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Daily Newsletter, Wednesday, 04/23/2008

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Table of Contents

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

Market Wrap

Patience

For those who preferred the new format for the newsletter that I was trying (table of contents, sections split apart, etc.) I apologize that I will not be able to continue doing the newsletter that way. It takes a few hours to put the report together and then the new format is quite a burden on the html guys to get it onto the web site. In the interest of getting the report to you in a timely manner it's better if we keep the formatting simple.

There was virtually no economic news to move the markets today and the battle between the bulls and the bears as to what the earnings mean for the future continues to give us a whippy and choppy market. As has been par for the course, each time it looks like we might get a little trend going during the day, it reverses. When it looks like we're in a bull or bear flag it doesn't follow through and stops out a lot of traders leaning the wrong way, and then it reverses again.

There's just not a lot I can tell you about this market except to say stay patient if your preferred trading is directional. If you're a directional trader you've probably been directed to the loony farm by now. If you're a market neutral trader (e.g., selling credit spreads) you're a happy camper to see the market stay within a trading range and let you collect some premium (and with a low VIX even you have suffered).

I prefer to trade directionally and mostly trade futures. Call me a hyper type-A kind of guy. I want some action. To say this market is not for me would be a gross understatement. I've turned mostly to credit spreads and have to satisfy myself with boring profits (wink) while I wait. Most days I spend my time researching and reading, making some intraday commentary on the Market Monitor (how many times can you say "the market is chopping up and down, hold your fire, keep your powder dry"?) and then when I realize I haven't even opened my broker window I'm amazed. It's quite a change for someone who likes to trade every day.

So that's my way of telling you to sit tight and not force trades. Even though I know the experts say it's more important to know when to trade than how to trade, putting that to practice is not easy. It's like being told to buy low and sell high. OK, got some clues for me as to how to do that? So, speaking of clues, let's just get right to the charts tonight and maybe get this to you a little earlier than usual.

First up, since I mentioned the VIX, is a review of another sentiment chart, the call/put ratio as reported by ISEE:

ISEE Index chart, Daily (courtesy International Securities Exchange):

I've shown this chart many times before and to reiterate I find this chart to one of the more accurate options sentiment charts when it comes to the put/call ratio (or call/put ratio as they report it). They have a very effective way of weeding out hedge plays and isolate the speculative plays, which is a better measure of sentiment than to simply look at the total number of puts and calls being bought and sold.

Yesterday's reading was 158 and typically when the reading gets above 150 it's a warning that we have excessive call buying going on. The previous highs on October 29th and December 28th coincided with market highs that led to steep sell-offs. If you see a reading approaching 200 it's time to back up the truck and load up on put options. Same thing with a reading approaching 50 (more put buying)--load up the truck with call options. So we've got a warning here that the bulls are feeling a wee bit complacent about the up side so be cautious if you're one of them.

And speaking of warnings, the market breadth in rallies continues to stink. As can be seen in the table at the beginning of the report, new 52-week lows continue to beat out new highs, even when the market rallies. The big guys might be trying to rally the market but the soldiers doth protest and are going AWOL.

In Monday's newsletter I pointed out some differences between using arithmetic vs. log price scales, especially when using longer term trend lines and large price changes. In tonight's charts I'm using the log scale on the indices because I've notice price action around them seems to fit better. On any chart I'm using the log scale I've so noted it in the top left corner of the chart. If price action looks like a better fit with the arithmetic scale I left it that way. I recommend you do the same thing when reviewing your charts--flip back and forth and see where the better fits are with trend lines.

SPX chart, Daily

Higher highs and higher lows makes for an uptrend and that's what we've had since the March lows. But when those highs and lows overlap, as they have, it's a sign of corrective price action. Corrective price action to the upside is not bullish so beware that not all up trends are created equal. Ideally, from a wave count perspective, the move up from March would look better with a pullback and another push higher, as depicted in dark red. A drop down to the uptrend line from March, near 1350 by Friday, would be a good setup for another run up to about 1410 (the downtrend line from October) by the end of this month or early May.

Sell in May and go away looks like good advice when I look at the setup on the charts.

While I say it would be bullish above 1415 (key level there), I would be very cautious since there's plenty of resistance up to 1460. A break below the uptrend line from March 17th, confirmed with a break back below 1324 would be more immediately bearish and we'd likely see a move back down to the 1270 area.

Key Levels for SPX:
- bullish above 1415
- bearish below 1324

SPX chart, 120-min

While SPX could rally right from here up to the trend line along recent highs (about 1425), that's the least likely scenario in my opinion. More likely is a pullback to the uptrend line from March 17th, near 1350, followed by another rally leg into the end of the month or early May, potentially topping out around 1400-1410.

DOW chart, Daily

SPX is well below its broken uptrend line from October 2002 so it doesn't matter in that respect whether I use the arithmetic or log scale. But for the DOW it's a big difference. Using the log scale shows price finding the broken uptrend line to be resistance. At Friday's high it ran into its broken uptrend line and its downtrend line from October. It was a double whammy and not surprisingly the DOW has since pulled back from it.

As with SPX I think the DOW's pattern would look best with a pullback to its uptrend line from March 17th, near 12500 by Friday, and then another leg up to finish the bounce off the March 17th low by the end of this month or early May, perhaps getting close to 13K for a high. It takes a break over 13100 to make it look more bullish and a break below 12270 to become more bearish. That's quite a wide spread and in between could be a lot more of the same choppy price action we've been seeing.

Key Levels for DOW:
- bullish above 13100
- bearish below 12270

DOW chart, 120-min

I kept all the little red trend lines on each of the moves up and down since March 17th. Sometimes that's all you need to trade--break a trend line and reverse and go that way with your trading. Right now, based on the break of the uptrend line from April 15th, you should be favoring the short side of the market, especially with trend line resistance just above.

Nasdaq-100 (NDX) chart, Daily

NDX is also struggling under its broken uptrend line from October (again using the log scale) and has tagged it three days in a row now. Each time it's been slapped away. Marginally higher, near 1936, is its downtrend line from October. While I say bullish above 1936 I think the bulls would find a lot of trouble between here and 2021 (62% retracement) so stay cautious if you're long and the market is able to push higher.

Right now the bearish divergence on MACD between the April 7th and current highs is a warning of loss of momentum in the buying while it's hitting resistance. Combine these signals with the excessive bullish sentiment as measured in the ISEE call/put ratio and we've got a clear warning to bulls.

Key Levels for NDX:
- cautiously bullish above 1886
- bearish below 1777

Nasdaq-100 (NDX) chart, 120-min

If the market pulls back into Friday before rallying again next week we could see the same thing for NDX. A drop back down towards 1830 and then another rally up to 1940-1950 is a good possibility. A break of the uptrend line from March 17th would be more immediately bearish.

Russell-2000 (RUT) chart, Daily

The top of a parallel channel since January and the downtrend line from October proved to be tough resistance on Friday. I'm showing a bit of a rising wedge pattern that calls for one more rally leg, probably next week, to finish it. The bearish divergence on MACD is a warning to bulls and the rally leg is by no means assured. A break below the uptrend line from March 17th (which the RUT is closest to) would be a heads up for the rest of the market so watch the RUT as a leading indicator. Another push higher could push marginally above 724, the key upside level, and get immediately reversed so stay cautious if you buy the break above resistance.

Key Levels for RUT:
- bullish above 725
- bearish below 685

Russell-2000 (RUT) chart, 120-min

This chart shows why I selected 736 as the key level--it's where the move up from April 15th would have two equal legs up. In the corrective pattern that the market has been in, this would be a typical move. But any further decline on Thursday would likely break its uptrend line from March 17th and that could spell trouble. Confirmation of the break would be a drop back below the April 15th low near 685.

BIX banking index, Daily chart

The pattern of 3-wave moves to the lows since February is indicative of not a bottom but a correction. We could see another rally leg (pink) before ending the correction but it would be followed by another decline. The alternative is for price to continue chopping lower to create an overlapping 5-wave move down within the descending wedge (dark red count). As in all triangle patterns, you will see nothing but chop inside them and trading them is an exercise in frustration. If I see this pattern play out into June/July as depicted then I'll be interested in recommending some bottom picking in the banking sector. But as for now I think all bottom calls for this sector are premature. Same with housing.

U.S. Home Construction Index chart, DJUSHB, Daily

While the banks appear to be forming a descending wedge it looks like housing could be forming a rising wedge. It's just another triangle pattern and means more chop. But it's not a bottom. Whether price drops lower from here (dark red) or after another leg up (pink), we should see lower lows. Watch for support, or not, at the uptrend line from January, currently near 380.

The retail sector is a good one to watch because a consumer-led recession would certainly be reflected in poor retail sales. The sector has already come down but it has a very interesting pattern (at least to me):

Retail SPDR (XRT), Daily chart

This chart shows a good example of a large sideways triangle playing out since January. It has remained inside its parallel down-channel and is forming a sideways triangle for what could be the 4th wave correction in the decline from June 2007. This index is also trading very well technically--the January low was exactly at the Fib projection at 28.62 (well, it actually undercut it by 4 cents) where the 2nd leg down was 162% of the 1st leg down (the June-Aug leg down).

The triangle pattern since then should get another leg up, as depicted, before finishing. So we could see a very good short play in this sector setting up later in May. In the meantime stay aware that the choppy environment we've been in will likely continue (it is, after all, another triangle pattern).

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As for downside potential, once we get the next leg down, if it's to be a 5th wave (dark red wave count), it projects to 24.60. But if the pink wave count is correct, calling the sideways consolidation as wave B, then wave C projects down to about 16.80 (two equal legs down from October). The b-wave sideways triangle actually looks better to me because it's getting too large--it's the subjective part of EW (Elliott Wave) analysis but I'm thinking the move down the $17 area looks more likely if we see it play out as depicted into May. That would be about a 50% haircut from an expected $33 price at the end of the triangle.

The retail sector could very well be telling us what's going to happen in the broader market. I know a lot of people expect an election-year rally but I'm thinking there are going to be a lot of disappointed people this year.

Transportation Index chart, TRAN, Daily

The Transports came oh so close to the 5147 price projection (for two equal legs up from January) and its broken uptrend line from March 2003 (I'm using the arithmetic scale on this one as the trend line is much higher and not a factor when using the log scale). As shown, the top of a rising wedge pattern for the rally off the March low is currently just above the March 2003 trend line. The current pullback found support today at the bottom of the wedge which is the uptrend line from March 17th. If it breaks down from here we might have already seen the top. If it rallies a little further (pink) I see resistance levels between 5200 and 5300.

To those who say we're in a bull market because of a DOW Theory buy signal, my understanding is that that signal is most important after major tops and bottoms and less useful in the middle of a move. But even the move above the February high by the TRAN has not been matched by the DOW (its February high is 12767). Yes, the DOW briefly moved higher but has since closed below that high for the past two days. Obviously it could move back above it but as I said, this is not as reliable an indicator as it is at major lows and highs.

Oil chart, Oil Fund (USO), Daily

The April rally is looking a bit extended but it's hard to argue with a strong up trend. Daily oscillators are clearly overbought but of course can stay there in and indicate an uptrend in progress. The June contract for oil (the new front month) left a bearish hanging man doji on the chart today and the 30 and 60-min charts left bearish divergences at this afternoon's highs. So the picture is looking at least short term bearish for oil even if it's able to hold up or push slightly higher first. Whether it drops straight down or consolidates in a choppy sideways/down move will tell us whether there will likely be one more leg up (pink).

Oil Index chart, Daily

While the oil contract is leaving bearish signals on its chart we see a bearish setup on the oil stocks as well. Before continuing, I had mentioned a great short play setup last Wednesday on this index based on price pushing up against its broken uptrend line from August 2007 (using the arithmetic scale) and a completed 5-wave count in the move up from March. What I neglected to mention is where to place a stop on the play and that was a mistake on my part and I apologize. All new trade entries must have a stop in mind before ever entering the trade. While I placed the key level to the upside at 900, meaning any higher than that was potentially bullish, I meant to say (but forgot) use 910 as your stop (a new high above the January high).

In Monday's newsletter I reviewed several charts using the LOG price scale and posted two charts of OIX showing the difference. Tonight's chart is using the LOG scale and you can see price pushed right up to it yesterday and today's candle is a bearish engulfing pattern (engulfs the previous day's candle). So here I am again, pounding the table. This is a very good short play setup and this time the stop should be at 930, above today's high. The play should work right away or get out of the way. It could go marginally higher and be another setup but you'll have to play that by ear. Right now, based on today's chart, short against 930 is my recommendation.

U.S. Dollar chart, Daily

The US dollar is refusing to break out of its little sideways triangle pattern that it's been in since the March low. But I'm beginning to wonder if that's the correct interpretation (which calls for a leg lower out of it, shown in dark red). The very choppy pullback from the March 24th high is looking more like a b-wave within an a-b-c bounce off the March low. That would mean a small rally leg up to around 73.50 before heading lower, shown in pink.

A small rally in the dollar could further depress the price of gold, and other commodities. Gold appears to have topped out earlier than oil and its non-confirmation of oil's rally continues to point to a high in oil soon. Gold players may be seeing a topping pattern in the euro that is warning them to take profits. Oil is clearly suffering a different problem than gold but still the short term fundamentals do not support a continuation of the rally in oil. In the meantime I continue to watch the pattern in the euro which could be close to giving us a sell signal:

Euro (June contract) chart, Daily

The euro is still within its bearish rising wedge (confirmed with the bearish divergence on MACD) so a break down from it, confirmed with a drop below the April 18th low at 1.5675, would be a sell signal. A drop back down to 1.500 and its uptrend line in May would be the likely move. For forex traders this is a good short setup.

Gold chart, Gold Fund (GLD), Daily

GLD is finding support at its 100-dma again, after finding support there at the end of March. This time I'm thinking it's not going to hold. If you look at the chart of the gold contract below, you'll see that price rebounded back up to the broken uptrend line from August 2007, which is a little different than what GLD did, and it presents a more bearish picture (test and failure at previous support--a kiss goodbye).

MACD is also showing a bearish setup--it bounced back up to the zero line but has since curled back over. This is typically a very good sell signal (just the opposite when it does it from above). Think of MACD as topping off its gas tank at the zero line, ready for a new assault to oversold (or overbought if it came out of overbought).

So assuming for now that we're going to get a move down with two equal legs, I show the price projection at 79.32. This is right on top of the horizontal red line that is at the apex of the sideways triangle in November and December, a common support level.

GLD is on a P&F sell signal and the current bearish price objective is also at 79. I'd say we have a bit of correlation for a downside objective and support at 79. It could be a good buying opportunity down there if you like the idea of owning gold for the long term.

Gold chart, Gold contract, June (GC08I), Daily

The shiny metal itself managed to retrace 50% of the drop from its March high (957.45 and 956.20 was the high on April 17th) but appears to have started its next leg down (at least that's the setup here). Its downside projection is in the 794-810 area by the triangle apex and two equal legs down. Let's just say it's headed to $800 and it could be a buying opportunity there, and a good short from here.

Economic reports, summary and Key Trading Levels

Thursday's economic reports could move the market so watch early-morning price action. Be aware that a large move prior to the cash market opening is often a head fake move and more often than not is a good fade trade.

In after-hours Amazon (AMZN) reported better than expected earnings and got rewarded with selling--it was off about $4 to $77 after hours. Starbucks (SBUX) missed on their earnings and said this is the weakest economic environment in the company's history (the company has been around since 1971 and Howard Shultz, the CEO, joined the company in 1982 and the company was incorporated in 1985 and then went public in 1992--now go into a store and wow them with your knowledge and see if you can get a free coffee out of them--do it Friday morning when McDonalds is giving away free lattes). For its fine performance SBUX was off about $1.85 to $16 after hours.

AAPL also reported and said they had $1.05B in sales, up from $770M a year ago, and handily beat analysts' estimates. Unfortunately stock price is derived on what they're going to do for us and not what they've done. They guided lower and their price followed in after-hours but then closed near the cash market closing price. So no harm no foul from AAPL tonight. Equity futures however are depressed this evening.

It's not an easy market to trade and could remain this way into May but I do see us getting closer to the end of it. Hang in there, stay patient for a little longer and then get ready to go directional again (which means credit spreaders could find it a bit more challenging). We'll have plenty of time to evaluate that to see how it all sets up.

Good luck and I'll be back with you on Wednesday.

Key Levels for SPX:
- bullish above 1415
- bearish below 1324

Key Levels for DOW:
- bullish above 13100
- bearish below 12270

Key Levels for NDX:
- cautiously bullish above 1936
- bearish below 1777

Key Levels for RUT:
- bullish above 724
- bearish below 685
 


New Plays

New Option Plays

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

New Calls

Aracruz Celulose - ARA - cls: 78.93 chg: +0.75 stop: 74.75

Company Description:
Aracruz Celulose is a Brazilian company, the world's leading producer of bleached eucalyptus pulp. It is responsible 24% of the global supply of the product, used to manufacture printing and writing, tissue, and high value added specialty papers. (source: company press release or website)

Why We Like It:
ARA is another Brazilian company who's stock is near all-time highs. Shares actually rallied in spite of the recent lackluster earnings report in early April. The stock is poised to breakout over resistance at $80.00. We're suggesting a trigger to buy calls at $80.25. The stock has been somewhat volatile this past week so we're using a wide, aggressive stop loss at $74.75 and more conservative traders may want to use a stop near $77 instead. If triggered at $80.25 we have two targets. Our first target is the $84.50-85.00 range. Our second target is the $88.50-90.00 zone. Currently the Point & Figure chart is bearish but a new rise over $80.00 would produce a brand new triple-top breakout buy signal.

Suggested Options:
We are suggesting the June or July calls. July's have more open interest.

BUY CALL JUN 75.00 ARA-FO open interest= 0 current ask $6.70
BUY CALL JUN 80.00 ARA-FP open interest=30 current ask $4.10
BUY CALL JUN 85.00 ARA-FQ open interest= 0 current ask $2.40

BUY CALL JUL 80.00 ARA-GP open interest=44 current ask $5.40
BUY CALL JUL 85.00 ARA-GQ open interest=217 current ask $3.60

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/07/08 (confirmed)
Average Daily Volume = 481 thousand
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Ashland Inc. - ASH - close: 50.60 change: -0.77 stop: 49.85

ASH continues to under perform. The stock lost 1.47% today although bulls continue to defend ASH near $50.50. We are growing concerned given this recent two-day pull back. More conservative traders might want to consider an early exit now to cut their losses. We're going to stick it out for now since the $50.00-50.50 zone is holding as support thus far. We only have a few days left until ASH reports earnings on April 29th. We do not want to hold over the report. Due to our declining time we are adjusting the target to $56.00-58.00. More conservative traders might want to start taking profits when ASH hits $55.00.

Picked on April 06 at $ 51.25
Change since picked: - 0.65
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 774 thousand

---

Alliant Tech - ATK - close: 106.95 chg: +0.75 stop: 104.85

ATK is essentially trading sideways but if you look at the intraday chart the bias seems to be bullish. We would still be buyers here but readers might want to wait for the breakout over its 100-dma (near $107.45) or the 200-dma (near 108.20). We have two targets. Our first target is the $109.90-110.00 zone. Our second target is the $114.00-115.00 range. FYI: A move over $110 would reverse the Point & Figure chart into a new buy signal. We do not want to hold over the May 8th earnings report.

Picked on April 21 at $106.00 *triggered
Change since picked: + 0.95
Earnings Date 05/08/08 (confirmed)
Average Daily Volume = 246 thousand

---

General Cable - BGC - close: 71.75 chg: +0.05 stop: 64.99

We do not see any changes from our previous comments. More aggressive traders might want to buy these bounces from the $70.00 level. We are waiting for BGC to pull back toward our suggested entry in the $68.50-67.50 zone. If triggered our target is the $74.00-75.00 range. We do not want to hold over the April 29th earnings report so that's not a lot of time. The Point & Figure chart is bullish with an $83 target.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 841 thousand

---

Express Scripts - ESRX - close: 72.35 chg: +2.77 stop: 67.45*new*

It was another strong day for ESRX. The stock broke through the $70.00 level and closed near its highs with a 3.9% gain. Shares are very close to our first target at $72.50. Prepare to take some profit off the table tomorrow. Our second target is the $74.85-75.00 zone. More aggressive traders could aim higher but we do not want to hold over the April 29th earnings report. The P&F chart is bullish with an $81 target. FYI: We are raising the stop loss to $67.45.

Picked on April 21 at $ 67.50 *triggered
Change since picked: + 4.85
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 3.1 million

---

Fluor - FLR - close: 159.50 chg: -0.47 stop: 149.85

There is still no change from our prior comments on FLR. If you haven't taken any profits yet we suggest you do so now. We're not suggesting new positions at this time. The stock has already hit our target at the $159.00 level. 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 /1st target hit $159
Change since picked: +13.00
Earnings Date 05/12/08 (confirmed)
Average Daily Volume = 2.3 million

---

CurrencyShares Euro - FXE - cls: 159.28 chg: -0.82 stop: 157.49

Strength in the U.S. dollar today sent gold futures plunging and the Euro to a minor correction on Wednesday. The trend is still bullish. Readers could launch new positions but you need a tight stop. This is a momentum play and when it runs out of momentum it could fall quickly. Our target is the $164.00-165.00 range. Our time frame is three to five weeks.

Picked on April 13 at $158.57
Change since picked: + 0.71
Earnings Date 00/00/00
Average Daily Volume = 307 thousand

---

Hovnanian - HOV - close: 11.24 chg: -0.33 stop: 10.45

We warned readers that the DJUSHB home construction index was poised to drop toward its recent lows and that index did hit those lows today with a 3.9% decline. Rival homebuilder PHM is supposed to report earnings out after the closing bell tonight but we haven't seen the announcement yet. PHM's results will probably set the tone for the sector tomorrow or more correctly PHM's guidance and attitude about the business environment. Lately the homebuilders have not offered bulls any good news and the most recent comments out of this group has been "no end in sight" yet for the slow down. In spite of these negative comments the sector appears to be building a bottom over the last few months. That may be great longer-term but short-term, for us, we could get stopped out if the news is very negative. HOV fell 2.8% today and looks like it could dip toward $10.50. We would consider a dip or bounce near $10.50 as a new bullish entry point to buy calls. Our target is the $13.50-14.00 zone. Our second, more aggressive target is the $14.75-15.00 zone.

Picked on April 16 at $ 11.86
Change since picked: - 0.62
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Intl.Bus.Mach. - IBM - cls: 123.60 chg: -0.07 stop: 118.49

We're starting to wonder if we're waiting in vain. Our plan is to buy a dip in the $120.75-120.00 zone. Traders keep buying the dip in IBM near $122.00-122.65. More aggressive traders might want to jump in now. We're going to stick to our plan. If triggered we'll have two targets. Our first target is the $124.90-125.00 range. Our second target is the $128.00-130.00 zone.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.8 million

---

Joy Global - JOYG - close: 75.11 chg: +1.42 stop: 69.95

JOYG out performed the market with a 1.8% gain. We remain bullish. Our target is the $79.50-80.00 range. The P&F chart is already bullish with an $88 target.

Picked on April 16 at $ 72.55 *triggered
Change since picked: + 2.56
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 2.3 million

---

Nucor - NUE - close: 75.24 change: +0.61 stop: 68.99

NUE is still drifting higher. We would still be buyers here in the May or July calls. We are starting the play with a wide, aggressive stop loss at $68.99. More conservative traders may want to try a stop near $72 instead. Our initial target is the $79.50-80.00 range. Our second, more aggressive target is the $84.00-85.00 zone. The Point & Figure chart is bullish with a $93 target.

Picked on April 22 at $ 74.63
Change since picked: + 0.61
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 5.6 million

---

Public Storage - PSA - cls: 94.44 change: +0.34 stop: 91.95

We don't see any changes from our Tuesday night comments. We would still be buyers here of the June calls. Our target is the $99.50-100.00 range. We'll try and limit our risk with a stop loss at $91.95. We do not want to hold over the early May (unconfirmed) earnings report.

Picked on April 22 at $ 94.10
Change since picked: + 0.34
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume = 1.6 million
 

Put Updates

Ambac Fincl. - ABK - cls: 6.03 change: +0.09 stop: 6.05

It was hard to hear among all the noise in the market today but that dull thud was ABK falling to a new all-time low. Shares plunged 42.6% to $3.46 after reporting earnings this morning. Wall Street was expecting a loss of $1.51 a share. ABK reported a loss of $6.93 a share. That's a HUGE miss and somewhere in the neighborhood of $1.5 billion in losses. The previous low for the stock was in January at $4.50. Shares hit $3.08 late this afternoon on massive volume. We have had this stock as a put play on the newsletter for a long time and depending on when you opened your position you may or may not have a profit. If you do have a profit, we suggest you take it. Now that the bad news is out the stock might bounce but I doubt it. If it does the $4.50-5.00 levels should be resistance. We're adding a stop loss at $6.05. FYI: The May $5.00 put (GIY-QA) hit a high of $2.10 and is trading at $1.65bid/$1.75ask. The May $2.50 put (GIY-QZ) hit a high of $0.45 and is trading at $0.30bid/$0.35 ask. We are not suggesting new positions.

Picked on January 27 at $ 11.54
Change since picked: - 5.51
Earnings Date 04/23/08 (confirmed)
Average Daily Volume = 10.9 million

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Capital One - COF - close: 45.92 chg: -0.46 stop: 50.26*new*

COF slipped to a new four-week low this morning at $45.02 but rebounded from round-number support. We're adjusting our stop loss to $50.26. Our target is the $41.50-40.00 zone. The Point & Figure chart is bearish with a $38 target.

Picked on April 13 at $ 48.30
Change since picked: - 2.38
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 9.0 million

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Fannie Mae - FNM - close: 26.30 chg: -0.83 stop: 30.26

FNM is still marching lower. Shares lost another 3% today. We're not suggesting new positions at this time. FNM has already exceeded our target at the $25.25 mark. Our second target is the $21.00-20.00 zone.

Picked on April 08 at $ 29.00 /1st target exceeded 25.25
Change since picked: - 2.70
Earnings Date 05/27/08 (unconfirmed)
Average Daily Volume = 26.5 million

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Humana Inc - HUM - cls: 44.16 chg: +2.28 stop: 44.55

Hmmm... sometimes the stock market doesn't make sense. Yesterday healthcare stocks were lower after United Health (UNH) reported earnings, missed estimates, and guided lower. This morning WellPoint (WLP) reported earnings, missed estimates, and guided lower. Yet shares of WLP rallied. The stock rose 7.2% to a new six-week high. We see no explanation for WLP's relative strength. It could be short covering but the stock didn't have a lot of short interest to begin with. Are investors buying it because they think all the bad news is baked in? At any rate this strength in WLP rubbed off on HUM. HUM rose 5.4% and closed above the $44.00 level. With our stop loss at $44.55 it won't take much to stop us out. It is possible that we'll be saved by another earnings miss. After the closing bell tonight Amerigroup (AGP) reported earnings, actually beat the estimates, but then guided lower. Yup, that's three in a row that have guided lower for 2008. HUM is actually trading down after hours, around $43.35, presumably due to this AGP news. We'll have to wait and see what happens tomorrow. 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: - 1.04
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 4.4 million

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Sears Holding - SHLD - close: 96.95 chg: +0.43 stop: 101.55

SHLD is trying to bounce again. Traders bought the dip near $95 for the second day in a row. Given the state of the consumer we can't imagine who is buying retailers right now. Maybe tonight's earnings warning from Starbucks (SBUX) will help push the retailers lower again. SBUX and SHLD are obviously in different businesses but both should be hurting as consumers cut back. Look for a failed rally in SHLD near the $99-100 zone as a new entry point to buy puts on SHLD. Our initial target is the $90.50-90.00 zone. More aggressive traders may want to aim for the $85 region. The P&F chart points to an $86 target. We would not want to hold over the late May earnings report.

Picked on April 21 at $ 97.48
Change since picked: - 0.53
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 2.1 million

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United States Oil - USO - cls: 95.18 chg: +0.10 stop: 97.05*new*

We were surprised to see crude oil futures rising. We've been expecting a sell-off to begin today, Wednesday, following the recent futures expiration. Crude oil did slip this morning but news that the weekly oil inventory report showed a build in inventory failed to spark any heavy selling. Crude oil actually traded higher, up 23 cents to $118.30 a barrel for the current month. The USO inched up a dime. We still think this is near a top and just to give us a little more breathing room we're adjusting the stop loss to $97.05 on the USO. If you want, wait for a drop under today's low of $93.81 to launch new put positions. Our first target is the $88.50-88.00 zone.

Picked on April 21 at $ 94.38
Change since picked: + 0.80
Earnings Date 00/00/00
Average Daily Volume = 5.9 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: 179.35 chg: -0.41 stop: n/a

Yet another day of consolidating sideways for GS. We don't know what investors are waiting for. We would be tempted to consider new strangles here with maybe the May or June options and you'll have to make an adjustment for GS at $180 instead of $175. GS will break one way or the other eventually. Keep in mind that May options only have three weeks left so if you do launch new positions we'd pick June strikes. 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: + 3.95
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume = 14.5 million

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Merrill Lynch - MER - cls: 44.91 chg: -1.59 stop: n/a

MER is under performing the markets and this sideways trading is just killing the options. We only have three weeks left for May strikes. More conservative traders may want to cut your losses now. We're not suggesting new positions at this time. The options we listed in the May strangle were the May $50 calls (MER-EJ) and the May $32.50 puts (MER-QA). Our estimated cost was $1.76 and we want to sell if either option hits $3.00 or more.

Picked on April 15 at $ 43.34
Change since picked: + 1.57
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 30.6 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

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