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Daily Newsletter, Monday, 07/07/2008

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Table of Contents

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

Market Wrap

Drink Up and Say Yahoo!

Stocks began the week mostly lower as volumes remained brisk at both major exchanges. The big board churned more than 5.0 billion for a third-straight session (excluding Thursday's 1/2 session 3.28 billion) with decliners outnumbering advancers for the bulk of the day, while average volume at the NASDAQ also found declining issues outnumbering advancers by a lesser degree.

New lows at the big board approached the 627 found on Tuesday of last week, and while the 5-day NH/NL and 10-day NH/NL ratios can always go to zero (0.00) and stay there, these readings continue to suggest some very oversold conditions.

Not unlike the 1, 2 and 3-lettered ticker symbols at the big board, NASDAQ's 623 new lows were equally matched with Tuesday's 528 new lows.

Bullish leadership as depicted by the new highs at both the NYSE and NASDAQ remain nonexistent and below respective 5-day averages (including Thursday) of 43 and 37.

The major averages did see a modest lift at this morning's open as oil prices eased from Thursday's record highs, but a still very short-looking US Oil Fund (USO) $114.77 -1.75% found buyers at $113.00 and July's "Max Pain Theory" tabulation of $109.00.

We should be getting some updated short interest reports on the USO in a couple of days. The most recent report had short interest at a record 18.29 million shares.

Energy futures were broadly lower to start the week and may have helped lessen a more bearish tone for equities. August Crude Oil futures (cl08q) settled down $3.92, or -2.70% (from Thursday's settlement of $145.29) at $141.37, while natural gas futures witnessed their largest percentage decline since 03/07/08 (-7.78%), settling down $0.60, or -4.42% at $12.97.

The NASDAQ-100 Index (NDX.X) 1,826.93 +0.58% and its tracker QQQQ $44.90 +0.60% bucked a more bearish equity tape, with beverage maker Hanson Natural (NASDAQ:HANS) $28.57 +13.14% bouncing from a 52-week low and leading component gainers on a percentage basis.

Goldman Sachs' analyst Judy Hong said that data received from a chain convenience store survey suggested total energy drink sales rose 13% in June and Hanson's Monster brand has been taking share in the energy drink category.

Also atop today's percentage gainers among the NDX/QQQQ components were shares of Yahoo! Inc. (NASDAQ:YHOO) $23.91 +11.99% after Microsoft (NASDAQ:MSFT) $26.02 +0.15% said it would be willing to renew takeover negotiations if Carl Icahn's effort to dump Yahoo's board is successful.

M&A analysts say that today's comments out of Microsoft give Mr. Icahn more credibility with Yahoo shareholders as he has been arguing that a new board of directors at Yahoo is the only way to salvage a deal with Microsoft.

While HANS and YHOO were among the NDX/QQQQ percentage gainers, shares of Teva (NASDAQ:TEVA) $43.18 -8.51% gapped below their 150-day ($46.16), 200-day ($45.72), 50-day ($45.34) and 21-day SMA ($44.76) and traded heavy volume of 26.8 million shares after the generic drug-maker said that top-line results of a trial dubbed "FORTE", the higher 40mg dose of Copaxone, was no more effective than the company's already FDA-approved 20mg dose in relapsing-remitting multiple sclerosis (RRMS).

It would be worth noting that today's low in TEVA ($42.49) found buyers at the 06/13/08 close ($42.50) and today's action simply back-filled the 06/13 to 6/17 gap higher from the company's Azilect study for the treatment of Parkinson's disease.

Major Global Markets, Currencies, Oil and Gold

Asian markets have been "steady" since last Monday's close and all eyes will be closely monitoring Japan's Nikkei-225 ($NIKK) 13,360.04, which gained 122 points, or +0.92% from Friday's close.

Nikkei-225 ($NIKK) - 50-point box

A quick update for Japan's Nikkei-225 ($NIKK) shows buyers lurking were we might expect, at bullish support trend. Like several of the world's bullish % from Dorsey/Wright and Associates, Japan's rather broad Tokyo Bullish % is nearing an "oversold" measure of 30%.

Any further weakness in the Nikkei-225 ($NIKK) at 13,100 or lower would have all the major global indices in the table above ($HSI, $SSEC, $FTSE, $DAX, $CAC, $INDU, $OEX, $NDX, $SPX, $RUT) all having broken below their bullish support trends.

Here's an updated World Bullish Percent Bell Curve from Dorsey/Wright and Associates, where I've made a few bullish % comparisons from a 06/24/08 screen capture.

World Bullish Percent Bell Curve -

Some sign of that things have been overdone to the downside may be developing in that the Shanghai bullish %, which measures approximately 754 securities, has rebounded from a very "oversold" measure of 0% to 14% on 6/24 to a more mid-point measure of 46% at tonight's reading.

This would suggest either some "bottom fishing" bulls, or the locking in of some very handsome gains by bears at a minimum.

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In recent sessions we have started to hear some chatter that last week's 25 basis-point hike by the ECB may be viewed as being equivalent to the highly critiqued FOMC rate hikes in 2000, where monetary policy was so focused on wage gains here in the U.S. that FOMC tightening choked the U.S. economy into recession.

Germany's DAX ($DAX) did gain 123 points, or +1.97% on Monday to close at 6,395, while France's CAC-40 ($CAC) rose 76 points, or +1.80% to 4,342.

U.S. Market Watch - 07/07/08 Close

Financials and just about anything "housing" related continued to trade weak today, where weakness in Freddie Mac (NYSE:FRE) $11.91 -17.86% and Fannie Mae (NYSE:FNM) $15.74 -16.18% was attributed to bearish comments out of Lehman Brothers. The firm said both may need to raise more capital as the credit crunch continues.

Calendar Q2 earnings season kicks off tomorrow evening with Alcoa (NYSE:AA) $33.39 +1.86% set to report results. Of the fifteen (15) analysts polled, current consensus is for the aluminum giant to report earnings of $0.68 per shares (low/high $0.60/$0.80). Nine (9) analysts making revenue projections see top-line results coming in at $7.37 billion (low/high $6.83B/$8.00B) on average.

Alcoa (AA) - Daily Intervals

Tomorrow's earnings, and more importantly the MARKET'S reaction to earnings and forward guidance will be important to many.

In fact, on 05/19/08, I changed my 2008 U.S. economic forecast from "modest recession" to "modest growth" (see 05/19/08 Market Wrap) based on the Conference Board's leading economic indicators report and some technicals from the like of the Dow Transportation Average (TRAN) 4,685.45 +0.14%.

Shares of Alcoa (AA) $33.39 +1.86% have witnessed a strong amount of selling in recent weeks, and may have "discounted" the recently completed June quarter's earnings.

IF not, then a break much below Friday's low would be a break of tentative bar chart trend (dashed green). It would take a close ABOVE the 12/31/07 close (dashed purple) $36.65 to begin to suggest that the MARKET has overly discounted calendar Q2 earnings.

And with energy prices at historic highs, the S&P 500 Index (SPX) 1,252.31 -0.83%, my primary barometer for the U.S. economy has yet to see a 3-box reversal higher after generating a double bottom sell signal at 1,380, and violating its bullish support trend at 1,340.

S&P 500 Index (SPX) - 10-point box chart

At tonight's close, Dorsey/Wright's S&P 500 Bullish % (BPSPX) has fallen further to 24.60% and remains in "bear confirmed" status.

Tonight's SPX close is also below this YEAR's support 2 level of 1,259.

At the "bottom" of Dorsey/Wright's 10-week trading band, Alcoa's earnings will be closely monitored.

With YEARLY S2 violated to the DOWNSIDE at tonight's close, the SPX's MONTHLY S1 (1,233.32) is "in play" as is its QUARTERLY S1 (1,221.27).

At a MINIMUM, a 3-box reversal back higher (1,280) is needed to observe any type of demand (X) observation.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None DIA
    LEH
    QQQQ

New Calls

None today.
 

New Puts

None today.
 

New Strangles

DIAMONDS - DIA - close: 112.21 chg: -0.84 stop: n/a

Company Description:
The DIAMONDS Trust, Series 1, is an exchange traded fund (ETF) designed to mimic the performance of the Dow Jones Industrial Average.

Why We Like It:
The DJIA is extremely oversold from its May highs and yet it continues to sink. The market should either see a sharp sell-off as the selling pressure culminates into a panic or a sharp rebound. Neither move is a guarantee but odds are pretty good. We're going to speculate on the move with an August strangle.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We don't care what direction the stock goes as long as it moves one direction. If it moves far enough one side of our trade will rise enough to pay for the entire trade and make a profit.

We are suggesting August options. Strikes are available at $1.00 increments if you don't like the ones we're choosing. Our estimated cost is $4.35. We want to sell if either option hits $6.90 or more.

BUY CALL AUG 115.00 DIA-HK open interest=3425 current ask $2.01
-and-
BUY PUT AUG 109.00 DIA-TE open interest= 664 current ask $2.34

Picked on July 07 at $112.21
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 15.5 million

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Lehman Brothers - LEH - cls: 20.84 chg: -2.01 stop: n/a

Company Description:
Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. (source: company press release or website)

Why We Like It:
Financials continue to be the thorn in the side of this market. Everyday there seems to be a new worry or new concern even as pundits and stock pickers try and call a bottom in the sector. There has been a lot of speculation over LEH and whether or not it will turn into another Bear Stearns disaster. Right now we don't have an opinion either way but the stock has pulled back to major support at $20.00. LEH should move big either way from here. We're going to speculate with a strangle. Try and open positions in the $21.00-19.00 zone. The closer to $20.00 the better as far as an entry point goes.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We don't care what direction the stock goes as long as it moves one direction. If it moves far enough one side of our trade will rise enough to pay for the entire trade and make a profit.

We are suggesting August options. Our estimated cost is $2.54. We want to sell if either option hits $4.25 or more.

BUY CALL AUG 25.00 LYH-HE open interest=3490 current ask $1.31
-and-
BUY PUT AUG 15.00 LYH-TC open interest=8444 current ask $1.23

Picked on July 07 at $ 20.84
Change since picked: + 0.00
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 44 million

---

PowerShares QQQ - QQQQ - cls: 44.90 chg: +0.27 stop: n/a

Company Description:
The PowerShares QQQ is an exchange traded fund (ETF) that mimics the performance of the NASDAQ-100 index (NDX).

Why We Like It:
The NASDAQ-100 index, like the rest of the major indices, is at a pivotal spot. It could produce a big move either way. We don't know which way it will go so we'll speculate with a strangle play. We suggest trying to open positions in the $45.25-44.75 zone.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We don't care what direction the stock goes as long as it moves one direction. If it moves far enough one side of our trade will rise enough to pay for the entire trade and make a profit.

We are suggesting August options. Our estimated cost is $1.80. We want to sell if either option hits $2.75 or more.

BUY CALL AUG 47.00 QQQ-HU open interest=30116 current ask $0.81

BUY PUT AUG 43.00 QQQ-TQ open interest=61620 current ask $0.99

Picked on July 07 at $ 44.90
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 148 million
 


Play Updates

In Play Updates and Reviews

Call Updates

CNOOC Ltd. - CEO - close: 167.19 chg: -3.80 stop: 164.95

CEO stumbled after being hit with a one-two punch today. First of all a $4 drop in crude oil tends to take the wind out of the energy stocks. Second, CEO announced it was buying Norwegian oil services company, Awilco Offshore, for $2.5 billion. Shares of CEO plunged toward support near $165.00 and closed under its 200-dma, which is bearish. The MACD is rolling over again and doesn't look healthy. The technical indicators on CEO are growing worse so we're not suggesting new positions at this time.

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. July options are available but we would prefer August calls.

Picked on July 01 at $171.36
Change since picked: - 4.17
Earnings Date 08/25/08 (unconfirmed)
Average Daily Volume = 500 thousand

---

CBOE Volatility Index - VIX - close: 25.78 chg: +0.98 stop:

The VIX rallied to new three-month highs. The trend is definitely up. We don't see any changes from our weekend comments. Essentially this play is a bet that the market will see a capitulation-selling event that will push the VIX to 30 or higher. There are only two weeks left for July options so we would suggest the August options. We were listing two targets. One target is $29.50 and a second one at $34.00.

Picked on June 30 at $ 23.95
Change since picked: + 1.83
Earnings Date 00/00/00
Average Daily Volume = n/a million
 

Put Updates

Amazon.com - AMZN - close: 72.49 chg: +0.49 stop: 73.85

AMZN did out perform the market today with a 0.6% gain but the trading action looks bearish. The stock failed at the top of its current trading range. We're still waiting for a breakdown. We're suggesting a trigger to buy puts at $69.75. If triggered our target is $62.50. The Point & Figure chart is already bearish with a $63 target. We do not want to hold over the late July earnings report.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume = 7.2 million
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

---

Alpha Nat. Res. - ANR - close: 87.74 chg: + 1.87 stop: n/a

Many of the coal stocks tried to bounce today after one analyst firm stated their opinion that the recent pull back was a buying opportunity. The bounce appeared to fail across the board. We are not suggesting new strangle positions at this time. We only have two weeks left for July options. If you're thinking about backing out and trying to salvage some capital then this is probably the time to consider it. 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: - 6.51
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 3.7 million

---

Chevron - CVX - close: 96.82 chg: -1.81 stop: n/a

A $4 plunge in crude oil futures pressured the oil stocks lower. Shares of CVX lost 1.8% and the afternoon bounce failed. 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: - 2.31
Earnings Date 08/01/08 (confirmed)
Average Daily Volume = 13.3 million

---

iShares Brazil - EWZ - cls: 81.85 chg: -1.21 stop: n/a

The EWZ Bounced around the $81.25-84.00 zone giving us plenty of opportunities to open strangle positions. Our suggested entry range was the $83.50-82.00 region. The options we suggested were the August $90 calls (EWZ-HR) and the August $75 puts (EWQ-TO). Our estimated cost is $3.95 We want to sell if either option hits $5.90.

Picked on July 03 at $ 83.06
Change since picked: - 1.21
Earnings Date 00/00/00
Average Daily Volume = 13.6 million

---

Garmin Ltd. - GRMN - close: 42.59 chg: +0.64 stop: n/a

GRMN continues to show relative strength by holding on to the $42.00 level - for now. We have just under two weeks left before July options expire. More conservative traders may want to exit early. 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: - 2.32
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Internet Holders - HHH - cls: 51.63 change: +1.38 stop: n/a

The HHH Internet holders out performed today with a 2.6% gain thanks largely to a 12% rally in YHOO. There was a dip back to the $50.54 region. Technically the play is not open yet. Our suggested entry point was the $50.50-49.50 zone. I suspect we'll get an entry point tomorrow. The options we suggested were the August $55 calls (HHH-HK) and the August $45 puts (HHH-TI). Our estimated cost is $1.60 We want to sell if either option hits $2.45.

Picked on July 03 at $ 50.25
Change since picked: + 1.38
Earnings Date 00/00/00
Average Daily Volume = 132 thousand

---

Holly Corp. - HOC - close: 33.50 chg: -1.15 stop: n/a

Wow! HOC just can't win. Rising oil prices, which pressure refiner's margins, have been pushing the stock price lower. Yet today oil pull back sharply but HOC failed to bounce. The stock lost another 1.4% and the put options are close to hitting our target. The July $35 puts hit $2.65 today. 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: - 7.75
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume = 1.1 million

---

KLA-Tencor - KLAC - close: 40.19 chg: +0.29 stop: n/a

No change from our weekend comments. Readers are going to want to consider an early exit. We are not suggesting new positions at this time. We have two weeks left before July options expire. 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: + 0.12
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 3.7 million

---

MarketVectors Agribusiness- MOO - close: 57.55 chg: +0.30 stop: n/a

The MOO provided a minor bounce today. We are suggesting readers open strangle positions in the $57.00-58.00 zone. The options we suggested were the August $62 calls (MYV-HJ) and the August $50 puts (MOO-TX). Our estimated cost is $2.10. We want to sell if either option hits $3.15.

Picked on July 03 at $ 57.25
Change since picked: + 0.30
Earnings Date 00/00/00
Average Daily Volume = 745 thousand

---

United States Oil - USO - cls: 114.95 chg: -1.87 stop: n/a

Talk of waning supply concerns and news that Iran might become more cooperative was enough to send crude oil futures to a $4 loss. The USO reacted with a 1.7% loss. We have less than two weeks left before July options expire and we need to see a bigger move in oil and the USO if these strangles are going to pay off! 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: + 5.81
Earnings Date 00/00/00
Average Daily Volume = 12.5 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.

DISCLAIMER

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

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