

GE has brought us many things to improve our lives over the years but Friday's earnings surprise was not one of them. GE stunk up the markets with a nasty earnings miss and lowered guidance for the entire year. Once thing GE has always been known for was no downside earnings surprises. They manage their earnings with clockwork precision or at least they had in the past. GE was known as being rock solid on earnings guidance and they affirmed that guidance as recently as March 13th. That all changed on Friday morning.

CEO Jeff Immelt had to step up and confess on Friday that GE only posted earnings of 44 cents compared to analyst estimates of 51 cents. Immelt blamed the implosion in the financial markets after the Bear Stearns collapse for the earnings miss. Reportedly they were unable to conclude some asset sales because the market had gone back into gridlock. GE lost a lot of credibility with that excuse and the magnitude of the miss. If it was a one-time thing related to the Bear Stearns event then why did they lower the full year earnings estimates to between $2.20 and $2.30 per share from their prior guidance of $2.42? It appears GE has more wrong under the hood than a simple miss in the earnings engine. They lost 3 cents from a failure to sell some real estate assets, 2 cents from mark-to-market asset write-downs, 1 cent from slowing appliance sales and 1 cent from slowing healthcare sales. Reportedly the problems in the municipal finance area are keeping hospitals from buying big ticket items like MRI machines until they can sell bonds to pay for them.

GE Business Segment Earnings Table

GE lost $4.70 for the day and that equates to a market cap loss of $46.9 billion. That is the equivalent to the entire market cap of EBAY or Target (TGT). It was the largest single day loss for GE since the 1987 crash. Volume on GE was more than 367 million shares. As a Dow component GE knocked was responsible for -36 Dow points but that is just the direct impact. GE is a major component in many of the ETFs for the Dow and S&P. When a company of their market cap take such a serious header it causes serious selling in all the associated ETFs. Indirectly you could say GE was easily responsible for the majority of the early morning declines as stops on ETFs were hit. Once those stops are triggered the rest of the day is on autopilot as investor sentiment fails along with the stops.

GE's dramatic failure to meet earnings estimates calls into question the capability for the rest of the stock market to meet theirs. If the strongest U.S. company stumbled badly then what about the 7,000 weaker companies to report? Can investors expect them to do better than the bluest of blue chips? GE has excellent management and a pristine balance sheet. If business was unexpectedly bad for them then the smaller, less well-managed companies may have had an ugly quarter.

GE was not the only bad news on Friday morning. The Consumer Sentiment number for April fell -6.3 points to 63.2 and a 26-year low. The expectations component fell -6.7 points to 53.4 and current conditions fell -5.8 points to 78.4. Inflation expectations spiked to 4.8% from 4.3% in March. The decline in sentiment is not only consistent with a recession but at these levels and acceleration it is indicative of a severe recession. The headline number is already below the level we saw back during the 1990 recession. The last time sentiment levels were this low was the 1981-1982 recession. Rising food and energy expenses were seen as the biggest drivers. Talk of $4 gasoline in May has nearly caused a panic among consumers whose budgets are already stretched to the breaking point. Add in the plunging housing market and nearly impossible loan requirements and you have a 26-year low in sentiment.

Consumer Sentiment Chart

On the economic calendar for next week we have the two main inflation reports in the Producer Price Index (PPI) and the Consumer Price Index (CPI). The PPI is Tuesday and this will show us how the rising energy prices are filtering through at the producer level. Expectations are for a rise of 0.5% to 0.8%. With oil hovering around $110 the odds are good there will be a sharp increase in those products related to crude. The CPI on Wednesday is also expected to show a sharp increase of 0.3% to 0.5% with last months zero gain an anomaly soon to be forgotten. The wild card for both would be a drop in prices due to a drop in demand as the recession worsens.

The Fed Beige Book on Wednesday will also give us a look at economic conditions in all 12 Fed regions. Last months report showed conditions were worsening in almost all regions and all components. Odds are good this report will be significantly worse given the recent change in posture by the Fed.

Ending the week we will see the Philly Fed Survey on Thursday and you may remember it actually rose in February rather than the months of consecutive declines we had seen. The March number rose to -17.4 from -24 so it was not an earthshaking change just a minor improvement. Analysts expect the April number to improve to -15.0 but I think that is wishful thinking. Either way it would still be deep in contraction territory.

Economic Calendar

The big events for next week will come from the earnings calendar rather than the economic calendar. In the list below I highlighted the important ones with orange the most important. Intel on Tuesday is going to be a very critical report. They continue to say business is good but did lower expectations for the quarter. Their guidance for the rest of the year will be far more important than their actual earnings. IBM will follow on Wednesday and they will be just as important as Intel if not more so since they deal directly with large corporations. If their guidance suggests those corporations are slowing their spending then the market could begin a new leg down.

There are several major banks/brokers due to report next week and that includes JPM, USB, WFC, MER, C, AMTD and ETFC. These will obviously be scrutinized for new write-downs and more assets moving to level 3 status. Analysts expect cautious guidance, higher delinquencies, higher level 3 balances and the need to raise more capital. Assets that cannot be valued by normal means because they are not currently trading are moved to level 3 status where the banks assign a value based on what they think they are worth rather than an actual market value. An independent analysis of the financial sector was released on Friday suggesting that up to 200,000 jobs could be cut by year-end due to falling profits.

I included mortgage insurer MGIC Investments (MTG) on the important list after ratings downgrades in the sector this week and potential problems in generating new business. Google reports on Thursday and there are plenty of people who think they could disappoint again given their constant hiring practices. They hired thousands of workers last quarter and continue to hire by the hundreds for their various new projects. This is a big cash drain and with web advertising slowing with the economy Google could be seeing a profit squeeze.

Earnings Calendar

Two weeks ago I wrote a long commentary in the LEAPS newsletter on the impending crisis in the airline sector. Since I wrote that article four airlines have filed bankruptcy. Those are Aloha Airlines, ATA, Skybus and now Frontier. The first three halted flights but Frontier is going to continue flying their normal schedule. Champion Air plans to shutdown and Maxjet Airways went bankrupt in December. Mesa is rumored to be considering bankruptcy. Northwest, Delta and American have announced cutbacks and fare increases. American announced on Friday it was adding another $30 to ticket prices to offset the cost of fuel. This matched the United increase earlier in the week. This was the 11th major fare increase by an airline in 2008. The Merrill Lynch airline analyst said this week that with oil prices at $110 for the rest of 2008 it would add $12 billion to the cost of fuel for those airlines still flying.

FRNT Chart - Daily

The straw that broke Frontier's back was a change in the way First Data was giving them money for credit card purchases of tickets. With three airlines going bankrupt in the last two weeks and halting flights immediately the credit card companies are inundated with charge backs from flyers with worthless tickets. First Data then has to collect the money it advanced the airline for the tickets. If the airline is in bankruptcy they can't get the money back or at least First Data has to wade through bankruptcy court for months to get the refund assuming the larger secured creditors have not already grabbed it. First Data told Frontier that starting on April 11th they would begin withholding a significant portion of the credit card proceeds until the travel was completed. Frontier depends on that cash flow to keep flying and filed bankruptcy to keep First Data from implementing that action. You can bet that all the other smaller airlines are getting the same notices from their credit card processors after last week's string of failures. Mesa could be the next domino to fall but at 67-cents per share there is no play there. AirTran (AAI) dropped -35% on Friday on worries that they would have the same credit card problem as Frontier. AAI quickly issued a press release saying they had no holdbacks at all and were in much better financial shape than Frontier. Greg Greenberg at TheStreet.com along with airline analyst Ted Reed were on TV with a buy call on the airline sector on Wednesday saying they had bottomed and specifically recommending AAI. Good call guys! Other airlines include ALK, AMR, CAL, DAL, JBLU, LCC, LUV, NWA, SKYW, UAUA and XJT.

The FedEx CEO Fred Smith said on Friday there was currently "no growth" in the U.S. economy but it was hard to tell if it had fallen into recession. That is political speak in its purest form. He also said if fuel prices began to decline he was expecting the economy to grow slightly in the second half of the year. UPS lowered its guidance last week due to higher costs and falling volume. My daily UPS delivery had been getting later almost every day for the last two weeks moving from about 2:PM to as late as 5:30. I thought that was strange given the UPS warning about lower volume. I asked the driver on Friday why business was so good in this area given the UPS warning. He said it was NOT good, volume had dropped off considerably and they had been combining routes to take trucks out of service. Now he has twice the route size and half the packages on each one. I would expect UPS to lower guidance even further when they report earnings on Apr-23rd. Under $70 UPS is a short.

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AMD announced their Chief Technology Officer, Phil Hester, resigned and he would not be replaced. He joined AMD in 2005 and was responsible for crafting AMD's technological roadmap over the last three years. I am surprised they did not have him executed given their many mistakes over the last three years. That he is not going to be replaced is an even stranger event.

United Technology reports earnings on Thursday and they are considered a smaller copy of GE. After GE's earnings UTX was quick to issue a press release saying they were comfortable with the quarter. It was an attempt to prevent a guilty by association massacre in UTX stock as GE plummeted.

Another sector that was crushed by the GE earnings miss was the hospital equipment makers like GE. That includes Siemens AG and Phillips Electronics. GE said that sales of equipment like CT scanners to community hospitals dropped 18% in March and that cost them $100 million in profits. The problem came from the lack of funding. These not-for-profit community hospitals sell bonds or auction rate securities to get the money for major purchases. According to one hospital CEO interviewed on CNBC the auction rate securities were rolling over every week at about a 3% annual interest rate in February. As the banking crisis increased and culminated with the Bear Stearns implosion those roll over auctions went to 6%, 9% and even as much as 17-20% before the market locked up completely. Those hospitals can't afford to pay those kinds of rates and they were forced to put upgrade plans on hold until the market returns to normal and that could still be months away. Other companies that make components for this high dollar equipment were hammered with ISRG falling -$20 on the news.

Friday was troubling for me. There were so many cross currents it was tough to decide which were really a problem and which were just noise. First, the unexpected stumble by GE triggered a massive squeeze on those who were long just like the April 1st squeeze crushed those who were short. Whenever the market goes sideways for several days the number of directional positions increases as traders bet on how the stalemate will end. We saw shrinking volume every day for a week leading up to Friday's implosion. The market had been easing off its highs for 3 days and Thursday's opening rebound energized the bulls to some extent. Going long the rebound and putting a stop under Wednesday's lows would have been a common strategy.

Friday's gap down open to a point well below those stops created the first wave of selling. Those with a little higher risk profile probably had stops at 12400. Those without stops would probably have either sold at the open or rushed to put a stop under the opening dip to 12405 in hopes an instant rebound would appear. After 2.5 hours that 12400 level broke at 12:00. That triggered a new wave of stops and just like a row of dominos they fell one by one the rest of the day. Once the cascade starts it rarely ends in a rebound. It was simply a short squeeze in reverse for the bulls.

Volume was minimal at only 6.4 billion shares of which GE totaled more than 366 million. A down day on low volume after a news event would normally be a potential buying opportunity. This time I am not so sure. The miss by GE is troubling on many counts. This shows dramatically how the credit crunch is still a problem. It also shows how the recession is slowing demand. GE is still a great company with something like $52 billion in order backlogs but they still missed. The bright spots that were overlooked in the hysteria were a +23% increase in infrastructure revenue, +12% increase in infrastructure orders, +41% backlog in major equipment and +38% jump in emerging market revenue. GE is still growing at a strong clip and it may have been just a single event, the Bear Stearns failure, that cost them the billion dollars in unfunded deals. It is tough to sell multimillion dollar equipment to people that suddenly can't get funding. That market has relaxed considerably since the Bear Stearns event with the Fed going to extremes to provide liquidity so that should not happen again unless somebody else goes under.

The cut of their full year estimates by as much as -22 cents bothered me initially. After thinking about it all day I believe it was simply a case of under promise and over deliver. Jeff Immelt had just been smacked with the biggest earnings miss in over a decade after affirming guidance only a couple weeks before the quarter end. He had so much egg on his face he could have made omelets for all the analysts on the conference call. He did not want to go through this experience again. Not knowing what the next six weeks of financial earnings will hold or how bad the recession will be he picked a number that was so low GE could make it the rest of the year without breaking a sweat. I could be so far off base it is laughable but that is my assumption and I am sticking with it

Unfortunately even if I am right that may not solve our market problem until mid July when they report again. Now traders are gun shy over next week's earnings. Nobody expected them to be good despite the minimal number of warnings we have seen. As of Wednesday Q1 earnings for the entire S&P were expected to decline by -13.2%. That was 2% worse than three days earlier and -5% worse than ten days before. After the GE news that forecast has probably fallen to a decline of more than -15%. If that was the bottom line I think the market could live with it given the already low expectations.

The GE miss has created new worries that the banks will report some new surprises. It is the financial uncertainty that will be the overriding worry next week. Locked up financial markets create serious uncertainty for earnings and survivability as BSC proved. The financial uncertainty coupled with recession worries could put a cloud over next week's earnings.

Here is another wild card. Three of the last four months have seen a -200 point loss on the Friday before expiration week. I think this is a function of traders being very cautious about expiring option positions and keeping very tight stops heading into expiration week. Funds typically roll positions forward the week before expiration. All of these factors were complicated by the GE miss. Ordinarily I would expect a rebound next week from the event driven drop. I am not so sure this time. I think traders will stay on the sidelines until the big boys report. That would be Intel, IBM, the handful of major financials, Ebay on Wednesday and Google on Thursday. This is probably not a week you want to be long into an earnings cycle.

The Dow hit 12732 on Monday and closed at 12325 on Friday for a range of 407 points. Initial support at 12525 and 12475 was broken on the gap down open on Friday. That makes 12200 the next material support for the Dow and a level we are likely to hit next week. The key will be volume. If it remains extremely light then that 12200 level could hold. However, the chart looks bearish given the triple failure at resistance over the last three months. That makes me question the current decline as more of a longer-term failure than just a GE event. GE may have triggered additional selling and accelerated the decline but it is also possible that decline was already in the cards.

Dow Chart - Daily

Nasdaq Chart - Daily

The Nasdaq also performed an almost perfect failure at strong resistance at 2400 and declined to close under 2300 on Friday. The almost perfect failure on the chart suggests there is no conviction that tech stocks will post decent earnings. Nasdaq 2275 is the next support level and that is less than 20 points away from Friday's close. I don't have a lot of confidence it will hold until Intel's earnings gives a direction to techs.

We have been keying on 1320 on the S&P as our long/short indicator. I have been suggesting buying dips back to 1320 and that has not changed. If we are going to rebound into earnings that is where the bounce should occur. If support at 1320 breaks I think we are going back to 1270 or lower. If you have to be in the market next week I would be short under 1320 and buy dips to that level.

S&P-500 Chart - Daily

With Consumer Sentiment at 26-year lows we are definitely in a consumer slowdown. Consumers simply don't spend when sentiment is that low. That will take several months to correct. As I said above I fear the earnings from techs and financials next week. If GE, with a spotless balance sheet, can't get transactions financed then these banks with significant counterparty risk should have trouble as well. The Fed's various programs to increase liquidity may have solved the problem but we need to see the earnings to be sure. It may have been just the gridlock in the 2-weeks following Bear Stearns that killed GE but we just don't know today. Intel already lowered estimates and IBM has been very quiet. The risk of being in the market is extremely high.

This earnings volatility will produce some excellent lottery plays or strangles on earnings candidates. I call them lottery plays because they will either win big if you guess right or lose it all if you guess wrong. Ebay would be one possible play and Google another. Both could move 10% on an earnings surprise. Guessing which way is the key. Personally I would short them both but that is only a gut feeling and not a technical or fundamental recommendation. Ebay spammed so many "special offers" to users in March it appeared they were desperate to get auctions. If they were unsuccessful then earnings could be ugly. If they were successful then a positive surprise would evaporate your put premiums in an instant. I love earnings plays in expiration week but you have to realize the risk is 100% when using April options. Good luck!

Jim Brown
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
FXE COF None
  EBAY  
  IYF  
  IYG  

Play Editor's Note: Earnings season begins to hit full steam this week. GOOG reports later this week and we'll probably try and play a strangle over the announcement. RIG might be tempting on a dip near $140 as a bullish play. The dip in MTL on Friday looks like a potential entry point. We're still watching PCU and FCX but probably want to see another $5.00 pull back before considering calls in those two. We strongly considered bullish positions in UNP tonight. UNP looks poised to rally again. VMC could be a call play over $72.00. If you are interested in some higher-risk, speculative strangles over earnings this consider playing April options on strangles for these stocks, which report earnings early this week: FRX, INFY, PII, RF, and WM. Remember, April options expire in five days.


New Calls

CurrencyShares Euro - FXE - cls: 158.57 chg: +0.81 stop: 156.45

Company Description:
This is an Exchange Traded Fund (ETF) on the price of the Euro currency.

Why We Like It:
As the U.S. dollar continues to sink the European Union's Euro continues to rise. This is a clear cut momentum trade. Bears will argue that the FXE is overbought and due for a correction. They're right but until the trend changes we're going to try and ride it. Shares have been following a strict trendline of higher lows so we can use a relatively tight stop loss at $156.45. We're suggesting call positions now. However, there is some resistance in the $159 region and more conservative traders may want to wait for a new high to launch positions. Our target is the $164.00-165.00 range. Our time frame is three to five weeks.

Suggested Options:
We are suggesting the May calls. Strikes are available at $1.00 increments. It is up to the individual trader to decide which month and which strike price best suits your trading style and risk.

BUY CALL MAY 155 FXE-EY open interest=1001 current ask $4.50
BUY CALL MAY 157 FXE-EA open interest= 84 current ask $3.10
BUY CALL MAY 160 FLN-ED open interest= 128 current ask $1.55
BUY CALL MAY 162 FLN-EF open interest= 30 current ask $0.95

Picked on April 13 at $158.57
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 307 thousand
 

New Puts

Capital One - COF - close: 48.30 chg: -1.32 stop: 52.55

Company Description:
Capital One Financial Corporation (www.capitalone.com) is a financial holding company whose subsidiaries collectively had $83.0 billion in deposits and $151.4 billion in managed loans outstanding as of December 31, 2007. (source: company press release or website)

Why We Like It:
No one is expecting good news out of the financial sector this earnings season. Normally when everyone is leaning against the same side of the boat it raises the odds of an upset or a surprise. However, this time we suspect that the news will be worse than expected. COF is likely to sell-off into its earnings report due April 17th after the closing bell. That gives us four days to ride any selling pressure and we're strongly considering the strategy of holding over COF's earnings report. Normally we do not want to hold over an earnings announcement. Our target is the $41.50-40.00 zone. The Point & Figure chart is bearish with a $38 target.

Suggested Options:
We are suggesting the May puts.

BUY PUT MAY 50.00 COF-QJ open interest=11872 current ask $5.00
BUY PUT MAY 45.00 COF-QI open interest= 7703 current ask $2.80
BUY PUT MAY 40.00 COF-QH open interest=19680 current ask $1.45

Picked on April 13 at $ 48.30
Change since picked: + 0.00
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 9.0 million

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eBay Inc. - EBAY - close: 30.87 chg: -1.09 stop: 32.26

Company Description:
Founded in 1995, eBay Inc. connects hundreds of millions of people around the world every day, empowering them to explore new opportunities and innovate together. eBay Inc. does this by providing the Internet platforms of choice for global commerce, payments and communications. (source: company press release or website)

Why We Like It:
Shares of EBAY have broken their multi-week up trend and look poised for more profit taking. The company's earnings report is coming up and we don't believe the results are going to please the street. Normally we do not hold over an earnings report. This is an exception to that rule and we're betting on a post-earnings sell-off. This does raise our risk since an earnings surprise could obviously send shares higher. Because of this unknown risk variable (earnings, whisper number, etc) we're labeling this an aggressive play. EBAY reports earnings on April 16th after the closing bell. Our initial target is the $26.00 mark.

Suggested Options:
We are suggesting the May puts.

BUY PUT MAY 32.50 XBA-QZ open interest=4370 current ask $2.62
BUY PUT MAY 30.00 XBA-QF open interest=5707 current ask $1.31
BUY PUT MAY 27.50 QXB-QY open interest=1424 current ask $0.58

Picked on April 13 at $ 30.87
Change since picked: + 0.00
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 14.9 million

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iShares Financial - IYF - close: 82.51 chg: -1.40 stop: 85.55

Company Description:
This is the iShares Dow Jones U.S. Financial Sector exchange traded fund (ETF).

Why We Like It:
Wall Street is going to see a lot of earnings reports out of the financial sector this week and we suspect that the news will be worse than predicted. Our biggest risk is one of the larger banks comes out with significantly better news and it sparks a short squeeze. Fortunately, the trend, which is bearish, is in our favor and by playing the IYF we don't have quite as much exposure as playing a specific company. We're also adding the IYG so you may want to pick the IYF or the IYG instead of both. Our target is the $76.00-75.00. We're adding a second target in the $71.50-70.00 zone.

Suggested Options:
We are suggesting the May puts.

BUY PUT MAY 85.00 IYF-QQ open interest= 75 current ask $5.30
BUY PUT MAY 80.00 IYF-QP open interest=185 current ask $2.75
BUY PUT MAY 75.00 IYF-QO open interest= 57 current ask $1.40

Picked on April 13 at $ 82.51
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 3.6 million

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iShares Fincl.Servcs. - IYG - cls: 87.26 chg: -1.72 stop: 92.26

Company Description:
This is the iShares Dow Jones U.S. Financial Services exchange traded fund.

Why We Like It:
The financial services sector is seeing the same selling and same troubles as the rest of the financial sector. The group just rolled over and we expect earnings to push this toward its lows. We're suggesting positions with the IYG under $90.00. We have two targets. Our first target is the $82.00-80.00 zone. Our second, more aggressive target is the $76.00-75.00 zone.

Suggested Options:
We are suggesting the May puts. At this time we don't see any strikes under $85.00 for May.

BUY PUT MAY 90.00 IYG-QR open interest= 3 current ask $8.10
BUY PUT MAY 85.00 IYG-QQ open interest=16 current ask $4.70

Picked on April 13 at $ 87.26
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 344 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Ashland Inc. - ASH - close: 50.63 change: -0.54 stop: 47.95

ASH had a little bit of news on Friday. The Harbert Management Corp. and its Harbinger Capital Partners Master Fund have raised their stake in ASH from 9.9% (6.3 million shares) to 11.4% (around 7.1 million shares). ASH endured Friday's market weakness pretty well. The markets lost about 2% and ASH only fell 1%. Buying dips, or bounces, near the $50.00 level still seems like a viable strategy. However, traders might want to tighten their stop losses closer to the $49.00 level instead. If the market really turns lower we would expect ASH to retrace to its 50-dma or the $45.00 region. At the end of the day, giving the market's tone on Friday, we wouldn't be rushing out to open new call positions. There is potential resistance at its 200-dma in the $54 zone. Our target is the $57.00-58.00 range. We do not want to hold over the late April earnings report.

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

Picked on April 06 at $ 51.25
Change since picked: - 0.62
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 774 thousand

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Bunge Ltd - BG - close: 103.37 chg: -1.55 stop: 99.90

BG also appeared to hold up reasonably well during Friday's market sell-off. Shares lost about 1.5% but are still clinging toward the 200-dma and 50-dma. Traders had already started to buy the dip late Friday afternoon. Nimble traders could try buying a dip or bounce near the $100.00 mark. We are going to stick to our plan and wait for a breakout over resistance at $105. We're suggesting a trigger to buy calls at $105.25. Our target will be $114.50-115.00. The Point & Figure chart is bullish with a $129 target. We do not want to hold over the April 24th (before the opening bell) earnings report.

Suggested Options:
We are suggesting the May calls but plan to exit ahead of the April 24th earnings report.

BUY CALL MAY 100 BG-ET open interest=1154 current ask $10.00
BUY CALL MAY 105 BG-EA open interest= 520 current ask $ 7.30
BUY CALL MAY 110 BG-EB open interest= 646 current ask $ 5.10

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (confirmed)
Average Daily Volume = 2.8 million

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Baker Hughes - BHI - close: 71.81 chg: -0.95 stop: 69.45

I do not personally watch Jim Cramer's "Mad Money" show on a regular basis but I happened to catch the beginning of the show on Thursday night. We had added BHI to the play list on Thursday and Thursday night Cramer is pounding the table on it as a buy. I'm sure the bulls won't complain. On Friday BHI slipped to its rising 10-dma during the market turmoil. We remain bullish on BHI and would technically consider new call positions here. However, I would much rather wait and see if BHI dips toward the $70 level and buy a dip closer to $70.00 or wait for a bounce from $70.00 instead. The P&F chart is bullish as the stock has broken through resistance and points to an $89 target. Our target is the $78.50-80.00 range. We do not want to hold over the April 22nd earnings report.

Suggested Options:
We are suggesting the May calls but plan to exit ahead of the April 22nd earnings report.

BUY CALL MAY 70.00 BHI-EN open interest=2832 current ask $4.90
BUY CALL MAY 75.00 BHI-EO open interest=5555 current ask $2.50
BUY CALL MAY 80.00 BHI-EP open interest=1736 current ask $1.10

Picked on April 10 at $ 72.76
Change since picked: - 0.95
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 4.7 million

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Core Labs - CLB - close: 131.40 chg: -3.75 stop: 122.45

After three weeks of hefty gains CLB looks like a prime candidate for some profit taking. We're going to stick to our plan with an entry point to buy calls in the $126.00-125.00 zone. Our stop loss is at $122.45 but more aggressive traders may want to put their stop under stronger support near $120 instead. Our target will move to $139.00-140.00. We still do not want to hold over earnings in late April, which does not give us a lot of time.

Suggested Options:
If CLB hits our trigger at $126 we are suggesting the May calls.

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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CONSOL Energy - CNX - cls: 75.63 chg: -2.27 stop: 69.49

We are adjusting our entry point in CNX. The market action on Friday combined with another failed rally at $80 for CNX has us turning a little bit more defensive. Our suggested entry point to buy calls is the $72.50-70.00 zone. The closer to $70.00 the better but we would buy calls at $72.50. 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, which does not give us much time left.

Suggested Options:
If CNX hits our trigger at $72.50 we are suggesting the May calls.

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: 149.46 chg: -2.94 stop: 144.45 *new*

FLR was not immune to the market weakness on Friday. Shares lost about 1.9% although they've been trading sideways for a week now. We do think that FLR will dip again. The question is how low will it go? Will shares find support near $145? Or will FLR dip all the way to $140 again? We are going to raise our stop loss to $144.45. You could take the opposite approach and use a wider stop under $140 (we'd use 137.45). However, we'd rather tighten our stop and just consider buying calls again if FLR bounces near $140. 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 bounces from the $145 level we would use the May calls.

Picked on April 01 at $146.50 *triggered
Change since picked: + 2.96
Earnings Date 05/07/08 (unconfirmed)
Average Daily Volume = 2.3 million

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Hovnanian - HOV - close: 11.34 chg: +0.38 stop: 9.69

Both the DJUSHB home construction index and the HGX housing index are down sharply this past week. Both indices dropped again on Friday and HOV paced the move with a 2.2% decline. What is somewhat surprising is that HOV is holding above its 200-dma - at least for now. HOV still has a multi-week trend of higher lows but we are seeing short-term bearish signals in the technical patterns. We are going to focus on the buy the dip entry point instead of the breakout entry point but we're going to modify the dip entry point from $10.50 to $10.25. We're also adjusting the stop loss to $9.69. If triggered at $10.25 our first target is the $12.75-13.00 range. Our second, more aggressive target will be the $14.50-15.00 zone.

Suggested Options:
Our trigger point to buy calls is $10.25. We're suggesting the May calls.

BUY CALL MAY 10.00 HOV-EB open interest=5284 current ask $1.95
BUY CALL MAY 12.50 HOV-EV open interest=6460 current ask $0.75

Picked on April xx at $ xx.xx <-- see TRIGGER 10.25
Change since picked: + 0.00
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Joy Global - JOYG - close: 68.66 chg: -2.34 stop: 68.45

Shares of JOYG were trading near all-time highs so it's no surprise to see the stock hit harder as traders try to lock in profits. JOYG lost about 3.3% albeit on below average volume. More nimble traders could try buying dips in the $65-66 zone. We are sticking to our plan and waiting for a new high. Shares have resistance in the $72.00-72.50 zone so we're suggesting readers buy calls at $72.55. If triggered our target is the $79.50-80.00 range. The P&F chart is already bullish with an $88 target.

Suggested Options:
If JOYG hits $72.55 we are suggesting the May calls.

BUY CALL MAY 70.00 JQY-EN open interest=1183 current ask $4.90
BUY CALL MAY 75.00 JQY-EO open interest=1321 current ask $2.60

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 2.3 million

---

Lincoln Elec. - LECO - cls: 69.67 chg: -1.41 stop: 67.90

We're starting to think maybe we should just cut our losses and go with LECO. The losses wouldn't be so bad if we hadn't gotten that bad fill on the gap higher. Traders bought the dip at $69.00 on Friday morning. More conservative traders might want to tighten their stops toward $69.00 or just exit early now. Another rally past $71.35 might convince us to go long calls again. The good news is that there hasn't been a lot of follow through on the failed rally but neither has there been any follow through as traders buy the dip near $70.00. 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:
We are not suggesting new positions at this time.

Picked on April 07 at $ 73.73 *triggered/gap higher
Change since picked: - 4.06
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 233 thousand

---

Arcelor Mittal - MT - close: 82.90 chg: -2.74 stop: 79.45*new*

MT, which had been at new all-time highs, was hit with profit taking on Friday. Shares fell almost 3.2% and broke down under its 10-dma. The trend is still bullish but we suspect that MT will pull back toward what should be support near $80.00. Wait for the dip near $80.00 or a bounce from $80.00 as a new bullish entry point to buy calls. We're upping our stop loss to $79.45. 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:
If MT provides a new bullish entry point we would use the May calls.

Picked on March 31 at $ 82.03 *triggered/gap open
Change since picked: + 0.87
Earnings Date 05/15/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Potash Corp. - POT - close: 178.47 chg: +0.37 stop: 159.90 *new*

The relative strength in the fertilizer and agriculture names has been impressive. POT is one of the leaders and shares actually hit a new all-time high over $180 on Friday. This group tends to be the last to breakdown when the market turns south but when it does break it really plunges. Right now we're suggesting readers buy calls in the $170.50-167.50 zone. Honestly, if the market really sees a sell-off we'd rather buy bullish positions in POT near $160 and its 50-dma. We have a very wide stop because the stock and this group has been so volatile. If triggered near $170 we have two targets. Our first target is the $184.00-185.00 range. Our second target is the $194.00-200.00 zone. FYI: The P&F chart is bullish with a $218 target. POT is due to report earnings in the last half of April and we do not want to hold over the report, which doesn't give us a lot of time so don't count on hitting that second target.

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

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

---

Ultra Petrol. - UPL - close: 81.90 chg: +0.40 stop: 77.95

UPL continued to show relative strength on Friday. The stock actually sneaked by with a new all-time high on an intraday basis (it was 82.45). We remain bullish but suggest a little patience. A dip near $80.00 is very possible in this market environment and would be a more attractive entry point. Our target is the $89.50-90.00 zone. The P&F chart has broken through resistance and points to a $95 target.

Suggested Options:
We are still suggesting the May $80 or $85 calls.

Picked on April 10 at $ 81.50
Change since picked: + 0.40
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume = 1.4 million

---

United States Oil - USO - close: 88.48 chg: +0.30 stop: 84.45*new*

Crude oil continues to trade near all-time highs and the commodity was back in rally mode on late Friday afternoon. Oil futures are due to expire around Thursday this coming week. There is huge open interest at the $110 strike, and oil is likely to trade sideways (to up) into futures expiration. We are adjusting our stop loss to $84.45. Our first target is the $92.50 mark. Our second, more aggressive target is the $97.50-100.00 zone.

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

Picked on April 07 at $ 86.49 *triggered/gap higher
Change since picked: + 1.99
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 5.4 million
 

Put Updates

Ambac Fincl. - ABK - cls: 5.33 change: +0.06 stop: n/a

ABK managed a minor, oversold bounce on Friday but the path of least resistance is still down. This coming week's parade of earnings reports from the financial sector could have a big impact (either way) on ABK. 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 are not suggesting new positions in ABK at this time.

Picked on January 27 at $ 11.54
Change since picked: - 6.21
Earnings Date 04/23/08 (confirmed)
Average Daily Volume = 10.9 million

---

Fannie Mae - FNM - close: 26.04 chg: -0.49 stop: 31.11

The sell-off in financial stocks and FNM continues. Shares lost 1.8% today on top of the 8.5% it had already lost since we added it to the newsletter. FNM looks poised to hit our first target soon. 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.

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

Picked on April 08 at $ 29.00
Change since picked: - 2.96
Earnings Date 05/27/08 (unconfirmed)
Average Daily Volume = 26.5 million

---

Humana Inc - HUM - cls: 42.21 chg: -1.97 stop: 45.76 *new*

HUM continues to see relatively big swings. The stock dropped 4.4% on Friday and hit a new relative low. The stock certainly looks poised to fall toward our target but lately it's been up one day and down the next. We are adjusting our stop loss to $45.76. 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 are not suggesting new positions at this time.

Picked on March 30 at $ 45.20
Change since picked: - 2.99
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 4.4 million

---

Juniper Networks - JNPR - cls: 22.83 chg: -0.48 stop: 24.55

An earnings warning from rival Foundry Networks led shares of JNPR to gap open lower on Friday. JNPR dipped to $22.23 before bouncing back. We remain bearish on JNPR and would still consider new put positions here. If shares surprise us with a bounce watch the $24.00 level for overhead resistance. 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. Our target is the $20.15-20.00 zone.

Suggested Options:
We are suggesting the May puts but plan to exit ahead of the April 24th earnings report.

Picked on April 09 at $ 22.95 triggered
Change since picked: - 0.12
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 11.5 million

---

MBIA Inc. - MBI - close: 11.80 change: -0.09 stop: n/a

MBI continues to inch lower. This week's earnings news from the financial sector could have a big impact on shares of MBI. Volume on this stock has pretty much dried up as investors wait for news on the health of this industry. 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).

Suggested Options:
We are not suggesting new positions.

Picked on January 27 at $ 14.20
Change since picked: - 2.40
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.)

---

Goldman Sachs - GS - cls: 167.30 chg: -3.25 stop: n/a

Just about everyone considers GS to be "best in breed" and a lot of investors and market pundits talk about how they want to own this stock but no one is buying it. Looks like they all want to own it just a little bit lower. It would appear that GS' consolidation under its trendline of resistance has broken to the downside although nothing is certain. This week's coming volley of financial sector earnings could definitely produce a lot more volatility for banks and brokers. We are not suggesting new strangles at this time. 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.

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

Picked on April 06 at $175.40
Change since picked: - 8.10
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume = 14.5 million
 

Dropped Calls

Aluminum Corp. of China - ACH - cls: 40.13 chg: -2.03 stop: 39.85

Friday's market weakness just yanked the rug out from under ACH's rebound attempt. Shares of ACH lost 4.8% and left it clinging to round-number support at $40.00. Unfortunately, we don't believe $40.00 is going to hold up this time so we're suggesting readers abandon ship. ACH hit our initial target at $44.85 and hit an intraday high of $46.38 on April 7th but that's as close as it go to our second, more aggressive target near $47.75.

Picked on March 30 at $ 40.80 /1st target exceeded (44.85)
Change since picked: - 0.67
Earnings Date 03/18/08 (unconfirmed)
Average Daily Volume = 1.8 million

---

3M Co. - MMM - close: 78.47 chg: -1.88 stop: 78.45

Weakness in the Dow Industrials continues to weigh on Dow-component MMM. The stock gapped down, presumably on the GE earnings news, and tried to bounce from the $78 level. We have been waiting on a bullish breakout over resistance with a trigger to buy calls at $81.75. That hasn't happened yet and we're choosing to drop MMM as a bullish candidate at this time.

Picked on April xx at $ xx.xx *never opened
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.9 million

---

Research In Motion - RIMM - cls: 115.85 chg: -4.83 stop: 116.49

With bulls on the run they quickly started selling RIMM. Shares gapped open lower at $118.96 and plunged to a 4% loss breaking the 10-dma and producing a new MACD sell signal on the daily chart. RIMM hit our stop loss at $116.49, ending the play. We would keep an eye on RIMM and a bounce from $110 or $100 could be an attractive entry point for new positions.

Picked on April 08 at $120.98
Change since picked: - 5.13
Earnings Date 06/26/08 (unconfirmed)
Average Daily Volume = 22.3 million
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Keltner-Style Divergences

Over the last few weeks, we've been studying the advance/decline (A/D) line. We've used nested Keltner channels to make determinations about what might happen with the A/D line.

Some market watchers, including me, think that volume patterns tend to lead price action. The hope is that by determining where the A/D line is likely to go and when it might turn, we might predict or at least corroborate what the SPX is likely to do.

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. Last week's article discussed setting targets for the A/D line. If you haven't read those articles or are unfamiliar with the A/D line or Keltner channels, a quick review might be appropriate.

Nested Keltner channels possess one last quirk that might help traders judge what's going to happen next. They display Keltner-style divergence.

People can get downright angry when determining what constitutes bearish or bullish divergence. We have an advantage here. Not many people discuss nested Keltner channels at all, and almost no one discusses Keltner-style bullish and bearish divergences. No one is going to argue with us.

I look for any divergences in Keltner channel setups or the way prices react to those setups at recent highs as signs of bearish divergences and any differences at recent lows as signs of bullish divergences.

To best illustrate what I mean, let's look at an example from the SPX's daily chart.

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the SPX:

My intraday charts cover only a 10-day span, so I drew from those daily SPX charts to find more examples of Keltner-style divergences. Now that we've seen Keltner-style divergences at work on the SPX's daily chart, let's look for instances on the A/D line's intraday charts.

Annotated 30-Minute Chart of the A/D Line:

Perhaps you're thinking that the same kind of information could have been derived from the SPX's chart alone. Not necessarily. For example, look at the same period covered in the A/D chart immediately above, this time studying an SPX chart.

Annotated 30-Minute Chart of the SPX:

In this last instance, Keltner-style divergence on the A/D line was showing a possibility that the SPX might climb, but the SPX charts weren't yet showing those same Keltner-style divergences. The A/D's chart was leading in this instance. The A/D line was providing a heads-up to traders.

As with any style of divergence, however--bullish or bearish, derived from price/oscillator comparisons or Keltner charts--a heads-up is all you're getting. You're not getting proof. Such divergences provide you with time to begin making your what-if plans. What if the A/D line is about to reverse? Where would it likely go if it did? What kind of profit-protecting plans need to be made for my trades? As with any kind of divergence, make those plans but let price action be your determinate of when those plans need to be put into action.

Next week, we're on to something else. About time, some of you might be thinking, but whether your agree with the information in this series of articles or think it's all hogwash, I urge you to watch the A/D line.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, 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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