Option Investor

Daily Newsletter, Wednesday, 07/02/2008

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Table of Contents

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

Market Wrap

Just Another 200-point Swing

The DOW rallied 200 points off yesterday's low and today it dropped 200 points from its high. All in a day's work. To say the market is a wee bit volatile is an understatement. This afternoon's decline looks like it caught many traders leaning the wrong way with bullish trades, probably in anticipation of the rest of the week being bullish. This week is typically bullish and after yesterday's strong recovery it looked good for a continuation higher. As bearish as I am about the stock market even I was expecting to see another rally leg into Thursday following an afternoon pullback today. Unfortunately for the bulls the pullback turned into a rout instead, as the market dropped below yesterday's lows.

By just about every measure the market is oversold. To which the bears say so what. They point out how much and for how long the market was overbought in the 2003-2004 and 2006-2007 rallies. Those rallies produced brief and shallow pullbacks and the march higher continued. Declines are not the same as rallies and corrections tend to be sharper and shorter in duration. Short-covering produces a much more panicked move than longs covering. When longs panic and finally decide to cover en masse is when we see the spike low and v-bottom reversal. Tops instead tend to be rolling affairs.

Tops in stocks tend to be a slow-motion battle between the bulls and the bears with the bears holding out for more (they get greedy) and the bears are convinced the market has no merit being that high. Bottoms are a result of fear--fear by those holding long that maybe there won't be a bottom. The bears get greedy and start piling on until a few start covering and then trailing stops start getting hit and before you know it we get a v-bottom reversal.

It's interesting that commodities trade the opposite. Tops tend to be spikes to the upside followed by a v-top reversal. That's because buyers are buying on fear rather than greed--fear that inflation is running away or that the commodity in question is getting scarce. Sound familiar? So the buyers panic and want to get in at any price until someone starts selling and then trailing stops start getting hit. But at bottoms there's a big argument between the bulls and bears about the state of the commodity market, what the fundamentals are and bulls believing that the fundamentals support higher prices. So bottoms tend to be slow-motion rounding bottoms.

So as we look at the price decline, especially from May 19th, we're seeing an acceleration lower (it has developed a waterfall appearance). These often lead to a v-bottom reversal (mirror image of a parabolic spike leading to a swift and large decline). With the stock market being as oversold as it is, and the selling accelerating, we might not be far away from a flush to the downside (otherwise known as capitulation or more euphemistically as puking ones position). The hard part is we don't know if that will happen or at what level it will happen. For now the trend is down and that's the direction we should be trading it. If you're a long-only investor then it's a good time to be on the sidelines and let this play out. I hope the warnings I've been providing since last fall have helped most of you at least protect your positions.

The day looked like it was going to start out well when I saw equity futures up nicely during the pre-market hours. But then the ADP jobs number came out and that brought the futures back to the flat line. ADP reported a loss of 79,000 private-sector jobs so when you add back in about 20,000 government jobs that says there were about 59,000 jobs lost and this is what the market is expecting to see reported by the government tomorrow. Anything drastically different could swing the open.

Not helping the employment picture was news by the outplacement firm Challenger Gray & Christmas that corporate-layoff announcements were up +21% for the first half of the year with nearly 476K job cuts announced. The layoff announcements are accelerating as the months go by so the news is getting worse rather than better. It's confirming the fact that the economy is in fact slowing down. Most of the layoff announcements have come from the financial sector, especially the mortgage sector but I suspect the problem will not be contained to this area, just as the subprime mortgage problem wasn't contained. It's a spreading disease called credit contraction and we're only in the beginning stages of the process. You want to get yourselves out of debt and have money in the bank as fast as you possibly can.

Orders for factory goods rose by +0.6%, primarily from orders for computers and defense equipment. Durable goods orders remained flat.

Not helping the market today was a report about one of the Fed heads, Frederic Mishkin, speaking in Israel today and he talked about inflation vs. the slowing economy. His words essentially depressed the market because he said it's rather unlikely that they'll be able to raise rates to fight inflation because of the depressive state of the economy. He said the financial system is in the hurt locker (my words) and will be hurting for some time and continue to depress growth. He concluded with "I hope it would pick up next year." Prior to this we had Fed expectations for the economy to improve in the second half of 2008 and into 2009. That expectation has now apparently turned into hope. Isn't that part of that slippery slope of hope?

Without a sustained rally today the charts continue to look rather bearish. We could be close to a capitulation event or we could be close to a big reversal back up, or anything in between. Let's see what the chart setups look like.

SPX chart, Weekly

The weekly chart of SPX looks, well, weak. I pointed out last week that we have a confirming sell signal from MACD and this week you can see that it has clearly rolled over and has a long way to go before being oversold. RSI is approaching oversold as measured against the January and March lows. SPX is now very close to confirming the DOW's break of the January/March lows (by breaking below 1257) and I suspect we'll see that break this week. Depending on the price pattern we could be getting close to a big bounce back up (pink) or a continuation lower to below 1200 before setting up a larger correction. Regardless, the pattern is bearish and the longer-term trend is down.

SPX chart, Daily

Using a parallel down-channel for price action since the May 19th high you can see that price is not far from the bottom which is near 1253 tomorrow, which of course is slightly below the March 17th low at 1257. As long as price stays in the lower half of the down-channel (today's bounce failed at the mid line) stay bearish the market. It takes a break above 1292 to confirm the first wave down from May 19th is complete and that it's into a correction of that decline. As shown in pink, that kind of bounce, probably into the end of July, would be an outstanding short play setup. In the meantime I see the possibility for the market to continue stair-stepping lower (with the possibility for big and short-duration rallies in between) to below 1200 by the end of July.

Key Levels for SPX:
- cautiously bullish above 1292
- bearish below 1273

SPX chart, 60-min

The 60-min chart shows a slightly steeper down-channel from the June 5th high and SPX has been tapping the bottom of this channel since last Friday's low. Tomorrow could see SPX finding support around 1253 and should be a time for a slightly larger bounce into next week. It will likely be a choppy sideways/up kind of correction so it won't be any fun to trade. Above 1292 would likely be an easier-to-trade move.


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The one thing to watch with these parallel channels is how price behaves around the bottom (of a declining channel or the top of a rising channel). Notice how price dropped out of the larger down-channel from May 19th last week and then found it to be resistance for today's bounce. This is very typical price behavior. If price drops out the bottom of the steeper channel (red) then we'll know the price decline is further accelerating (water-falling lower). That would be clearly bearish, as it was when it fell below the blue channel, but then you need to start watching for capitulation.

DOW chart, Daily

The DOW's daily chart looks very similar to SPX--price has declined in a tight parallel down-channel since its May high. Like SPX it found the mid line of the channel to be resistance today and is now heading back down towards the bottom of the channel again, currently near 11060 tomorrow. Unless the DOW can rally back above 11430 stick with the trend and look to sell the rallies.

Key Levels for DOW:
- cautiously bullish above 11430
- bearish below 11400

DOW chart, 60-min

I had originally drawn the down-channel slightly differently (off the initial highs and lows) and then a steeper channel from the June 17th high. You can see how price has been struggling underneath these channels since breaking below them. The DOW has been one of the weaker indexes (first to break the January/March lows) and to see it breaking below its channels is not a surprise. It may be time to draw in a new steeper down-channel and see how price does inside it.

Nasdaq-100 (NDX) chart, Daily

The bottom of the down-channel for NDX is near the uptrend line from October 2002 and gap closure from April 15th, all in the 1785-1795 area and I'd be surprised if we don't get a bounce from that level, as depicted on the chart. The larger degree pattern is down so here again, if we get the bounce it will be a good opportunity to short it.

Key Levels for NDX:
- cautiously bullish above 1875
- bearish below 1850

Russell-2000 (RUT) chart, Daily

The RUT shows the "waterfall" look as the selling has started to accelerate. I've said many times that we will see selling in the techs and small caps start to out accelerate the selling in the blue chips once fund managers realize they bought into, literally, the idea that we'll have a rally this year. That's why we saw the RUT outperforming on the upside. We will now see it outperform on the downside. If the decline sticks to the Fib relationships between the individual waves it should soon find support around 660 and then bounce back up to perhaps the 670 area. As depicted that could mean a bounce back up to retest the broken downtrend line from October. But trying to pick a bottom for a counter-trend long play is difficult at best. In a downtrend it's better to take profits on short plays and then wait to reinitiate. Surprises will be to the downside now.

Key Levels for RUT:
- cautiously bullish above 695
- bearish below 683

BIX banking index, Daily chart

I thought the banks would find support in the 178-180 area and for a few days it looked like they would. The banks are actually showing some relative strength (not hard when they've been beaten down as much as they have). I think the chances of additional downside have now increased since they weren't able to hold above 180. It's really painful to think about where this index could eventually bottom out (perhaps down near 100). After a high above 400, a 75% haircut is hard to imagine. These aren't tech stocks! In fact, for a painful reminder for some, this monthly chart shows why you want to use stops no matter how strong you think the stock/sector/market is. Emotions rule, not fundamentals (of course we became painfully aware how poor the banks' fundamentals became, and still are).

BIX banking index, Monthly chart

Ouch. There will be many who kick themselves for not stopping out when that long term uptrend line was broken back in July 2007. Don't let your other holdings suffer the same ignominy.

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

The price pattern for the decline from the April high is clear--it looks like it's into its 5th wave down and when finished (maybe near 216) there's a good chance the decline in the home builders will be finished. It could be dead money for a while but it's not hard to get a 50% rally from 200 than when it was up at 1100. But, we'll see how it looks if and when it gets down there. The 2000 low for this index was near 125.

Transportation Index chart, TRAN, Daily

Another index that was outperforming to the upside is playing catch-up to the downside now. It too has developed a waterfall decline appearance. It might find support here at its old inverse H&S neckline from last October. But I see an equal possibility that it will break below it and then find it to be resistance on a bounce as it continues to drop back down towards its January low.

After the DOW failed to confirm the TRAN's new high in May (DOW Theory non-confirmation), a drop below the January low would be a DOW Theory sell confirmation. There were many in the media who appeared confused about this back in May.

U.S. Dollar chart, Daily

The US dollar closed below its uptrend line from March and that looks bearish for the dollar. If it doesn't immediately reverse tomorrow but instead continues lower, and especially with a break below the May low of 71.82, we can expect to see the dollar work its way down to new lows this summer. That would of course be bullish for the euro and commodities.

The ECB (European Central Bank) decides tomorrow (8:30 AM EST) whether or not to hike interest rates. Just about everything Trichet has been saying the past few weeks indicates they will raise rates and the euro, and commodities, have been rallying in anticipation of that (makes for a more attractive investment than the US dollar). If the ECB decides to hold rates steady look for a fast reversal of the recent gains (and a rally in the dollar).

Oil chart, Oil Fund (USO), Daily

Oil broke out of its sideways consolidation and appears to be heading for the top of its channel. As noted on the chart I have three upside targets: 118 is a Fib projection for the 5th wave of the rally (which will be followed by a much larger decline than we've seen this year), 120 is the projection out of the sideways consolidation pattern, and then 122 is the top of the channel.

Oil Index chart, Daily

Oil stocks took a nose dive this afternoon and produced that big red candle inside its consolidation pattern, which looks more like a sideways triangle than a rectangle. And interestingly, this consolidation pattern is bearish and I expect to see price break down from it. But I think first it needs one more push back up to the top of the triangle pattern before letting go. If it drops below 921 tomorrow then the consolidation is finished and it's starting the next leg down.

Gold chart, Gold Fund (GLD), Daily

Gold's pattern continues to look bearish. The multitude of 3-wave moves is indicative of a corrective pattern and not one that says we're going to see a strong rally from here. It's possible we'll see gold chop its way higher but I'm still having my doubts about any strong rally. As depicted in dark red, I'm looking for gold to top out around the current level and start heading south at a high rate of speed. This chart says the ECB is going to hold rates steady tomorrow. I could of course be completely wrong on this one but it sure looks ready to reverse to me and I can't think of another reason why gold bulls would run scared from here. But much higher than 94 (953 spot price) and I'll have to join the bulls (or at least go neutral).

Economic reports, summary and Key Trading Levels

Tomorrow morning we've got the ECB rate decision at 8:30 AM which will affect the US dollar, euro, commodities and maybe even our own Treasuries, it will very likely have an impact on our stock market. And then we'll get reports on earnings (the Fed does not want to see wage inflation creeping in here) and the jobs report. So we could have some early fireworks in the futures tomorrow morning. How that will translate to the cash open is anyone's guess. Just be aware the morning could be a little wild. Throw in a day before a long weekend when fewer traders will be at their desks and the lower-than-normal volume could make for a volatile morning.

The bulls have one more chance to make this week the bullish one that it normally is. That means they need to get the DOW at least up to 11353 and SPX to 1279. From today's closing prices of 11215 and 1262 that should be a piece of cake (after all, we've been easily swinging 200 points in the DOW). Holding onto those gains seems to be the challenging part lately.

The bottom line is we're in a downtrend and a pretty steep one at that. For those who don't like to play the short side, and admittedly it's often the tougher direction to play, continue to stay safe on the sidelines. Picking bottoms is generally a very difficult trade and especially so when we're in a steep decline as the current one is. It's far better to look for a bottoming signal and then buy the pullback after that. It can be frustrating to miss a big v-bottom (not that I'm predicting one) but it's even more painful to bleed to death by a multiple cuts from your attempts to catch falling knives.

If you like attempting short plays you've got your downtrend lines and channels for your guide. Keep an eye on Fibonacci retracements and your other favorite trading tools to identify when a bounce may be getting ready to roll back over. As they say, the trend is your friend so go with it. Just stay aware of those short-covering rallies that tend to blow up bears' accounts. Trade it, don't fall in love with it. Take profits and don't kick yourself for missing some of the move. Congratulate yourself instead on getting a piece of it before they come roaring back to get you. Grab that little piece of cheese and scurry back into your hole to enjoy it.

Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- Cautiously bullish above 1292
- bearish below 1273

Key Levels for DOW:
- cautiously bullish above 11430
- bearish below 11400

Key Levels for NDX:
- cautiously bullish above 1875
- bearish below 1850

Key Levels for RUT:
- cautiously bullish above 695
- bearish below 683

Keene H. Little, CMT
Chartered Market Technician

The Contrarian

The Contrarian

Contrarian defined: In simple terms it is taking the opposite position of the majority opinion. I was speaking with a Financial Advisor last about the use of the Contrarian methodology with Put/Call ratios. His difficulty with the concept was that volume on options trades are from both buys and sells. He thought it is hard to determine the actual tendencies of the option trader to define whether the masses are more bullish or bearish. Because it is assumed that many of the equity option trades are performed by retail investors and that most retail investors only buy options, we have to conclude that the majority of the volume is on the buy side. As contrarians we need to think smart about the tendencies of the average investor. At times that the masses are bullish the market is near a top and when the masses are bearish the market is near a bottom. It is important to note that the duration and degree of the contrary move are the variable and do not always represent long term trends. The herd mentality references the tendency of animals to mostly move together in large groups. This tendency is also prevalent in investors. As contrarians we dont want to be the lone gazelle that has strayed from the heard. We want to be the lion that attacks it. One constant is that we look for a peak in investor sentiment that suggests if the majority of investors (the heard) are bullish, then they have already bought. Who is left to buy to push the market up if the majority has already put their money to work? That is where the contrary position comes into play.

The CBOE Equity Put/Call Ratio

The chart below represents the last few months of the CBOE Equity Put/Call Ratios 10 and 20 day Simple Moving Average. I use the data archived on the CBOEs web site rather than using the figures provided from my charting service. The problem with the CBOE data is that it is in Microsoft Excel format and requires me to create the charts. However, I am currently testing the reliability of using the total Equity Put and Call Volume that is provided by the charting system so you can follow the Ratios throughout the week in real time and act on the signals in a timelier manner.

The Signal: Last week we has a tick down in the 10 day moving average after breaking above 0.80, the historical upper range of the indicator. With that we moved the bias to Neutral from Negative (Bearish). In hindsight it would have been nice to be bearish for one more week. As of Tuesdays close, the 10 day moving average of the CBOE Equity Put/Call ratio closed at 0.774, up a little from Mondays 0.77 close. Last week I wrote a decline of the 10 day MA below the 20 day MA would signal a Positive (Bullish) bias signal. The 10 and 20 day MAs have been crisscrossed each other yesterday. But as of Tuesdays close the 20 day moving average is at 0.772 or 0.02 from signaling a Positive Bias. I would like to see the 10 day MA close below the 20 day to confirm a positive bias. SIGNAL: NEUTRAL BIAS

The CBOE Volatility Index ($VIX)

The signal: Last week the 10 day MA (green line) of the CBOE VIX curled over aggressively and almost broke below the 20 day MA (red line). On June 25th the 10 day MA closed down at 21.95 from a peak of 22.44. Last week I wrote that the 20 day moving average is fast approaching the 10 day moving average and will signal a Positive (Bullish) Bias. Since the moving average cross confirmation never occurred and the 10 day MA continued its uptrend to break out to a new high of 22.79 the bias was not changed to Positive. In addition, the 20 day moving average has maintained its advance upward and closed up at 22.40. With the breakout on Mondays close the signal is being moved back to a Negative bias and will remain so until the 10 day moving average closes below the 20 day moving average. At that point of inflection, the bias will be sharply changed to a Positive bias since the two moving averages are so close. SIGNAL: NEGATIVE BIAS

The Investors Intelligence Polls

About the Indicator: The Investors Intelligence polls do not actually poll individual investors. It polls investment newsletter writers all vying for individual investors subscription dollars. Therefore, there is a bias integrated into their writings set to attract subscribers since more people tend to read newsletters that are more optimistic. Most people are coded to look for the good in things and are generally long the markets. So they want a newsletter to make them feel justified with their long portfolios. That is why there is a bias toward bullish investors in each weeks readings. That should explain why the peak reading for a bearish signal (55%+ for bulls) is greater than that of the bullish signal (45% bears). We normally look for bearish triggers when the Bullish % peaks and bullish triggers when the Bearish % peaks. I like to see confirmation after the peaks. But there is usually a lag because this poll comes out once a week so at times I will estimate the tendency and move the signal early.

The number of bullish newsletter writers/advisors polled decreased another 2.8% to 31.9% from 33.7%. The percent of bearish newsletter writers/advisor polled increased significantly to 44.7%. The spread declined to -12.8% which is slightly above the low established on March 19th. When the Bearish% reaches near 45% the market is usually oversold. It is unusual to see the spread in negative territory. Most of the times the spread declined below 0 the market (S&P 500) tends to bounce soon after. Negative spreads indicate extremes in bearish sentiment. Thus the contrarian move is to move to a bullish bias. I am tempted to step in front of the signal and issue a Positive Bias now. However, I prefer to see a confirmation with a higher spread next week. SIGNAL: NEUTRAL BIAS


New Plays

New Option Plays

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

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

CNOOC Ltd. - CEO - close: 174.91 chg: +3.55 stop: 164.95

Don't be fooled by CEO's 2% gain. The stock was trading lower all day long following its gap higher this morning. Shares opened at $178.65 and hit $180.76 before reversing. We would look for a dip back into the $172.50-171.00 zone as the next potential entry point and more conservative traders are going to want to wait for a bounce before initiating positions. Remember, trading CEO tends to be a higher-risk play. The stock is traded as an ADR on the NYSE and shares gap open, up or down, almost every morning as it adjusts to trading back home in China. This is also a higher risk play because the spreads on the options can be abnormally wide and that immediately puts us at a disadvantage. If you can handle the volatility this might be a play. We have multiple targets. Our first target is $179.50. Our second target is $184.50. Finally, our very aggressive target is $195.00. If you are aiming for $195 we suggest you use the August calls. FYI: The Point & Figure chart has reversed into a new bullish signal with a $204 target. Please tonight's play editor's note on strategy.

Picked on July 01 at $171.36
Change since picked: + 3.55
Earnings Date 08/25/08 (unconfirmed)
Average Daily Volume = 500 thousand


Deere & Co. - DE - close: 70.25 change: -3.17 stop: 69.95

Man the lifeboats! DE could be poised to crack down under support at the $70.00 level. Shares hit the $74 region this morning and reversed sharply. Today's move has painted a big, bearish engulfing candlestick pattern. Wait for a bounce over $71.55 before considering new bullish positions. If the market shows any weakness tomorrow we would expect DE to hit our stop loss. Our target is the $77.50-78.00 zone.

Picked on July 01 at $ 73.42
Change since picked: - 3.17
Earnings Date 08/13/08 (unconfirmed)
Average Daily Volume = 5.8 million


DIAMONDS - DIA - close: 112.15 change: -1.62 stop: 111.69

The lack of follow through on yesterday's rebound is very negative. It's going to have an impact on investor sentiment, which was already bearish. More conservative traders may want to tighten their stop losses closer to $112.00. Wait for a new rise over $113.50 before considering new bullish positions. Our target is the $118.00-119.00 range (11,800-11,900 on the DJIA).

Picked on July 01 at $113.77
Change since picked: - 1.62
Earnings Date 00/00/00
Average Daily Volume = 14.5 million


Murphy Oil - MUR - close: 95.13 chg: -5.80 stop: 93.95

Ouch! MUR was another target for the "sell the winners" crowd today. The stock hit another high this morning and then just dropped into free fall this afternoon posting a 5.75% loss. We would expect a test of potential support near $94.00 soon. We're not suggesting new positions at this time. More conservative traders may want to exit immediately. MUR has already exceeded our first target near $100. Our second target is $104.85. The P&F chart is bullish and the upside target is $121.

Picked on June 29 at $ 96.26 /1st target exceeded 99.95
Change since picked: - 1.13
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume = 1.9 million


CBOE Volatility Index - VIX - close: 25.92 chg: +2.27 stop:

Investor fear definitely rose today. The lack of a market bounce following yesterday's test of support and then this afternoon's sudden acceleration lower does not bode well for the market. The VIX bounced from its 200-dma and painted a huge, bullish engulfing candlestick. The VIX index rose almost 9.6%. Now that the market's bounce from its March lows is struggling suddenly the odds of a capitulation sell-off event have risen. We were suggesting the July or August calls with a preference for the August 30s. We were suggesting two targets. One target is $29.50 and a second one at $34.00.

Picked on June 30 at $ 23.95
Change since picked: + 1.97
Earnings Date 00/00/00
Average Daily Volume = n/a million


S&P SPDRs - SPY - close: 126.18 chg: -2.20 stop: 125.85

The S&P 500 index failed to see any follow through on yesterday's test of what should have been support. Today's session has painted a bearish reversal candlestick and the SPY is back to testing its lows. It won't take much for the SPY to hit our stop loss at $125.85 tomorrow. Tonight's earnings warning out of NVDA doesn't do the bulls any favors. If by some miracle we don't get stopped out then wait for a new move over $127.50 or $128.00 before considering new bullish positions. Our target is the $132.25-132.50 range.

Picked on July 01 at $128.28
Change since picked: - 2.20
Earnings Date 00/00/00
Average Daily Volume = 215 million


Wynn Resorts - WYNN - close: 79.26 chg: -2.84 stop: 76.95

It's very possible that we're just wrong and that WYNN is not going to find any support in the $79-80 zone. Shares rallied to $85.14 before reversing under its 10-dma and eventually losing 3.4%. The trend remains very negative. We are not suggesting new positions and more conservative traders are going to want to consider an early exit immediately. Our target is $89.00.

Picked on June 30 at $ 82.10 *new play
Change since picked: - 2.84
Earnings Date 08/04/08 (unconfirmed)
Average Daily Volume = 2.0 million

Put Updates


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.)


Alpha Nat. Res. - ANR - close: 87.62 chg: -16.69 stop: n/a

Wow! We knew ANR was volatile but it's still impressive to see a 16% move. Traders bought the dip yesterday at its rising 10-dma and ANR looked poised to move higher. That proved to be a fake and shares were crushed today on big volume. We're not suggesting new positions at this time. This is a higher-risk strangle play with the options so expensive. The options we suggested were the July $105 calls (ANR-GA) and the July $85 puts (ANR-SQ). Our estimated cost was $9.40. We want to sell if either option hits $14.50.

Picked on June 15 at $ 94.25
Change since picked: - 6.63
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 3.7 million


Chevron - CVX - close: 97.42 chg: -1.66 stop: n/a

CVX bounced up to the $100.00 mark and rolled over. Today's failed rally and close under its 50-dma is bearish. However, the move to $100 did allow for another great entry point to open strangles. We are not suggesting new positions at this time. The options we suggested were the August $110 calls (CVX-HB) and the August $90 puts (CVX-TR). Our estimated cost is $2.20 (based on June 30th prices we needed 2 calls per 1 put). We want to sell if the puts $3.85 or if the calls hit $1.90. More aggressive traders may want to aim higher.

Picked on June 30 at $ 99.13
Change since picked: - 1.71
Earnings Date 08/01/08 (confirmed)
Average Daily Volume = 13.3 million


Garmin Ltd. - GRMN - close: 42.67 chg: -0.27 stop: n/a

We don't know what it's going to take to shock GRMN out of its $41.50-44.50 trading range. More conservative traders may want to abandon ship. We have less than three weeks left for July options. We're going to stick with the play for now. We're not suggesting new positions at this time. The options we listed were the July $50 calls (GQR-GJ) and the July $40 puts (GQR-SH). Our estimated cost was $2.55. We want to sell if either option hits $ 4.75 or higher.

Picked on June 15 at $ 44.91
Change since picked: - 2.24
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 4.1 million


Holly Corp. - HOC - close: 34.65 chg: -2.13 stop: n/a

HOC plunged almost 6% as crude oil charged to new highs. The stock is breaking down under the $35.00 level. Keep an eye on the put side of our play. We're not suggesting new positions at this time. The options we listed were the July $45 calls (HOC-GI) and the July $35 puts (HOC-SG). Our estimated cost was $2.00. We want to sell if either option hits $ 3.00 or higher.

Picked on June 15 at $ 41.25
Change since picked: - 6.60
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume = 1.1 million


KLA-Tencor - KLAC - close: 40.31 chg: -1.23 stop: n/a

KLAC has failed near short-term resistance at $42.00. We are not suggesting new positions at this time. We have less than three weeks left, which raises the risk for this play. We listed two different strangles on KLAC.

Suggested Options:
KLAC Strangle #1) The options we listed were the July $42.50 calls (KCQ-GV) and the July $37.50 puts (KCQ-SU). Our estimated cost is $1.65 We want to sell if either option hits $3.00.

KLAC Strangle #2) The options we listed were the July $45.00 calls (KCQ-GI) and the July $35.00 puts (KCQ-SG). Our estimated cost is $0.70. We want to sell if either option hits $1.50.

Picked on June 22 at $ 40.07
Change since picked: + 0.24
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 3.7 million


United States Oil - USO - cls: 116.84 chg: +2.25 stop: n/a

Crude oil rallies to another new high and USO follows. We are not suggesting new positions at this time. We suggested two different strangles. The strangle with the wider strikes costs less but has higher risk.

USO Strangle #1) The options we listed were the July $115 calls (IYS-GK) and the July $105 puts (IYS-SA). Our estimated cost is $7.10 We want to sell if either option hits $9.75.

USO Strangle #2) The options we listed were the July $120 calls (QSO-GP) and the July $100 puts (IYS-SV). Our estimated cost is $4.10. We want to sell if either option hits $6.50.

Picked on June 22 at $109.14
Change since picked: + 7.70
Earnings Date 00/00/00
Average Daily Volume = 12.5 million

Dropped Calls

Burlington Northern - BNI - cls: 92.52 chg: -5.10 stop: 94.95

It was a very ugly day on Wall Street. Most of the market's recent leadership stocks were crushed today. Railroads, which had already broken their bullish trend, were also hammered. BNI's bounce from support yesterday immediately failed today. The stock fell through support near $95.00 and hit our stop loss at $94.95. The next stop for BNI looks like the 200-dma near $90.00.

Picked on July 01 at $ 97.62 */stopped out 94.95
Change since picked: - 5.10
Earnings Date 07/24/08 (confirmed)
Average Daily Volume = 3.3 million


Diamond Offshore - DO - cls: 134.78 chg: -4.92 stop: 135.85

Oil rallies to a new all-time high and yet DO gets slammed. The stock spiked to $143.31 this morning and then collapses on no news. DO looks like it was a casualty to Wednesday's "sell the winners" mentality that was running rampant across the market. Shares broke through short-term support at $136.00 and hit our stop at $135.85.

Picked on July 01 at $139.70 *stopped out 135.85
Change since picked: - 4.92
Earnings Date 07/24/08 (confirmed)
Average Daily Volume = 2.0 million

Dropped Puts


Dropped Strangles

Valero - VLO - close: 37.92 change: -2.46 stop: n/a

Target achieved. A new record high in crude oil pushed VLO to a 6% loss. The put side of our strangle, the July $40 puts, traded at an intraday high of $3.00 and are currently around $2.91bid/$2.97ask. It was our plan to sell if either option hit $2.75 or higher. More aggressive traders may want to let it ride and see how far VLO falls (oil rises). The options we suggested were the July $50 calls (VLO-GJ) and the July $40 puts (VLO-SH). Our estimated cost is $1.89.

Picked on June 15 at $ 44.84 /target achieved (strangle)
Change since picked: - 6.92
Earnings Date 07/29/08 (unconfirmed)
Average Daily Volume = 10.8 million

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


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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