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Daily Newsletter, Saturday, 05/10/2008

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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

Sell In May?

The major indexes posted their first weekly loss in four weeks on mixed news from companies like AIG and Citigroup. Just when it appeared the markets were breaking out the reactions to major news events changed. Just a week ago bad news from the financial sector was shaken off and the indexes moved higher. What changed? A major motivator for trading was the Q1 earnings cycle and that is now over. Secondly we are heading into and option expiration where traders book profits from earnings plays. Lastly, we are heading right into the middle of the 10-day period where "sell in May" investors actually begin leaving the market.

Wilshire 5000 Chart - Weekly

The economics last week were almost invisible with very few reports to interest the markets. Next week that will change as we head into the normal end of month reporting cycle. The first key report on Wednesday is the Consumer Price Index or CPI and the Fed is expecting price inflation to decline. The street is expecting prices to continue to climb. If the Fed is right then the pressure will ease on expectations for future rate hikes. If the street is right and inflation is moving higher then the Fed will begin to get even more nervous about their current low rates and high stimulus posture. Last month prices rose +0.3% from February and +4.0% year over year. Core CPI was up only 2.4% year over year. Core CPI excludes food and energy prices and as we know those are the prices that are exploding higher. By excluding food and energy the Fed can say that inflation is low and actually slowing over the last couple months. That is like a service station advertising gasoline for $1.50 when they don't have any gas. Is gasoline $1.50 or $3.50? Is inflation 5% or 2%? It all depends on how you spin the numbers. The CPI report is 8:30 Wednesday morning.

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Next up is the Philly Fed Manufacturing Survey on Thursday. The survey showed manufacturing conditions in the Philadelphia region fell to -24.9 and a 7-year low in April. Not since 9/11 have conditions been this bad. Tight credit and weak demand are weighing on the manufacturing sector. New orders in April fell to -18.8 and weak backorders at -16.8 suggest it could be several months before the region recovers. Any number under zero represents a contraction. The headline number of -24.9 is expected to improve to -20 but still in a decline.

The NY-Empire manufacturing survey is Thursday morning but it is not as closely watched as the Philly Fed survey. Industrial production is also on Thursday. Consumer sentiment is out again on Friday but it would be hard to surprise traders with a continued drop. This is not a heavy calendar but there are enough reports to distract traders from the lackluster earnings calendar. Of the hundreds of companies reporting next week there were less than 10 that most traders would know. Hewlett Packard is biggest report of the week on Thursday.

Economic Calendar

The biggest reason for Friday's decline was the AIG disaster. AIG lost $3.87 on Friday, which accounts for about 32 Dow points. There was only one other Dow component down more than a dollar and that was ExxonMobil (XOM) at -1.11. AIG lost -8.35 over the last three days and that equates to more than 65 Dow points. With the Dow losing -312 points for the week AIG was 20% of that decline.

AIG Chart - Daily

The problem on Friday was an announcement that AIG lost $7.8 billion in Q1 and needed to raise $12.5 billion in additional capital. AIG said it lost 3.09 per share for the quarter. The losses came primarily from their investment portfolio and credit-default swaps. The swaps are promises to cover losses on $579 billion in bonds and other kinds of debt. Losses from their investments in debt backed by mortgages totaled more than $6.09 billion. AIG said it would raise $7.5 billion through an offering of common stock and another $5 billion through sales of fixed income securities. AIG has a market cap of about $100 billion so that share sale is roughly 7% dilutive. The stock offering will take place on Monday. The real question here is where will the pain end? Analysts thought AIG was done with their write-downs after the Q4 earnings disappointed. This seems to be a consistent trend that every quarter is producing additional losses from financial companies. Granted Q1 was the Bear Stearns quarter and could have been the bottom for valuations but until that starts showing up in financial earnings we won't know for sure. Remember, a major disaster in a Dow stock causes the Dow ETFs to fall sharply. That triggers sell stops on the ETFs and that causes more selling in the individual Dow stocks. AIG may have only accounted directly for 65 Dow points but indirectly through ETF selling that could have been nearly 100 points.

Citigroup (Nyse:C) held an analyst meeting on Friday and revealed they were going to sell up to $500 billion in non-core assets. That is an amazing metric. $500 billion in extra assets they have just laying around. Citigroup has about $2.2 trillion in assets so this trimming of the fat only amounts to about 20%. The sales will occur over time to avoid fire sale prices but it represents a restructuring of monumental proportions. This will include its mortgage portfolio and assets in their securities and consumer banking segments. Revenue is expected to grow by 9% through more cost cutting and layoffs. Citigroup has cut 13,200 jobs since last summer. They have written down $38 billion in assets since this crisis began. Analysts say Citigroup is being forced to take these measures to raise more capital because of their current exposure to home equity loans ($63 billion), mortgages ($150B) and $21B in auto loans. As consumer credit continues to spiral downward they expect additional write-downs and that requires additional capital.

After the bell on Friday FedEx warned on earnings for the current quarter. Warning after the bell on a Friday is the kiss of death. The CFO didn't just run into the CEO's office at 2:PM and say, dang we are going to miss estimates. We better warn! When a company warns after the close on a Friday they normally have something else to hide. They are hoping everyone went home early and will miss the news. FDX said earnings are now going to be $1.45-$1.50 compared to prior estimates of $1.60-$1.80. Analysts had already cut estimates from $1.95 to $1.69 after FDX initially warned for this quarter back in March. FDX said rapidly rising fuel prices were the reason for the warning. The CFO said fuel costs had risen by more than $100 million since the March warning. They have dynamic fuel surcharges in place but they said they were not dynamic enough to cover the rapidly rising prices. They also said the weak economy has restrained demand for U.S. domestic express package and LTL freight services. FDX declined to discuss earnings other than the published warning saying they were in their quiet period before their scheduled earnings release on June 18th. That should also be a red flag since a normal quiet period does not extend over five weeks ahead of earnings. FDX lost -$2.84 in regular trading and another $3.00 in after hours after the announcement.

FedEx Chart - Daily

Circuit City (CC) got a boost today after disclosing they will allow Blockbuster and Carl Icahn to look at the books. Blockbuster has offered $1 billion for troubled Circuit City. Icahn is a major shareholder in Blockbuster and he said he was prepared to buy Circuit City if Blockbuster could not raise the required financing. That relieved concerns that the Blockbuster acquisition would not complete since both are in trouble and financing could be a problem.

Oil prices continued their record run to close at $126 in extended trading. As evidenced by the FedEx warning this is becoming a major problem. It is not just the airlines raising prices 14 times since 2008 began. It is not just John and Peggy Consumer being faced with paying $3.67 or more for gasoline this weekend. This rise in oil prices is taking on a life of its own and the U.S. economy is going to suffer. The weak rebound that supposedly started in April could quickly be squashed if this continues. Over 60% of consumers claim they are facing hard decisions about how they are going to afford fuel. The gains on Friday were attributed to the Hezbollah takeover in Lebanon and new revelations on Hugo Chavez's involvement with the Columbian rebels. On Friday the Wall Street Journal published a report that suggested even closer ties between Chavez and the rebels than previously thought. The WSJ said it had reviewed computer files recovered in Columbia that showed firm offers by Chavez to arm and fund the rebels in exchange for their attacks in Columbia. Analysts are afraid the U.S. will put sanctions on Venezuela given the clear evidence Chavez is promoting violence in other countries. Venezuela is one of the top 5 exporters to the U.S. and should the U.S. put sanctions on Venezuela you can bet Chavez would halt shipments of oil to America in retaliation. Since he has to sell the oil to stay in power and the U.S. has refineries specifically tailored for his grade of oil it would still make its way to us but through middle men and that would raise oil prices again. In Lebanon the Iranian backed Hezbollah group seized the Muslim half of Beirut from fighters loyal to the U.S. backed governing coalition. Lebanon does not produce oil but violence there always pushes up prices on fears other countries will become involved. For instance, if the U.S. decided to punish Iran and Syria for aiding Hezbollah then oil supplies could be threatened. It is a complicated world when you start tracing all the oil supply ramifications to localized civil unrest.

June Crude Futures Chart - Daily

You would think with oil up +$10 in a week that oil stocks would be soaring. That is not the case and almost every oil related stock was down on Friday. Despite the $126 close on oil there is a growing number of investors who feel it has run its course and a correction is imminent. Unfortunately the landscape is littered with the skeletons of investors that have had that same thought over the last six weeks. I believe we are also seeing the pressure from another round of expirations next week. June crude options expire on Thursday and the June crude futures contract expires the following Monday. Those who were crushed by waiting until expiration to exit in the last two expiration cycles probably have vivid memories of the losses and are exiting early this time around.

Another reason given for the last three days of market declines is the win by Obama on Tuesday. Clinton's poor showing in North Carolina and the weak win in Indiana suggest it is all over but the crying. Obama will be the democratic candidate. Even Obama credited the win in Indiana to cross over republican voters who wanted to keep Clinton in the race as long as possible so the candidates would continue to pick each other to pieces. Rush Limbaugh reportedly organized Operation Chaos to mobilize republicans in Indiana. Obama admitted the plan worked. The market could be starting to price in an Obama candidacy and his frequent calls for higher taxes on individuals and corporations. Clinton policies would have had less change and a government more like the 1990s. Investors could have swallowed that pill a little easier according to the pundits on TV. Personally I don't believe it was a major factor in the selling but in these low volume sessions it does not take much of a spark to decide the direction.

The revelations from AIG and Citigroup suggest the credit crisis is not over. There are fears that Freddie Mac (FRE) will come to the market with earnings on Wednesday with a new disclosure of write-downs and new capital requirements. A JP Morgan private banker, Stuart Schweitzer, said on Friday that JP Morgan was decidedly uncomfortable with the market and was mostly in cash. They feel the crisis is not over and new revelations are still to come. They feel the housing crisis will worsen throughout the rest of the year, oil prices will continue to weigh on the economy and a consumer meltdown will be the next shoe to drop. CEO, James Dimon said at a meeting in Frankfort last week that he did not expect the financial crisis to end soon and JP Morgan would remain very cautious. "We can only speculate how deep and how long the recession in the U.S. will really be and how that will impact banks. We will not be done with the crisis for a long time Imagine we would need to announce to our shareholders one day, sorry but the recession in the USA is so bad we are broke. We need to be able to rule that out at all times so it will not come to that," Dimon said. Greenspan said this week he also expects the housing crisis to continue into 2008. He was widely misquoted earlier in the week as saying the worst of the credit crisis was over. He qualified that on Friday on CNBC saying it was over "IF" housing recovered and credit markets improved, etc, etc. He is never one to make simple statements.

Merrill was also out with a note to avoid seven sectors. Those seven were specialty retail, industrial conglomerates, capital markets, consumer finance, insurance, consumer services and health providers. They called them wealth traps at this stage of an economic recovery saying that historically they lagged other sectors under these economic conditions.

Next week has a lot of retail earnings and expectations are not very high. So far we have not seen the fallout from the economic downturn translate into weak sales. With gasoline going up daily it is only a matter of time before that does happen. Analysts are worried that we could see some guidance warnings next week. Major reporters are KSS, JCP, ANF, M, URBN and JWN. A weak showing by retailers could further pressure the markets.

The AIG opening plunge knocked the Dow below initial support at 12800. After that initial drop the selling was well contained and the opening dip to 12720 remained intraday support the rest of the day. The volume was very low at 5.9 billion shares across all markets and that was the lowest volume since April-28th and only the 6th time under 6 billion shares in 2008. Volume is a weapon of the bulls and it appears they are either out of ammo or just not fighting. We have seen a 1400-point rally off the March lows so a -300 week is not a disaster. The decline brought the Dow only back to uptrend support. However, a break here could be serious. The FedEx warning after the close on Friday will depress the Dow transports on Monday and probably the Dow by association.

Dow Chart - Daily

Nasdaq Chart - Daily

The Nasdaq continues to perform better than the Dow and only gave up -5 points on Friday. Support appears to be forming around 2440 and for two days that support has held. The Nasdaq could easily pullback to 2400 without doing any real damage to the uptrend. On Monday Research in Motion (RIMM) will officially announce the BlackBerry 9000 that some have been calling an iPhone killer. I have seen a demo on it and I don't believe it is an iPhone killer but it will definitely be a hot commodity. This could give RIMM and the Nasdaq a boost as long as they follow through with the release without any further setbacks or qualifications.

The S&P-500 is more troubling for me this weekend. My initial support level at 1400 was broken on Thursday but 1380 returned as a backup. With 1375-1380 only a gap open below the 1388 close there are several levels here that could continue to act as support. I recommended on Tuesday to reverse to a short bias under 1400 and I still have that recommendation today.

S&P-500 Chart - Daily

Russell 2000 Chart - Daily

A surprising thing happened during Friday's drop. The Russell 2000 did NOT drop and closed in the green. In fact 715 was solid support on both Thursday and Friday. The Russell futures closed up +3.20 and near the high for the day until the FDX warning. I was all set to change my bias based on the Russell but now we need to see how the FDX warning affects the open on Monday. With the Russell's close at 720 we are still 12 points away from a breakout level over 732 but the relative strength was encouraging.

To recap my expectations for next week I would be leery of the retail earnings. Hopefully enough people are expecting problems so anything they report will be an improvement. Watch the RIMM announcement on Monday for some tech direction. If oil continues higher ahead of expiration the market may start to pay more attention given the FedEx warning. Obviously oil's $15 rebound off the May-1st lows is extremely over extended but traders have the Goldman Sachs prediction as emotional backup for existing longs. It is a confusing trade when every fundamental is saying decline but prices are spiking. Watch for the CPI on Wednesday to cause some Fed anguish unless by some freak of nature prices fell last month. There may not be any single compelling reason for last week's losses but remember we are in exactly the right spot on the calendar for the sell in May and go away crowd to exit. That occurs after earnings and around options expiration. To rebut this cycle in 2008 we need the markets to hold these levels for the next two weeks. Otherwise we need to start targeting 1275 again on the S&P. I am not ready to make that call. I want to believe that the worst is behind us and this is just some minor profit taking. Of course we can believe what we want but we need to trade the charts and the S&P is in sell mode under 1400.

Jim Brown
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
CRR None None
FWLT    

Play Editor's Note: I almost added a strangle play on Amylin Pharmaceuticals (AMLN). The stock has coiled into the very tip of a pennant pattern of higher lows and lower highs so a breakout is imminent. That breakout will probably happen on Tuesday when the company presents at an investor conference in Las Vegas. I chose not to add it because the strike prices seemed too far apart to make it really work. More adventuresome traders could try a strangle with a June $30 call and the June $25 puts but you'd have to but 2 puts for every 1 call to make your investment neutral. The calls were about $1.60 and the puts were going for about 80 cents. Something to think about. If AMLN didn't move significantly by Thursday I'd probably exit.


New Calls

Carbo Ceramics - CRR - close: 47.45 change: +1.15 stop: 44.89

Company Description:
CARBO Ceramics is the worlds leading producer of ceramic proppants, which are spherical pellets used to increase productivity of oil and gas wells. CARBO and its predecessor companies have been manufacturing ceramic proppants since 1978. With four manufacturing plants in the U.S. and China. (source: company press release or website)

Why We Like It:
After a strong rally from March and April shares of CRR took a couple of weeks off to pull back and catch their breath. Now shares are bouncing again after finding new support near $45.00. We're suggesting readers buy calls on this bounce. We'll put a stop under last week's lows. There is some resistance near $50.00 but we're aiming for the $52.00-52.50 zone.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 45.00 CRR-FI open interest=168 current ask $4.10
BUY CALL JUN 50.00 CRR-FJ open interest= 86 current ask $1.45

Picked on May 11 at $ 47.45
Change since picked: + 0.00
Earnings Date 04/24/08 (confirmed)
Average Daily Volume = 303 thousand

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Foster Wheeler - FWLT - close: 68.97 change: +0.09 stop: 65.99

Company Description:
Foster Wheeler Ltd. is a global company offering, through its subsidiaries, a broad range of engineering, procurement, construction, manufacturing, project development and management, research and plant operation services. (source: company press release or website)

Why We Like It:
It was a volatile week for FWLT as the market reacted to the company's latest earnings report. Yet in spite of the rocky trading the stock has maintained its bullish trend of higher lows. Shares now look poised to breakout over resistance near 470.00. We are suggesting a trigger to buy calls at $70.51, which is above last week's high. If triggered we have two targets. Our short-term target is $74.90-75.00. Our secondary target is the $79.50-80.00 range. We're starting the play with a relatively wide (aggressive) stop loss. You may want to use a tighter stop! The P&F chart is bullish with an $84 target.

Suggested Options:
Our trigger to buy calls is at $70.51. If triggered we're suggesting the June calls.

BUY CALL JUN 65.00 UFB-FM open interest= 568 current ask $6.60
BUY CALL JUN 70.00 UFB-FN open interest=1591 current ask $3.90
BUY CALL JUN 75.00 UFB-FO open interest=1477 current ask $1.95

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/07/08 (confirmed)
Average Daily Volume = 3.4 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

AGCO Corp. - AG - close: 59.15 change: -0.30 stop: 57.75

AG is a new bullish candidate from our Thursday night newsletter. The stock traded sideways on Friday and we don't see any changes from our previous comments so we're reposting them here:

It has been a very volatile couple of weeks for AG. The stock has plunged from $70 to $55 and bounced back to $60 again. The sell-off followed its earnings report. The earnings were better than expected but management offered guidance that was below analysts' estimates. The stock is bouncing from support near $55 and its trendline of higher lows. We suspect the stock could bounce back toward $65 and maybe $70 if the agriculture stocks rally again. We're suggesting a trigger to buy calls at $60.40, which is just above last Wednesday's high. If triggered at $60.40 our short-term target is the $64.90-65.00 range. FYI: The P&F chart is bullish with a $71 target.

Suggested Options:
Our trigger to buy calls is at $60.40. We're suggesting the June calls.

BUY CALL JUN 60.00 AG-FL open interest=833 current ask $3.70
BUY CALL JUN 65.00 AG-FM open interest=195 current ask $1.80

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 1.8 million

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Aracruz Celulose - ARA - cls: 81.51 chg: -0.52 stop: 79.45 *new*

As expected ARA found support near $80.00 and the afternoon bounce looks like a new entry point to buy calls. The Brazilian market had pulled back a bit from its recent highs but the Bovespa index was also rebounding higher into Friday's closing bell. We are raising our stop loss on ARA to $79.45. Shares of ARA have already hit our first target at $84.50. Our second target is the $88.50-90.00 zone. The recent rally over $80.00 did produce a new P&F chart buy signal, which currently points to a $94 target.

Suggested Options:
We would suggest the June or July calls.

Picked on April 28 at $ 80.25 *1st target hit $84.50
Change since picked: + 1.26
Earnings Date 04/07/08 (confirmed)
Average Daily Volume = 481 thousand

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CNOOC - CEO - close: 180.98 change: +0.31 stop: 174.75 *new*

We remain bullish on CEO. Four days ago the stock broke out from its pennant-shaped pattern, which followed a larger breakout higher from its six-month consolidation. While the stock has gone sideways since last week's "breakout" the trend of higher lows is still in place. We're upping our stop loss to $174.75. We would suggest new positions here or you could wait for a new move over $182 before initiating plays. Our target is the $199.00-200.00 range. FYI: We have to label this a more aggressive play because the option spreads are so wide!

Suggested Options:
We are suggesting the June calls

Picked on May 06 at $183.47
Change since picked: - 2.49
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 548 thousand

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CF Ind. - CF - close: 136.83 chg: -0.64 stop: 129.90 *new*

It was a relatively quiet day for CF. Of course this is a volatile group, the fertilizer stocks, and a quiet day for CF was a $5.00 trading range. We remain bullish but we're raising our stop loss to $129.90. More conservative traders might want to raise their stop toward $132 since last week's low was $132.35. While we are suggesting new positions here we could see waiting. The major market indices look a little vulnerable and if the market continues lower then CF will be a natural target for profit taking. One alternative entry point might be to wait for a rally over $140 again (or last week's high at $142.00). Our target is the $155.00-160.00 range. FYI: CF announced that its annual shareholder meeting will be held on Tuesday, May 13th.

Suggested Options:
We are suggesting the June calls.

Picked on May 05 at $137.50 *triggered
Change since picked: - 0.67
Earnings Date 04/27/08 (unconfirmed)
Average Daily Volume = 3.1 million

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Cytec Ind. - CYT - close: 60.44 change: -0.55 stop: 58.45 *new*

CYT out performed the markets last week with a 2% gain but volume was weak and was getting worse heading into the weekend. Investors continue to buy the dip, which makes Friday's rebound look like another entry point. We are adjusting our stop loss to $58.45. More conservative traders might want to tighten their stop closer to Friday's low. 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. 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.

Suggested Options:
We would use the June calls.

Picked on April 27 at $ 60.64
Change since picked: - 0.20
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 556 thousand

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Deere & Co. - DE - close: 86.31 change: -0.51 stop: 84.40 *new*

We are running out of time for DE. The company reports earnings on Wednesday morning, May 14th, and as you know we don't want to hold over the announcement. Thus we're planning to exit on Tuesday at the closing bell. Given our time frame we're turning defensive with our stop loss and moving it higher to $84.40, just under Friday's low. The stock bounced twice near $84.50 last week so it should be short-term support. We're eliminating our aggressive target at $94 and just focusing on the short-term target at $89.95.

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

Picked on May 06 at $ 86.08
Change since picked: + 0.23
Earnings Date 05/14/08 (confirmed)
Average Daily Volume = 5.3 million

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Express Scipts - ESRX - close: 70.79 chg: -0.17 stop: 68.19

Traders continue to buy the dips in ESRX. They did it again on Friday at $69.41. The rebound looks like another entry point to buy calls. However, given the market's recent weakness our readers may want to wait for a rise past $71.50 before initiating new call positions. Overall we don't see any changes from our Thursday's night new play description. We do expect some resistance at $74.25 but our target is the $77.00-80.00 range. More conservative traders will want to consider taking some profits off the table near $75.00. The Point & Figure chart is bullish with a $81 target.

Suggested Options:
We're suggesting the June calls.

BUY CALL JUN 70.00 XTQ-FN open interest= 504 current ask $3.80
BUY CALL JUN 75.00 XTQ-FO open interest=2458 current ask $1.60

Picked on May 08 at $ 70.96
Change since picked: - 0.17
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 2.8 million

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Fortune Brands - FO - close: 68.96 change: -0.59 stop: 67.95

Nothing has changed in FO. The stock is still trading sideways in the $68.00-70.00 trading range. Shares hit our trigger to buy calls on an intraday blip above resistance at $70.00 last Wednesday. Our play is officially "open" but we're not suggesting new positions at this time. Instead wait for a dip or bounce near $68.00 or a new rally over $70.00 or 70.15 as an entry point to initiate positions. Our target is the $74.00-75.00 range. The 200-dma is technical resistance near $75.00. The P&F chart is bullish with a $95 target.

Suggested Options:
We are suggesting the June calls.

Picked on May 07 at $ 70.05 *triggered
Change since picked: - 1.09
Earnings Date 04/24/08 (confirmed)
Average Daily Volume = 971 thousand

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Gilead Sciences - GILD - close: 53.64 chg: -0.47 stop: 49.99

GILD is holding up pretty well. Shares hit new all-time highs on Thursday. We don't see any real changes from our prior comments. We've been suggesting that readers buy a dip in the $53.75-53.50 zone and before that it was buy dips in the $53.00-52.00 zone. A dip toward $53.00 still looks like a good bet and we wouldn't be surprised to see a correction in the $52.50-52.00 region. Our target is the $57.50-60.00 range. Don't forget that any time we play a biotech company it should be considered an aggressive, higher-risk trade. There is always risk of some FDA decision or clinical trial result surprising the market and sending the stock gapping one direction or the other. FYI: GILD is due to present at a conference on May 13th.

Suggested Options:
We are suggesting the June calls.

Picked on May 04 at $ 53.63
Change since picked: + 0.01
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.9 million

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Harsco - HSC - close: 60.92 change: -0.28 stop: 59.45

HSC is bouncing from support near $60.00. Friday's rebound looks like a new bullish entry point to buy calls. However, traders should be cautious here. Last week's high and the mid April high looks like a potential bearish double-top pattern. We're leaving our stop loss at $59.45 but more conservative traders might want to consider a stop closer to Friday's low (59.96). Our four-week target is the $64.50-65.00 range.

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

Picked on May 01 at $ 60.38
Change since picked: + 0.54
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 613 thousand

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Intl.Bus.Mach. - IBM - cls: 124.06 chg: -0.86 stop: 119.75

Last week was positive for IBM. The stock hit our first target in the $124.90-125.00 zone. Shares look like they are coiling for a bullish breakout through the $125 level. If you're looking for a new position then wait for a new relative high (125.20) and use a tighter stop loss than the one we have suggested. Our secondary target is the $128.00-130.00 range but if you're buying calls above $125 we'd probably aim for the $129.75-130.00 zone.

Suggested Options:
We're not suggesting new positions but if we were we'd suggest the June or July calls.

Picked on April 30 at $120.75 */1st target achieved 124.90
Change since picked: + 3.31
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.8 million

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iShares Russ.2000 - IWM - cls: 71.50 chg: -0.21 stop: 69.85

We don't see any changes from our prior comments on IWM. The small caps are holding up reasonably well. The six-week trend is still positive. We've been suggesting dips near $71.00 as an entry point and the IWM hit $71.04 on Friday. If you missed it then wait for a move over Friday's high around $72.15. More conservative traders might want to raise their stop loss closer to $71.00. Our multi-week target is the $77.50-80.00 zone. The P&F chart is bullish with an $87 target.

Suggested Options:
Strikes are available at $1.00 increments. We're suggesting the June calls.

Picked on April 28 at $ 72.55 *triggered
Change since picked: - 1.05
Earnings Date 00/00/00
Average Daily Volume = 84.6 million

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Joy Global - JOYG - close: 78.99 chg: +1.49 stop: 74.99 *new*

JOYG actually rallied to a new high on Friday. Shares hit $79.31 late in the day. The relative strength is encouraging but we're concerned that JOYG will turn lower with the market again and with it at all-time highs it's a big target for profit taking. Our first target is the $79.50-80.00 range. We are suggesting that readers take some profit off the table right now and only keep a small position open. Our secondary, more aggressive target is the $84.00-85.00 range. We're raising or stop loss to $74.99. We will plan to exit ahead of the late May earnings report. The P&F chart is already bullish with an $88 target.

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

Picked on April 16 at $ 72.55 *triggered
Change since picked: + 6.44
Earnings Date 05/29/08 (confirmed)
Average Daily Volume = 2.3 million

---

Mosaic - MOS - close: 126.42 change: -0.66 stop: 119.75 *new*

The fertilizer stocks spent Friday's session churning sideways. Of course this is a volatile group and that meant a $5.00 trading range for MOS. We remain bullish but we're raising our stop loss to $119.75. More aggressive traders will want to keep their stop loss under the 50-dma (115.71). More conservative traders could tighten their stop toward last week's low (121.15). Our first target is the $138.00-140.00 range. We are still suggesting bullish positions here but if you prefer to buy on momentum wait for a rise past $130.00.

Suggested Options:
We are suggesting the June calls.

Picked on May 05 at $126.75 *triggered/gap higher entry
Change since picked: - 0.33
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 7.4 million

---

Arcelor Mittal - MT - close: 94.57 chg: -1.45 stop: 91.45*new*

Our time available to trade MT just got cut. The company has announced that it will report earnings on May 14th in the morning. That means we will exit on Tuesday at the closing bell. Considering this new time frame we're working with our new target is now $96.50 instead of $99.00. Our new stop loss is $91.45. We're not suggesting new positions.

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

Picked on May 05 at $ 90.25 *triggered
Change since picked: + 4.32
Earnings Date 05/14/08 (confirmed)
Average Daily Volume = 3.7 million

---

Nucor - NUE - close: 78.41 change: -3.46 stop: 75.95

Steel and metal-related stocks turned in a strong week. NUE soared to new highs and broke through resistance at $80.00 to hit 81.93. Our first target was the $79.50-80.00 zone. Our second target remains the $84.00-85.00 range but after Friday's big sell-off (-4.2%) we're not suggesting new positions at this time.

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

Picked on April 22 at $ 74.63 /1st target exceeded 79.50
Change since picked: + 3.78
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 5.6 million

---

POSCO - PKX - close: 127.59 change: -1.10 stop: 119.75

The trend is still bullish following PKX's breakout over its long-term trendline of resistance and over resistance near $125.00. We would still consider buying calls again on a dip near $125.00. The 100-dma around $131 and the exponential 200-dma near $133 might offer some overhead resistance. Our target is the $139.00-140.00 range. More conservative traders may want to raise their stop loss toward $122.25 under last week's low. NOTE: We would consider this a slightly more aggressive play for two reasons. First, PKX is prone to gap openings as the U.S. traded shares adjust to trading overseas the night before. Second, the spreads on the options are pretty wide and that immediately puts us, as option traders, at a disadvantage.

Suggested Options:
If PKX provides another entry point we would suggest the June calls.

Picked on May 05 at $125.55 *triggered
Change since picked: + 2.04
Earnings Date 07/16/08 (unconfirmed)
Average Daily Volume = 907 thousand
 

Put Updates

None
 

Strangle Updates

None
 

Dropped Calls

HSBC - HBC - close: 84.07 change: -1.99 stop: 84.90

We've been stopped out of HBC. Weakness in Europe combined with a downgrade for HBC before Friday's opening bell pushed shares to gap open lower at $83.91. This was below our stop loss at $84.90. Shares jumped past support near $85 and its 200-dma. For us the play has been closed but readers might want to keep an eye on HBC for a dip near $82.50 and its 50-dma. HBC is one bank that has been out performing many of its peers for weeks and a bounce from support with a tight stop might offer another opportunity.

Picked on April 28 at $ 86.19 *gap entry & exit/stopped 83.91
Change since picked: - 2.12
Earnings Date 03/08/08 (confirmed)
Average Daily Volume = 1.7 million

---

iShares DJ Transports - IYT - cls: 92.07 chg: -1.35 stop: 91.48

Another record higher in crude oil is starting to weigh on the transports. The IYT dipped toward the $92.00 level multiple times on Friday. The intraday low you see at $91.28 is actually an after hours trade. The transports spiked lower after FedEx (FDX) issued an earnings warning due to higher fuel costs. You can check the time and sales. The trade at 91.28 happened at 16:09:28. That doesn't bode well for Monday and we would expect the IYT to trade down toward support near $90.00. IYT has already surpassed our first target in the $94.85-95.00 zone.

Picked on April 27 at $ 91.48 /1st target exceeded
Change since picked: + 0.59
Earnings Date 00/00/00
Average Daily Volume = 1.4 million
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Keltners and Condors

I can hear the groans. You've heard enough about Keltner channels. You don't use them and don't intend to use them and they look like gobbledygook to you.

Fair enough.

I didn't intend to write another article about them so soon, either, but a question from a member of my trading club prompted me to reconsider. Most of us in our small group trade condors, and that member wanted to know how I used nested Keltner channels in my condor trading. A fair number of our subscribers also trade condors or other types of combination trades, so they might like a look at how Keltner channels or other types of channeling systems such as Bollinger bands might be used to establish entries.

For those of you new to the site and options trading, condors are a type of combination options trade. They involve selling a put and a call, usually but not always out-of-the-money ones, and then hedging risk by buying a put with a lower strike and a call with a higher strike. For example, for the May option expiration cycle, I had condors on the SPX with sold strikes at 1505 for the call and 1120 for the put. I hedged those by buying a 1515 call and an 1110 put.

The person establishing the condor takes in a credit since the sold strikes are closer to the action and therefore more expensive than the strikes bought to hedge the position. The credit is deposited in that person's trading account. This is an example of a high-probability condor, a kind in which the trader bets on a high probability that the SPX will not trade across the sold strike at expiration. In that case, the entire credit stays in the account. I don't let my condors go into expiration, closing them out earlier and locking in a lesser amount of profit. For example, I closed out those May condors on 3/31 and 4/02. Exit strategies are a discussion for another forum, however, so let's move the discussion back to entries.

Other types of condors can be established, but any trader considering a condor or a credit spread of any type should know its pitfalls well. The risks are high in relationship to the credit one takes in. Mike Parnos' Couch Potato site is a sister publication devoted to trading condors and is the site I studied for two years before changing the proportion of my trades devoted to such strategies. Dan Sheridan's webinars on CBOE.com also often are devoted to strategies related to condors, so you can listen to those for extra information.

I use nested Keltner channels to optimize my entries for each leg of a condor. Some condor traders enter the whole condor--the bear call spread and bull put spread portions--at once, but most times I don't. Each method of entering can have its pros and cons, but I like to wait for wide swings to the upside to establish the bear call portion and wide swings to the downside to establish the bull put portion.

One of the cons to that method is that I sometimes don't get the swing I expected to get me into one side of the condor. I end up with the side only in the direction of a trend. That's not fun. Most times, though, this method provides me with sold strikes that are perhaps farther apart than they would otherwise be.

Nested Keltner channels can be utilized to find optimum entries for each leg of a condor, times when it appears that the markets may be at a turning point and a swing one direction about to reverse. They also give the technician some idea of potential targets, suggesting where the sold contract should be placed.

A couple of weeks ago, I snapped a chart showing what had happened over the last couple of cycles. Unfortunately, however, I typed the annotation incorrectly, and if I correct it now, the chart will look doctored with respect to the top annotations. What I should have written in the bottom annotation was "Here is where I was looking for May BULL PUT spreads," not BEAR CALL spreads.

Annotated Daily Keltner Chart of the SPX:

Here's another chart also snapped a couple of weeks ago that shows the procedure I was going through at the time I entered those June 1530/1540's. It's the chart that had shown the potential upside target near 1550, mentioned in those previous annotations.

Annotated Three-Day Chart of the SPX:

Intraday charts can be used to fine tune the entrance, and I used them that way to enter the June 1530/1540's.

Annotated 30-Minute Chart of the SPX:

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

What about the bull put spread? Remember when I talked about one of the cons of not establishing both sides of the condor at the same time? The risk is that you won't get an opportunity to establish the other side, that there won't be a swing in the direction of the other side. So far, that swing toward the downside that I feared has not occurred, but the next chart depicts what I was watching for as of two weeks ago.

Annotated Daily Chart of the SPX:

That downturn never occurred and the chart setup is different now, if it did, but I had turned to intraday charts to fine-tune my expectations two weeks ago. They allow traders to set up if/then scenarios. Let's see what they were showing and why I was still hesitating a couple of weeks ago, perhaps missing for good my chance to get into bull put spreads for June.

Annotated 15-Minute Chart of the SPX:

As of about 1:00 pm on April 25, those if/then conditions had not been met. The SPX looked as likely to rise up toward 1397-1404 as it did to fall toward 1375.40, and that's exactly what it did.

As of today, May 9, I'm out of those 25 June 1530/1540 bull put spreads that I had established as the SPX began testing what I thought might be strong resistance. I had collected $0.50 credit for those and got out for a $0.17 debit, so kept $0.33 per contract minus the commissions. If the SPX should rally again, perhaps I'll have the opportunity to put those bear call spreads back on again. If not, if next week brings a sharp downturn to the 30-sma, I'll be watching how the downturn acts and deciding if I can find some bull put spreads that interest me. That 1354-1358 potential support level has now risen to 1375-1376, so if the SPX should roll over next week and hit that level, you'll know I'm bent over the computer, deciding whether I can get enough premium on strikes low enough below the action to interest me in June bull put spreads. I've got my wish list sitting right by the computer monitor.

The Keltner setup used on these charts was as follows:

Smallest blue channel, based on the 9-ema, with a multiple of 1.4.
Mid-sized black channel, based on the 45-ema, with a multiple of 3.
Largest purple channel, based on the 120-ema, with a multiple of 7.2.
 

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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