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Daily Newsletter, Saturday, 04/26/2008

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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

Economic Overload

Friday was a skinny day for economics and there are none scheduled for Monday. Consider that a pause for a deep breath by economic analysts because the rest of the week will be extremely heavy. Nearly every heavyweight report for the month has crowded into next week's schedule.

The only material report on Friday was the second reading for April Consumer Sentiment. The index fell another 0.6 points from the initial reading to close the month at 62.6 and a new 26-year low. The present conditions component fell to 77.0 from 84.2 and the expectations component fell to 53.3 from 60.1. A whopping 9 out of 10 respondents believe the economy is already in a recession. Inflation expectations over the next 12 months rose to 4.8% from 4.3%. The current level of sentiment is consistent with a more severe recession than is currently expected. You have to go back to the 1981 recession to find sentiment this low. Worry about $4 gasoline is weighing on consumers. The national average hit $3.58 on Friday making the projections for $4 gasoline in May very achievable.

April Consumer Sentiment Chart

The calendar for next week is jam packed with major economic time bombs. The first one will be the first look at the Q1 GDP with estimates for only 0.2% growth in the quarter. Since almost everyone believes we are already in a recession any positive reading would be a good sign. There is a very strong chance the GDP could come in negative and that would not be a huge surprise unless it was very negative. A positive GDP would give the bulls a reason to run despite the FOMC meeting this week. Traders would rather have growth rather than rate cuts so the GDP will be a key report.

Also on Wednesday is the Chicago Purchasing Managers Index (PMI) and expectations are for a contractionary drop to 48.0 for April. That would be the second month in contraction territory. We saw new orders and production rise slightly in March so there is the potential for an upside surprise.

The biggest economic event on Wednesday is the FOMC announcement. The various events in the financial sector over the last couple weeks have almost erased the chance for a rate cut. Most believe the Fed will still cut rates by 25-points simply because they have not given any signals they were going to move off their easing bias. Recently the Fed speakers have raised their talk about inflation so they may be setting the stage for a bias change at next week's meeting. The majority of analysts now expect a one-and-done message next week. The FOMC will cut rates one more time by 25-points to 2.0% and announce the problem is improving and they are moving to the sidelines to watch while their prior cuts filter through the system. Most expect them to remain on the sidelines for the rest of 2008 due to the continued problems in the housing market. They can't afford to raise rates until the housing reset peak passes in June/July. There is a small contingent that believes the Fed could cut by another 50-points to help that reset peak but then come back to the market in Q4 with a series of rate hikes. The Fed Funds Futures are only showing a 38% chance of a 50-point cut so this option is not garnering a lot of followers.

Following the FOMC event on Wednesday is the national Institute for Supply Management (ISM) report on Thursday. The ISM is also expected to have a contractionary number at 48.0 and that would be the 4th month out of the last five that were under 50. Last month saw a very minor gain from the 48.3 low in February but that gain is expected to be erased in April. If the ISM did happen to turn higher it would be very bullish for the market. This would be especially bullish if the FOMC said on Wednesday that the economy may have bottomed.

The last major report for the week is the Non-Farm Payrolls on Friday. After revisions the report has shown job losses for the last three months averaging 77,000 per month. The economy is expected to have lost another 75,000 jobs in April. It would be hard for the report to surprise investors unless it was horribly skewed to the downside. Most are expecting it to show another loss and that is priced into the market. If the number suddenly showed a decent gain after the FOMC made positive statements it would be the best of all worlds and I would expect the markets to rally hard.

The best scenario for the week would be for a positive ISM, a 25-point cut and positive statement from the Fed and a positive job gain on Friday. That would induce billions in idle cash to come off the sidelines and back into play.

Economic Calendar

The majority of the major earnings reporters have already made their confessions but there are still plenty of smaller companies to report. Next week there are approximately 1075 companies reporting but I would bet there are few names in the list below that really matter to the average investor.

There are a lot of energy names and I probably could have filled the list using only names related to the energy sector. BP reports on Tuesday, ExxonMobil (XOM) reports on Thursday and ChevronTexaco (CVX) on Friday.

The current earnings cycle has seen 260 S&P-500 companies report with average earnings declining -18.6%. Take out the financials and the S&P would still be up +11% for the quarter. Guidance has been mixed and mostly dependent on how much of the earnings came from overseas business. Those large multinationals did very well relatively speaking.

Earnings Calendar

Microsoft was the exception to the rule for multinational earnings. Microsoft disappointed the street and was rewarded with a 6% drop on Friday. Considering they were up about 15% over the prior 7 days that was not as bad as it seemed. Microsoft posted earnings that were down slightly from the comparison period but still managed to beat the street. The culprit was slowing sales of Vista and Office. The acceptance rate for Vista has been less than expected. Most of the major computer makers, HPQ, DELL and Lenovo have announced programs in place to continue shipping computers with Windows-XP instead of Vista despite Microsoft's deadline of June to stop selling XP. Vendors have reportedly been stocking up on Windows-XP and have plans to ship units with a Vista CD but with XP installed. This should be clear evidence that consumers are revolting and are not buying the bloated Vista software. Add in the worry that Microsoft might bid higher to get the Yahoo deal done and MSFT shareholders had a bad day.

American Express (AXP) posted earnings that declined -6% but beat street estimates and AXP affirmed full year earnings. AXP said revenue rose +11% and total spending on its cards rose 14% to $166.4 billion. Unfortunately most of those gains came from outside the country. AXP said they increased loan loss reserves by $881 million for credit losses during the quarter. Losses were up 52% from the comparison period. Unlike Mastercard and Visa, American Express has exposure to credit risk from its 88 million cardholders. Visa reports earnings on Monday.

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Citibank broke out to new 2-month highs on Friday as money rotated into financials and out of commodity stocks. Fitch downgraded several classes of CDOs belonging to various financial firms and that should come as no surprise. What does surprise me is the $179 billion in CDOs currently in default. Of those in default Citigroup owns 24 valued at $30 billion, UBS owns 24 valued at $26 billion and the biggest group of 26 valued at $29 billion belongs to Merrill Lynch. None of those stocks seem to be impacted from the news.

The biggest spike on Friday came from oil once again. Crude prices had fallen for two days and hit $114.25 overnight before another news event sent the futures spiking to $119.55. Predicting the price of oil is harder than predicting the weather. There are thousands of oil facilities in over 100 countries. As we approach Peak Oil the odds are good something negative will happen in at least one of those countries every week. On Friday it was news from the Persian Gulf that an American merchant ship under contract to the military had fired on an Iranian boat. Iran denies they had any boats in the neighborhood and the news report was more than 24 hours old before it surfaced on the wires. It immediately spiked the crude futures over $5 on fears a shooting war could close the Straits of Hormuz to oil tankers. More than 30% of the worlds oil supply transits that passage every day. The shipping lanes are only 6-miles wide through the strait and it is considered an easily attacked choke point. There have been 5 or 6 reports of shots fired at boats harassing U.S. ships in the last 4 months. Thursday's event came only one day after a report surfaced in the U.S. saying the Joint Chiefs of Staff were preparing "potential military courses of action" against Iran. Reportedly the U.S. will make public evidence next week that Iran has stepped up its aid to insurgents in Iraq and that they funded/supplied the Basra uprising a couple weeks ago.

Straits of Hormuz

The news about the warning shots came at a bad time for crude supplies. We also heard this week that a strike at the 210,000 bpd Grangemouth Refinery in Scotland would cause the shutdown of the British Forties pipeline. That pipeline carries 700,000 bpd of crude. The refinery supplies steam that is used in the pipeline operations. There was also news from Nigeria of another pipeline attack against Shell but there was no mention of supply numbers. Also in Nigeria workers went on strike against Exxon and that strike caused a shut in of 200,000 bpd of crude. These types of localized events would not have any impact except for the small surplus of daily capacity on the global stage. If there were 2-3 million barrels of extra capacity nobody would ever notice these events. With less than one million barrels of spare capacity every little event has the potential to combine with others to put global supplies at risk of falling below demand. If you are short oil the combination of these 4 events was very painful despite there being no immediate impact to global supplies. These conditions can exist for weeks before a supply constraint develops. You would think from the $5 rebound a meteor had taken out an entire field permanently.

Crude Oil Chart - Daily

Speaking of meteors Research in Motion (RIMM) shares fell -3% on Friday after the delayed the introduction of their new 3G BlackBerry model named Meteor from June until August. The phone will use the faster AT&T network and reportedly AT&T was concerned about call quality in some tests. RIMM already had problems with its chip supplier Marvel (MRVL) but those problems are over. Now the network certification process that takes about 3-months has begun. The Meteor is expected to be officially unveiled in about 6-weeks for a projected August launch. The phone has been wildly anticipated and initial deliveries are expected to be huge. Apple hinted that it would have a 3G iPhone at a trade show in early April but they did not give a date. RIMM lost 3% on the news.

This was a heck of a week for market direction. Officially the major indexes only gained about half a percent for the week after being down significantly several times. Last Friday the Dow topped at 12893 and it closed this Friday at 12891. It was one of those weeks. I believe next week will be significantly better.

I believe the economic reports will not be that bad and assuming the Fed does not spoil the party on Wednesday we could be trading a lot higher by next weekend. The financials are breaking out and they are leading indexes higher. Energy stocks, the second biggest group in the S&P are also moving higher despite some directional challenges. It would be almost impossible for the markets not to move higher with both of those groups in rally mode.

The FOMC meeting on Wednesday is the only material challenge since they can ruin the entire picture if they do something stupid. I don't believe they want to do that. They want the markets to move higher. They want financials to recover and for sentiment to improve. I would expect them to be passing each other high fives in the meeting if this rebound extends through Wednesday. They also need to avoid a long statement on inflation concerns if they want to keep the rally going. With the yield on the 2-year note above the Fed funds rate this is a clear sign that the rate cut scenario is over. The market is pricing in a recovery and the Fed is going to confirm that with a change in their bias.

The Dow closed right at resistance at 12900 and continued the uptrend started back in early March. It has been a rocky road but once we break over 12900 with conviction I think we will pick up speed in a hurry. 12700 has appeared as initial support but I hope we don't test it again. Next major resistance is 13500.

Dow Chart - Daily

Nasdaq Chart - Daily

The Nasdaq finally broke out over 2400 and then fought to hold it all week. Even with Microsoft and RIMM declining on Friday it still managed to hold near the flat line with only a -6 loss. Initial support is 2385 and the next material resistance is 2725 and that is a long way off.

The S&P is still the laggard but managed to close ever so slightly over 1395 and a new 3-month high. Being +2 points over 1395 does not classify as an overwhelming breakout and could have been just Friday afternoon short covering. However, if financials and energy open positive on Monday we could be off to the races.

S&P-500 Chart - Daily

Dow Transports Chart - Daily

The Transports rallied in the face of $119 oil and closed at a new 8-month high at 5120. If the Dow can move over 12900 we would have a potential Dow theory confirmation. I am still just amazed that the transports are not at 4100 instead of 5100 given the airline disaster and the price of fuel. This is definitely confirmation of a change in market sentiment and evidence that investors are already taking positions and looking for a new post recession bull market.

The Russell-2000 is an even bigger laggard than the S&P with strong three-month resistance at 723 still providing a solid ceiling. The funds have not been as bullish on the small caps and that suggests there is still a lack of conviction this rebound will hold. Once the Russell breaks over 725 with conviction it should be a green light to load the boat assuming we are past the FOMC announcement.

Russell-2000 Chart - Daily

With the continued upward pressure on the indexes I am going to move my decision trigger to S&P 1370. That should be support on any dip and I would look to buy any dips to that level. Under 1370 I would be more cautious if not downright bearish for a short-term trade. I would look for the PMI, ISM, FOMC and NonFarm Payrolls to provide inflection points next week and trade accordingly. We did get a volume increase on Wed/Thr with Thursday coming very close to 8 billion shares. Friday clocked in at only 6.5 billion but it was a Friday. I was encouraged we did not get a sell off, as has been the trend on several recent Fridays. The attempt to sell the open on the Microsoft news was stopped and traders bought that dip. For next week buy dips to 1370 and breakouts over 1400. Look to change direction if 1370 fails.

Jim Brown
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
CYT None None
HBC    
IWM    
IYT    
NKE    
TXT    

Play Editor's Note: After dipping under support at $50.00 on Thursday ASH is on the rebound. This might be another bullish entry point. MER has rallied to resistance near $50.00. Traders might want to consider buying calls if MER can breakout over $50 or its 100-dma. I've been listing FCX and PCU in my Play Editor's notes for days. I would have added PCU this weekend but it looks like earnings are due out in the next day or two. FCX looks strong but I didn't want to chase Friday's $7.00 bounce.


New Calls

Cytec Ind. - CYT - close: 60.64 change: +1.28 stop: 57.95

Company Description:
Cytec Industries Inc. is a global specialty chemicals and materials company focused on developing, manufacturing and selling value-added products. Our products serve a diverse range of end markets including aerospace, adhesive, automotive and industrial coatings, chemical intermediates, inks, mining and plastics. (source: company press release or website)

Why We Like It:
Traditionally petroleum has been a big ingredient and thus cost for the chemical companies but it doesn't seem to be affecting shares of CYT. The stock has been rebounding. The company's recent earnings report was a lot better than expected. Broken resistance is now acting as new support so the Thursday-Friday bounce looks like a new entry point to buy calls. We're starting the play with a stop loss at $57.95 but you could probably try a stop at $58.45 instead. We have to label this a more aggressive play because the spreads on the options are pretty wide. There isn't much we as traders can do about that except try to minimize its impact with good entry and exit strategy. The P&F chart is bullish with an $83 target but CYT is trying to push through resistance on its P&F chart and hasn't quite done it yet. We think that could happen this week. We're listing two targets. Our first target is the $64.75-65.00 range. Our second target is the $68.00-70.00 zone.

Suggested Options:
Remember, this is an aggressive, higher-risk play because the option spreads are so wide! We're suggesting the June calls but August ones could work. The August strikes have more open interest.

BUY CALL JUN 55.00 CYT-FK open interest= 0 current ask $7.00
BUY CALL JUN 60.00 CYT-FL open interest=34 current ask $3.50
BUY CALL JUN 65.00 CYT-FM open interest=22 current ask $1.25

Picked on April 27 at $ 60.64
Change since picked: + 0.00
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 556 thousand

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HSBC - HBC - close: 85.78 change: +0.99 stop: 83.90

Company Description:
Headquartered in London, HSBC is one of the largest banking and financial services organisations in the world. HSBC's international network comprises over 10,000 offices in 83 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. (source: company press release or website)

Why We Like It:
If investors believe the worst is over for the financials then this group should continue to lead the market higher. One stock that has been very strong in its recovery is HBC. The rally stalled about a month ago and shares have been consolidating sideways and resting up for its next leg higher. HBC rallied toward resistance near $86 and its 200-dma on Friday. A breakout higher looks imminent. We are suggesting a trigger to buy calls at $86.15. If triggered we have two targets. Our short-term target is the $89.75-90.00 range. Our more aggressive, longer-term target is the $94.00-95.00 zone. The P&F chart is bullish with a $113 target.

Suggested Options:
We are suggesting the June calls. Our trigger is at $86.15.

BUY CALL JUN 85.00 HBC-FQ open interest=8816 current ask $3.30
BUY CALL JUN 90.00 HBC-FR open interest=3842 current ask $1.20

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/08/08 (confirmed)
Average Daily Volume = 1.7 million

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iShares Russ.2000 - IWM - cls: 71.90 chg: +0.67 stop: 69.49

Company Description:
The IWM is an exchange traded fund (ETF) on the Russell 2000 Index.

Why We Like It:
The IWM has produced a bullish double bottom with the low in January and March. Now the rally is slowly building with a series of higher lows. The IWM is flirting with a breakout over resistance near $72.00-72.50. We are suggesting two different entry points depending on what happens next week. If the markets breakout then we are suggesting readers buy calls at $72.55. If the markets correct then we are suggesting readers buy calls in the $70.50-70.00 zone. We're listing the stop at $69.49. Our four to six-week target is the $77.50-80.00 zone. The P&F chart is bullish with an $87 target.

Suggested Options:
We have two different entry points. One at $72.55 or $70.50.
We're suggesting the June calls. Strikes are available at $1.00 increments.

BUY CALL JUN 70.00 DIW-FR open interest=5838 current ask $3.85
BUY CALL JUN 72.00 IOW-FT open interest=2843 current ask $2.61
BUY CALL JUN 75.00 IOW-FW open interest=2633 current ask $1.22
BUY CALL JUN 77.00 IOW-FY open interest=6359 current ask $0.62

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 84.6 million

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iShares DJ Transports - IYT - cls: 91.48 chg: +1.13 stop: 87.79

Company Description:
The IYT is an exchange traded fund (ETF) on the Dow Jones Transportation average.

Why We Like It:
It is an amazing show of strength that the transports can rally the way that they are in the face of $120 oil. High oil means high fuel prices, which is killing the airlines and is also hurting the truckers. UPS warned a few weeks ago. The airlines are announcing horrendous losses. Yet strength in the railroads and the shipping stocks has been impressive. Even YRCW, a trucker, offered some positive comments this past week. The IYT has produced an inverse or the bullish version of a head-and-shoulders pattern. The breakout over $90.00 is a new entry point to buy calls. This isn't a fast-moving equity but the trend is pretty clear. We'll try and limit our risk with a stop loss under $88.00. We have two targets. Our short-term target is the $94.85-95.00 range. Our longer-term eight-week target is the $98.00-100.00 zone.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 85.00 IYT-FQ open interest=107 current ask $8.60
BUY CALL JUN 90.00 IYT-FR open interest=334 current ask $5.10
BUY CALL JUN 95.00 IYT-FS open interest=105 current ask $2.55

Picked on April 27 at $ 91.48
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 1.4 million

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Nike Inc. - NKE - close: 68.74 chg: +0.68 stop: 66.74

Company Description:
NIKE, Inc., based near Beaverton, Oregon, is the worlds leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. (source: company press release or website)

Why We Like It:
There are just over 100 days left until the 2008 summer Olympics begin in China. While many may believe the impact of the Olympics is already baked into NKE's share price, especially after the March 20th earnings report and rally, we suspect that Olympic fever will continue to carry the stock higher. The hype and the press for the Olympics is only going to pick up steam over the next three months. We're suggesting call positions now although traders could wait for a rise past short-term resistance at $69.00 or the $70.00 mark. We're going to try and use a relatively tight stop loss at $66.74. More aggressive traders may want to use a stop under true support near $65.00. Our target is the $74.00-75.00 range. The P&F chart is bullish with an $83 target.

Suggested Options:
We are suggesting the June or July calls.

BUY CALL JUN 65.00 NKE-FM open interest= 20 current ask $5.20
BUY CALL JUN 70.00 NKE-FN open interest= 477 current ask $2.25
BUY CALL JUN 75.00 NKE-FO open interest=2207 current ask $0.70

BUY CALL JUL 70.00 NKE-GN open interest=2357 current ask $3.20
BUY CALL JUL 75.00 NKE-GO open interest=2553 current ask $1.40

Picked on April 27 at $ 68.74
Change since picked: + 0.00
Earnings Date 06/26/08 (unconfirmed)
Average Daily Volume = 4.0 million

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Textron - TXT - cls: 61.39 change: +0.65 stop: 58.90

Company Description:
Textron Inc. is a $13.2 billion multi-industry company operating in 34 countries with approximately 44,000 employees. The company leverages its global network of aircraft, defense and intelligence, industrial and finance businesses to provide customers with innovative solutions and services. (source: company press release or website)

Why We Like It:
Shares of TXT are definitely recovering. The stock has put in a bullish double-bottom in 2008 and shares are stair-stepping higher. TXT cleared resistance near $60.00 and its 200-dma several days ago but has spent the last week digesting those gains. We now think TXT is poised for the next step higher. Our short-term target is the $64.85-65.00 zone. Our secondary, more aggressive target is the $68.00-70.00 range. The Point & Figure chart is bullish with an $83 target.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 60.00 TXT-FL open interest=1068 current ask $3.90
BUY CALL JUN 65.00 TXT-FM open interest=5497 current ask $1.60

Picked on April 27 at $ 61.39
Change since picked: + 0.00
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 2.1 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Aracruz Celulose - ARA - cls: 78.72 chg: +0.75 stop: 74.75

Shares of ARA continue to consolidate sideways. The stock has been trading sideways for three weeks now and with the market poised to breakout higher we think ARA will follow. We're suggesting a trigger to buy calls at $80.25. The stock has been somewhat volatile 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:
Our suggested trigger is at $80.25. We're suggesting the June or July calls.

BUY CALL JUN 80.00 ARA-FP open interest= 33 current ask $4.00
BUY CALL JUN 85.00 ARA-FQ open interest= 0 current ask $2.25

BUY CALL JUL 75.00 ARA-GO open interest=107 current ask $7.70
BUY CALL JUL 80.00 ARA-GP open interest= 41 current ask $5.20
BUY CALL JUL 85.00 ARA-GQ open interest=217 current ask $3.50

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

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Alliant Tech - ATK - close: 110.18 chg: +1.44 stop: 105.99*new*

Target achieved! Defense stocks continued to rally and shares of ATK broke through technical resistance at its 200-dma. Shares added 1.3% and hit an intraday high of $110.52. Our initial target was the $109.90-110.00 zone. We are adjusting our stop loss to $105.99. More conservative traders may want to use a tighter stop in the $107.50 region. We wouldn't be surprised to see a dip back toward $108. Even though ATK closed over resistance near $110, which is bullish, we're not suggesting new positions at this time. Instead wait for a dip or a bounce in the $108.00-107.50 zone. Our second target is the $114.00-115.00 range. FYI: As expected a rally over $110 has produced a new P&F chart buy signal that now points to a $133 target. We do not want to hold over the May 8th earnings report.

Suggested Options:
If ATK provides a new entry point we would suggest the May or June options. Remember that we plan to exit ahead of earnings.

Picked on April 21 at $106.00 /1st target hit $109.90
Change since picked: + 4.18
Earnings Date 05/08/08 (confirmed)
Average Daily Volume = 246 thousand

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Express Scripts - ESRX - close: 73.71 chg: +2.13 stop: 68.49*new*

Target exceeded! ESRX out performed the markets on Friday with a 2.9% rally to a new three-month high. Our fist target was the $72.50 mark and shares hit $74.27. We strongly suggest readers take profits right here! We are raising our stop loss to $68.49. Our second target is the $74.85-75.00 zone. We only have two days left for this play. ESRX is due to report earnings on April 29th and we don't want to hold over the announcement.

Suggested Options:
We are not suggesting new positions. Take profits here!

Picked on April 21 at $ 67.50 *1st target achieved 72.50
Change since picked: + 6.21
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 3.1 million

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Fluor - FLR - close: 161.47 chg: +4.42 stop: 152.49 *new*

After trading sideways for the first half of Friday the bulls finally joined the party and FLR raced back across the $160 level. The stock looks poised to make a run at its October 2007 highs. We are adjusting the stop loss to $152.49, just under the Thursday low. 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.

Suggested Options:
Nimble traders could buy calls here but use a tighter stop, maybe near $156.

Picked on April 01 at $146.50 *triggered /1st target hit $159
Change since picked: +14.97
Earnings Date 05/12/08 (confirmed)
Average Daily Volume = 2.3 million

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Hovnanian - HOV - close: 11.85 chg: +0.29 stop: 10.45

The homebuilders seemed to lag behind the market on Friday but HOV still posted a 2.5% gain. Volume has been very light all week for HOV. It seems like investors are waiting for something and it might be the FOMC meeting this week. We're leaving our stop at $10.45 for now. We would still consider bullish positions here or on a dips near $11.00. Our target is the $13.50-14.00 zone. Our second, more aggressive target is the $14.75-15.00 zone. FYI: The P&F chart is bullish with a $25 target. HOV still has a high amount of short interest. The most recent data listed short interest at almost 65% of the 37.2 million-share float. That really raises the odds of a short squeeze, which would be great for us.

Suggested Options:
At this point we would suggest the June or August calls.

Picked on April 16 at $ 11.86
Change since picked: - 0.01
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.1 million

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Intl.Bus.Mach. - IBM - cls: 123.08 chg: -1.11 stop: 118.49

We are really tempted to buy this dip in shares of IBM on Friday. The stock slipped about 0.9% to the bottom of its $122.00-125.00 trading range, where it has been all week long. More aggressive traders may want to jump in right here. We're going to wait and stick to the plan. Our suggested entry range is the $120.75-120.00 zone. 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.

Suggested Options:
We are suggesting the June or July calls.

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

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Joy Global - JOYG - close: 75.69 chg: +2.29 stop: 69.95

Fellow mining equipment maker BUCY reported earnings that beat estimates on Thursday night and the news helped propel JOYG to a 3.1% gain on Friday. The stock has established old resistance near $72.00 as new support so more conservative traders may want to raise their stops. JOYG really looks poised to hit new highs this week. Our target is the $79.50-80.00 range. The P&F chart is already bullish with an $88 target.

Suggested Options:
If you launch new positions now we suggest a stop near $72.00. The June or July options should work well.

Picked on April 16 at $ 72.55 *triggered
Change since picked: + 3.14
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 2.3 million

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Nucor - NUE - close: 75.73 change: +2.28 stop: 69.75 *new*

Traders bought the dip in NUE on Friday and the rally began to pick up steam heading into the closing bell. NUE looks ready to breakout over short-term resistance near $75.00 soon. We are adjusting our stop loss to $69.75. More conservative traders may want to consider a stop closer to $72.00 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.

Suggested Options:
We are suggesting the June or July calls.

BUY CALL JUN 70.00 NUE-FN open interest= 31 current ask $8.60
BUY CALL JUN 75.00 NUE-FO open interest=275 current ask $5.50
BUY CALL JUN 80.00 NUE-FP open interest=248 current ask $3.30

BUY CALL JUL 75.00 NUE-GO open interest=2592 current ask $6.70
BUY CALL JUL 80.00 NUE-GP open interest=3285 current ask $4.50

Picked on April 22 at $ 74.63
Change since picked: + 1.10
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 5.6 million

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Public Storage - PSA - cls: 96.79 change: -0.33 stop: 91.95

PSA managed to hit another new relative high at $98.01 on Friday morning but succumbed to profit taking. The stock delivered a strong week and still looks poised to move higher although readers might get another chance to buy a dip near $95 and its 10-dma soon. Our target is the $99.50-100.00 range. We do not want to hold over the early May (unconfirmed) earnings report. Note: the May earnings report is still a mystery. One source is suggesting PSA reports on May 1st while another is suggesting the company reports in the May 5th-10th range. If we don't see something soon to confirm an announcement date we may end up closing the play early just to be safe.

Suggested Options:
We would hesitate to open new positions given our lack of time left in the play.

Picked on April 22 at $ 94.10
Change since picked: + 2.69
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume = 1.6 million
 

Put Updates

United States Oil - USO - cls: 95.66 chg: +2.46 stop: 96.55

The USO has completely erased Thursday's losses. Jim has already discussed what happened to crude oil in the market wrap this weekend. Briefly the combination of XOM reporting a shut in of 200,000 barrels of oil in Nigeria and news that BP would have to shut down their North Sea pipeline and 700,000 barrels of oil due to a strike at a Scotland refinery and news of a U.S.-affiliated boat firing shots at Iranian vessels all pushed crude oil back to its highs. The USO traded to $96.28 on Friday. Our stop loss isn't very far away at $96.55. While we still think oil is near a short-term top we could get stopped out on Monday. Our first target is the $88.50-88.00 zone.

Suggested Options:
We would wait for a new decline under $94.00 before initiating new positions. We're suggesting the June puts.

Picked on April 21 at $ 94.38
Change since picked: + 1.28
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: 192.00 chg: +3.56 stop: n/a

After spending days hovering around the $180 level GS finally broke out higher. The stock is soaring and pushing past resistance levels pretty quickly. We only have three weeks left for May options so we need to see GS continue this strength. We're not suggesting new strangle positions. 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 in GS at this time.

Picked on April 06 at $175.40
Change since picked: +16.60
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume = 14.5 million

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Merrill Lynch - MER - cls: 49.64 chg: +1.55 stop: n/a

MER is still in rally mode and shares are pushing against resistance near $50.00. A breakout here would be very bullish. We're not suggesting new strangle 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.

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

Picked on April 15 at $ 43.34
Change since picked: + 6.30
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 30.6 million
 

Dropped Calls

Research In Motion - RIMM - cls: 120.04 chg: -3.62 stop: 118.40

Our brand new play in RIMM didn't last very long. Shares pulled back and hit our suggested entry point in the $120.50-120.00 zone and then just kept right on falling. News that RIMM would delay its launch of the 3G BlackBerry model named "Meteor" sent the stock lower. RIMM slipped to an intraday low of $117.12 before paring is losses. Our suggested stop loss was $118.40 so the play was "opened" and "closed" in less than two hours.

Picked on April 25 at $120.50 *triggered/stopped same day
Change since picked: + 0.00
Earnings Date 06/25/08 (unconfirmed)
Average Daily Volume = 21.6 million
 

Dropped Puts

Ambac Fincl. - ABK - cls: 3.86 change: +0.10 stop: 6.05

Piper Jaffray downgraded shares of ABK before the opening bell on Friday but it failed to have much impact. Now that the earnings are out there isn't much left on the table as far as negative catalyst. The ratings agencies could still come out and downgrade ABK's credit ratings or the company could declare some sort of bankruptcy or a new pressing need for more capital. Unfortunately, we only have there weeks left on May options. We're dropping ABK from the newsletter. We've been suggesting that readers exit at these recent lows. It's up to you if you want to try and milk a couple of more points out of this stock.

Picked on January 27 at $ 11.54
Change since picked: - 7.68
Earnings Date 04/23/08 (confirmed)
Average Daily Volume = 10.9 million

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Capital One - COF - close: 50.91 chg: +2.46 stop: 50.26

The financials have shown a lot of strength this past week. The better than expected earnings report from rival American Express (AXP) was too much for the bears. COF rallied more than 5% on Friday on top of Thursday's 5% gain. Shares hit our stop loss at $50.26 closing the play. The AXP news may have lessened fears regarding COF's exposure to bad consumer debt.

Picked on April 13 at $ 48.30 /stopped out 50.26
Change since picked: + 2.61
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 9.0 million

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Fannie Mae - FNM - close: 30.93 chg: +2.90 stop: 30.26

It looks like the shorts got squeezed on Friday. FNM gapped open higher at $28.47 and when the market started moving higher Friday afternoon FNM soared past the $30.00 level, nailing our stop loss at $30.26. At the end of the day FNM was up more than 10%. Friday's move marks a breakout over its short-term trendline of lower highs. FNM had already hit our first target at $25.25 a couple of weeks ago. We had been expecting more follow through to the downside but the financials seem impervious to bad news these days.

Picked on April 08 at $ 29.00 /1st target exceeded 25.25
Change since picked: + 1.93
Earnings Date 05/27/08 (unconfirmed)
Average Daily Volume = 26.5 million

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Sears Holding - SHLD - close: 99.75 chg: +2.75 stop: 101.55

I am suggesting that readers hit the emergency eject button on our SHLD put play. The market has just been too strong and the retailers have been showing a lot of relative strength. SHLD has been under performing the market and its peers but it looks like the stock is poised to rally higher next week. The $100.00 level could hold as overhead resistance but we'd rather just cut our losses now and move on.

Picked on April 21 at $ 97.48 /exiting early 99.75
Change since picked: + 2.27
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 2.1 million
 

Dropped Strangles

None
 


Trader's Corner

Roundup

It's time to round up a couple of old Trader's Corner articles and check on the conclusions achieved in those articles. They discussed charting techniques that attempted to make predictions about a security's movement. It's a good idea to check up later and see if those predictions played out.

This will be an anecdotal, not scientific, glance at some past chart studies. One of those articles discussed exhaustion gaps. If you're not familiar with the term, you might review the article, found at this link.

As mentioned in that article, the third or fourth gap produced during a trending move might be an exhaustion gap. Such gaps, according to market gurus such as Martin J. Pring, can warn that momentum is waning and prices might reverse.

That article combined information about exhaustion gaps with Tom Williams' studies on volume/price-spread analysis. As noted in that previous article, Williams' book, MASTER THE MARKETS, warns that market participants should think differently about volume than they're accustomed to doing. They should combine observations about volume with observations about what happened as a result of that volume.

For example, the common wisdom is that market participants need to see confirming strong volume when a new high is reached and confirming strong volume when a new low is reached. Williams would warn that, important as that information is, it leaves out half the important information. If there was a high-volume breakout to the upside, for example, but prices pulled back strongly by the end of the day, leaving a long upper candle shadow behind, what did that mean?

Williams argues that the high volume means that big money was involved, and the pullback likely means that big money was distributing and not accumulating. Conversely, a new recent low on high volume pierces a new level but bounces by the end of a high-volume day, leaving a long lower shadow, would suggest that big money was involved and accumulating.

It's not all as easy as that, of course. All kinds of caveats and tests apply, so I urge a review of that article if you haven't read it. In fact, I urge a review of Williams' book if you can find it. It's a costly book with poor production values but plenty of information, but I've heard that it's sometimes found as a downloadable on the Internet. I paid full price, of course, buying it just before I started hearing about those promotional copies.

In my previous article, I combined an observation of a possible exhaustion gap with a look at volume and price spread when it was created. One example employed was found on a chart of ARRS. Below you'll find the original chart included in that article.

Annotated Daily Chart of ARRS:

Although I had clarified that the chart wasn't being offered as a trade suggestion, the conclusions reached as a result of the possible exhaustion gap and the big volume presented the possibility that "[a]s of February 15, then, it looked possible that an exhaustion gap was forming that might signal at least a short-term turning point for ARRS." I listed some concerns about whether a turnaround would be immediate and also the dangers of a rollover again from gap resistance at the top, midpoint or bottom of that gap.

Now it's time to see what's happened since.

Annotated Daily Chart of ARRS, as of April 24:

Another article, published in the December 15, 2007 edition of the Option Investor Newsletter, was itself a follow up to a November 24 article discussing the corrective fan principle as described by Pring. Those who aren't familiar with the corrective fan principle might review the previous article at this link.

The corrective fan principle, as applied to a downtrend, suggests that the first sharp decline creates a steep descending trendline. It's too steep to be maintained. Prices break up through that trendline and some equity bulls celebrate, thinking that the downtrend has concluded.

Instead, a second, less steeply declining trendline is forming. Its slope is not as severe, but the trendline is probably still too steep to be sustainable. Prices break up again through this second trendline and bulls celebrate again, thinking the downtrend over. By that time, significant damage can have been done. However, it's not until the third trendline is formed and then subsequently broken that the downtrend is completed. Price movements might become disorganized for a while or might begin a new uptrend.

Sometimes those trendlines are easy to discern, particularly if RSI forms trendlines of its own that are broken at the same time or previously to the price trendline breaks. However, as of the time of that December 15 article, it wasn't so easy to determine where the trendlines defining the corrective fan lay. Markets had just seen a steep rally off the November low, but since a third trendline hadn't yet fully formed, much less been broken, the corrective fan principle suggested that the downtrend had not yet concluded. The chart below is a chart included in that December 15 article.

Annotated Daily Chart of the SPX:

The conclusion at the end of that article was that subscribers "should consider the possibility that the last month's sharp rally was nothing more than a relief rally up to the second of three descending trendlines or fanlines that will eventually form."

What's happened since? Clearly, the downtrend had not concluded and that sharp November rally was indeed nothing more than a relief rally. Time and again, follow up articles on the correct fan principle have shown it to be worthy of study when trying to determine whether a trending move has ended.

What about the location of the second and third trendlines? Have those trendlines since been clarified?

Annotated Daily Chart of the SPX as of April 24, 2007:

If not for the following price movements, I would have totally discounted the validity of that blue trendline: the action seen in late February, when prices rose to test that blue trendline and pulled back; in late March when prices did so again before breaking through; and April 14 and 15, when prices dipped to the trendline and then sprang higher again. Those actions do keep it in the running for the location of the second in the three trendlines.

I'm not totally convinced that it's a valid second trendline. The price movements since that trendline was first drawn do not appear typical of those I've seen in the many times over many years that I've observed the corrective fan principle at work. It's not usual to see prices break back below the second trendline and spend so much time below it after first breaking through it and beginning the formation of the the third trendline. I suspect the green trendline may in fact be the second trendline with a third one yet to go.

But I don't know that for sure. This case has me stumped. So, here's what we know for sure. At least two trendlines have been or may be in the process of being established. The green trendline as drawn still has only two touchpoints, so may not be in the final form. If the green line were drawn through the upper candle shadow on December 11's high, cutting off that shadow, the April 14 high was a third touch point for the green trendline, so it's possible that we'll decide that version works best at some point in the future. Or prices may rise up to test the version drawn above and pull back from that, validating that version.

Whether the green trendline is the second or third corrective fanline, as of April 24 it had not been violated to the upside, no matter how it was drawn. The best-fit version would have been pierced on both December 11 and April 24, but both days, the closes were at or below the trendline. As of April 24, then, whether that green trendline is the third fanline or not, the corrective fan principle says that the downtrend that began last fall has not yet concluded.

We're going to have to check on this one again. Another decline to and bounce from the blue trendline would force me to give it credence as the second trendline of the three corrective fanlines. Those hoping for an end to the downtrend would then want to see an upside break of the green trendline. They should prepare for the possibility that what happens next is a period of disorganization rather than a new uptrend. A new trend doesn't always occur immediately.

If prices instead break immediately up through the green trendline while we're still undecided about whether its the second or third corrective fanline, as they threatened to do April 24, some question remains as to whether that's the final break, the end to this particular trend, or not.

I've drawn and redrawn these trendlines. I've fanned them out from the 10/31/07 high rather than the 10/11/07 higher high, thinking that perhaps this downtrend really began with that lower 10/31 high. I've tried this and that, and I'm stumped, but my best guess at this time is that the green trendline may well be only the second and not the third of the three corrective fanlines.
 

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.

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