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Daily Newsletter, Saturday, 06/17/2006

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Table of Contents

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

Market Wrap

Kick the Cat

The rally from Tuesday's lows was the biggest Dow gain since April 2005. All indexes surged on significant short covering after the Bernanke speech. While the talking heads are all rattling on about how the market found its bottom I think caution is in order. Somebody needs to kick the cat to see if it is alive otherwise Thursday was just a dead cat bounce.

Dow Chart - 180 Min

Nasdaq Chart - Weekly

Economic reports for the week were benign despite continued signs of rising inflation. Those signs were no worse than expected and they only guaranteed another rate hike in late June. The market was already expecting it and we got a small relief rally that it was not any worse. The only economic reports on Friday were the current account deficit at -$208.7 billion, no surprise, and the Consumer Sentiment at 82.4. The sharp jump in sentiment was a surprise with analysts expecting only 79.0. The present conditions component jumped even more sharply from 96.1 to 103.1 and far outdistancing the one point gain in the future expectations component. Consumer sentiment had fallen -8.3 points in May primarily due to the rise in gasoline prices, weakening housing market and the drop in the stock market. Several analysts felt the sharp gain in June was simply a snap back from the May drop while others felt the May drop was due to a statistical error and the June numbers corrected it. Whatever reason pushed the headline number higher it was a positive factor for Friday's markets.

Economic Calendar for Next Week

Next week the economic calendar is rather slim with no major reports capable of really moving the market. Every report should not stray far from the prior month and all eyes are going to be on the Fed meeting the following week rather than the eclectic group of reports on the calendar. The PPI and CPI last week were the keys for the Fed and the Fed funds futures are showing nearly a 100% lock on another quarter point hike.

There were nine public speeches by Fed officials last week with three by Bernanke himself. He is widely credited with some of the Thursday bounce after comments on energy but I doubt that was the real push behind the gains. On Friday we heard from Kohn, Kroszner and Poole. Kohn told a Boston audience that cutting inflation could be difficult and costly if it is allowed to gain a foothold. He also said widespread expectations of rising inflation can be self-fulfilling. Kroszner told a crowd that the Fed needs to always be looking ahead for future implications of current actions rather than looking in the rear view mirror. He also said the potential exists for current high energy prices to pass through to the consumer in the form of inflation. This is a break from the party line as most of the Fedspeak has suggested impacts from energy should be contained due to a slowing economy. Bernanke himself said on Thursday that the impact of energy prices would be manageable. This was one of his comments that was thought to have contributed to the market rally. Poole said on Friday that the Fed must persist in fighting inflation to prevent it from taking hold. Also, current inflation was outside the Fed's comfort range. This should be the end of speeches from the Federal Open Mouth Committee until after the meeting on the 28th. Next week begins the normal quite period before the meeting.

All of these speeches were seen to have been telegraphing continued Fed moves rather than a coming pause. Fed funds futures are now pricing in a 60% chance of another quarter point at the August 8th meeting to take us to 5.50%. There is also growing support in the futures for another hike before November. While most brokers are keeping their estimates at 5.5% as the top Lehman came out on Friday saying they expect a 5.75% top with a cut shortly thereafter. These rising estimates will continue to pressure the equity markets as investors manage fears of higher rates and a slowing economy.

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The economic calendar next week will be light but it will be replaced with anxious waiting for earnings guidance. We have started to see the warnings appear but the pace should begin to pickup next week. In the past week Carnival said that higher fuel costs and a sluggish Caribbean market reduced profits for the quarter. CCL still beat analyst estimates by a penny and CCL gained +2.02 for the day. Oracle told investors that revenue was +25% higher than the $3.88 billion in the year ago quarter. Oracle had previously guided analysts to +13% to +17% growth. Oracle gained only +49 cents. Not all the early guidance has been positive. Adobe warned that results for the quarter and year would be below current estimates. On Thursday Adobe said Q2 profits fell short of its own projections but the stock rebounded late in the day. Adobe warned last month that results would come in at the low end of estimates. Caterpillar reiterated its $50 billion revenue target by 2010 and expected a +15% to +20% annual growth rate to that target. This helped the equipment stocks and commodities on Thursday. CAT said 2004 was the best economy in 20 years and although 2005 slowed slightly it was still an excellent year and 2006 is expected to be on par with 2005. KB Homes warned Q3 and Q4 revenue to be "well below Wall Street forecasts" but the stock gained +37 cents. KBH said the housing market would remain challenging for the rest of the year and reduced the number of homes they expect to sell to 40,000 from 42,000. Apparently investors feel all the bad news is already priced into the builders.

Overall the number of warnings has been few and the reactions minimal. It was felt that most stocks were already severely oversold and no further damage was possible. That was last week and next week could be a different story. If warnings accelerate and some big names start surprising the street it could easily get ugly again and very quickly. Currently analysts are not expecting a difficult quarter so some unexpected surprises could sour that view. Intel is widely expected to miss earnings and lower guidance and Microsoft is also expected to have a tough quarter. If any of the big guys suddenly start appearing in the news headlines you should increase your caution level.

Next week could also be challenged from another direction. The Russell indexes are rebalanced each year at the end of June. The list of changes was posted after the market close on Friday and will be effective after the market close on June-30th. However, now that the deletions are known they will be sold beginning with the market open on Monday. It is not that the index funds will race to dump shares but everyone else hoping to profit on the June 30th change will short them immediately. Just deleting 185 or so stocks from the Russell-2000 index is not the only downward pressure on index. Russell will also be adding 21 new IPOs that now qualify for addition. Some of these IPO stocks have very large market caps like MasterCard (MA) currently at $3.37 billion. Russell states that the total market cap for the Russell indexes will increase from $14.3 trillion to $15.3 trillion after the rebalance, a +7% increase. Bear with me here as I try to explain how that will impact the market. According to Russell, funds worth $3.8 trillion are indexed to the Russell. This means that roughly 7% of the $3.8 trillion or $266 billion in index share value will have to be sold to make room for purchases of the new companies being added. This is a VERY broad explanation and does not take into account all the various methods for investing in and/or managing a fund tracked to the Russell indexes. It is also based on the entire Russell-3000 not just the R1K or the R2k. Russell ranks the top 3000 stocks by market cap which are eligible for inclusion in its indexes. The top 1000 become the Russell-1000 index and the bottom 2000 become the Russell-2000. A company like Mastercard will go into the top 1000 and that will push some other company out of the R1K and back to the R2K. That means funds indexed to the R1K have to sell the deleted company and buy Mastercard. Funds indexed to the R2K will have to sell other stocks and buy the stock dropping from the R1K into the R2K. Since a stock being pushed out of the R1K has a bigger market cap than any of the R2K stocks it requires an downside adjustment to all R2K stocks currently held. Trust me, the Russell rebalance is a giant headache for fund managers. Any portfolio shifting or hedging before June 30th will exert downward pressure on the indexes since only the deletions or reduction in position size counts towards index movement until July 3rd. Any buying of Mastercard or the 236 other companies being added on June-30th will have no impact on the indexes prior to July 3rd.

I will summarize this as briefly as I can. Roughly 189 companies are being removed from the Russell indexes and selling by speculators will begin on Monday morning. Furthermore, fund managers will have to reduce existing positions by something around -7%, which includes those being deleted as well as those being reduced to make room for the $1 trillion in additional market cap of companies being added. The vast majority of liquidations will not occur until June-30th since index funds are only charged to track the index not anticipate changes. Some will anticipate and try to game the change but the vast majority will not. Still, hedge funds and individuals will start shorting the deletions and buying the additions on Monday morning in hopes of capitalizing on the rebalance.

Link to stocks being deleted:
http://www.russell.com/us/Indexes/US/Reconstitution/recon_deletions.asp

Link to stocks being added:
http://www.russell.com/us/Indexes/US/Reconstitution/recon_additions.asp

Another challenge investors are likely to face over the next several weeks is market cap rotation. In times of rising interest rates and economic slowing it is typical for investors, especially funds, to rotate out of small caps and into big cap blue chips. Small cap companies are usually impacted more by rising interest rates since they borrow more and debt in a slowing economy is a drain on profits. Since nobody knows what is really ahead for the economy other than a projected slowdown we are going to see investors become more defensive. Moving into dividend paying blue chips for the next few months will be a strategy many will follow. If the economic correction is brief they will jump back into smaller and more speculative stocks on the first economic upturn. If the Fed goes too far or the economy slips into recession then they are already in the relative safety of blue chips and collecting their dividend checks while they wait for a rebound. This market cap rotation is already underway to some extent and will likely accelerate as this earnings cycle progresses. The pace of earnings warnings will likely dictate the pace of rotation until earnings are over. Investors are stubborn and most will refuse to bail from their speculative positions until after the earnings are announced. Regardless of how many times companies tank on the earnings announcement investors continue to hold over the event hoping for that jackpot that occasionally appears. Wise investors bail a couple days before earnings content to take the routine profits on the build in expectations rather than routine losses on post earnings reality. One of the most frustrating events in trading is to be holding profitable calls on a company that is tanking in after hours and you can't get out until tomorrow's open and watching those profits turn into losses. The next most frustrating thing is to be holding those calls on your favorite stock when a different company in the sector misses earnings and the entire sector tanks in after hours taking your profits down with it.

Energy stocks rose from the dead on Thursday with very strong gains across the board. The gains held on Friday with very little erosion despite an intraday drop in crude to $68.80. Oil inventories on Wednesday confused the picture with a draw of -1.0 mb in crude but a sharp jump of +2.8 mb in gasoline. Refinery utilization also jumped by +1.7% to 92.7%. It means the floodgates are open ahead of the July-4th weekend and gasoline is pouring into the system. The demand table is showing slightly less demand than in 2005 but it did increase +5% over the prior week. Demand is averaging only about 67,000 bbls per week below 2005 but some heavy usage weeks are just ahead. The average price for gasoline over the last six weeks has risen to $2.92 or +70 cents over the same time last year. Higher prices have produced less consumption but only slightly. The longer prices stay at this level the acceptance of those prices will improve. Ethanol hit an all time high of $4 per gallon in the cash market this week. Any questions why gasoline prices are rising? Did you know that gas mileage from ethanol blended fuels is lower than gasoline alone by -5% to -8% depending on the strength of the blend? Mileage on E85 vehicles is as much as -25% less than gasoline alone. Yes, you are paying more and getting less.
http://www.fueleconomy.gov/feg/noframes/20392.shtml

Gasoline Demand Table

Crude Oil Chart - Daily


Friday was options expiration and it occurred with barely a whimper according to the closing levels on the indexes. Much of the impact had been felt over the last week leading up to the actual expiration. We saw monster volatility and very high volume as positions were closed or adjusted. The average daily volume for the last four days was 5.995 billion shares making it one of the busiest periods on record. Note in the table below the 16:1 up to down volume on Thursday and nearly 4:1 advancers to decliners. This was the mother of proverbial short squeezes heightened by the expiring options. Everyone short on Wednesday going into the quadruple witching was caught off guard by the sudden reversal with time expiring rapidly. Note also the reversal of fortunes on Friday despite the minor losses on the indexes. Sellers showed up in volume but they were not able to take back the gains from Thursday. If you are looking for a silver lining to Friday's cloud that was it.

Table of Market Internals

Index Correction Table

The rebound for the week came after some new lows were logged on Wednesday. Many analysts are calling Wednesday a bottom but a few professional traders are not betting on it. They feel Thursday's rebound was the product of a severely oversold market, option expiration and a well timed buy program combining to produce a short squeeze bear-b-que. The Dow rambled for a +345 point rebound and came to a stop right at resistance of 11050-11060. This is right in the middle of the expected range of 10700-11300 we could see over the next several weeks. Dow 10700 was strong support and a perfect place for the bears to give up prior to OpEx. Friday's -0.64 Dow showing was actually bullish given the +345 point rebound. The gains held under strong declining volume. Chalk that one up for the bullish case. It would also match the big cap rotation scenario I laid out earlier with the smaller cap indexes Nasdaq -14 and Russell -8. Yes, compared to the Dow the Nasdaq Composite is a smaller cap index. Need more proof? The S&P-100, the bluest of the blue chips was only off -1.41.

The Nasdaq rebounded +83 points (+4%) from its Wednesday low of 2065. The dead stop just below strong resistance at 2150 was followed by a -14 point decline. It was a bullish rebound but far from being confirmation of a new bull market. That 2150 level on Monday will be exactly downtrend resistance from where the May-9th decline started. Even if the Nasdaq manages to find additional traction the resistance only grows stronger as it nears 2200. The Nasdaq also has strong resistance in the form of earnings worries from Intel, Microsoft and quite a few other major techs that have been strangely quiet heading into the warning period. If a couple of those large names pops up with a surprise warning then overhead resistance will be even more difficult to break. Of course the obvious question arises. If everyone is expecting Intel and Microsoft to warn/miss would it actually be a surprise? Could just getting it over with actually be positive for the market? It would not be the first time a warning cleared the air. It is the unknown that bothers investors the most.

The S&P-500 ran out of steam at 1258 on the Thursday spike and that is exactly in the middle of the 1255-1260 resistance band. It is also right in the middle of our recent range where biases tend to evaporate. The S&P hit a low of 1219 on Wednesday and only 25 points away from the 1194 level needed for a -10% correction. Heck, that is close enough for me given the decline from the 1327 high but I don't make the rules. If we do roll over below 1260 next week I would expect that 1194 level to be reached.

S&P-500 Chart - Weekly

The market declines have not dampened any bullish spirit by the noted market strategists. In a CNBC poll of top money managers the average target for the S&P before year-end was 1359. That would be a +8.5% gain from Friday's close but there is a catch. Nearly everyone expected lower lows before that level was reached. If you are a student of market history then you know summers are not noted for bullishness and the Aug/Sep/Oct period is know for market bottoms. October is know as the bear killer month because of the number of market bottoms seen during those 31 days. This brings me back to my market projections I have been making over the last couple months. Despite the low last week and the nice rebound I still expect the S&P to trade in a range that is flat to down until later this summer. I do believe the highs are in for the coming months but I do expect new lows. My range target is 1175 as a potential support level for summer but we could bleed down to 1150-1165 and long term support. I still expect the upper range to be 1295 but would be very surprised to see it again in the near future. You can see that gives us plenty of room to wander and I think we will need it. I suspect we will spend most of our time wandering in the middle but opposing forces are very strong and we could see spikes to extremes on either side.

Russell 2000 Chart - Daily

For next week I would look to short or buy puts on any failure below S&P 1260. One way to do this and capture the Russell rebalance volatility would be with the IWM, or Russell-2000 Ishares. The July puts would be cheap and plentiful but a quick check shows others had the same idea. Nearly 300,000 puts traded on Friday with the largest volume of 105,000 at the money. That leaves the Russell futures as the only pure play left. The other option would be to pick a couple stocks from the Russell addition or deletion list from the links above and buy calls on the additions and puts on the deletions. Hint, the bigger the market cap the more buying you will see on the additions. That would target MasterCard (MA) or Burger King (BKC) as big cap entries. There are others but you will have to scan the list to find them. Next week is devoid of any scheduled events that could produce positive results so be on guard for any unscheduled events like earnings warnings that could sour sentiment fast. While everyone would like to think that the bullish sentiment from Thursday would carry over next week I would want to see high volume confirmation before entering any new long positions from this level. It is summer, a week before a Fed meeting, Russell rebalance notice week and the first week of the earnings warning cycle. Anything is possible but for me the risk of downside far outweighs the upside possibilities.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
ASFI CV
ASVI KDE
ELOS MDT
ETP MSEX
VZ NTMD
  RBAK
  SNHY
  TLAB

New Long Plays

Asta Funding - ASFI - close: 35.16 change: +0.98 stop: 33.95

Company Description:
Based in Englewood Cliffs, NJ, Asta Funding, Inc., is a leading consumer receivable asset management company that specializes in the purchase, management and liquidation of performing and non-performing consumer receivables. (source: company press release or website)

Why We Like It:
ASFI has spent the last five weeks consolidating lower and now shares have reached their rising trendline of support. Coincidentally the stock has already reached its trendline of support on the Point & Figure chart. While it looks like ASFI is trying to bounce we want to see some confirmation. Our market bias is not very optimistic and ASFI does have potential resistance at its 10-dma and 50-dma still overhead. We're going to suggest a trigger at $36.01 to go long the stock. If triggered our target is the $39.95-40.00 range.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 165 thousand

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A.S.V.Inc. - ASVI - close: 21.20 change: +1.25 stop: 19.45

Company Description:
ASV designs, manufactures and sells rubber track loaders and related accessories, attachments and traction products. ASV also manufactures rubber track undercarriages, some of which are a primary component on Caterpillar's Multi Terrain Loaders. (source: company press release or website)

Why We Like It:
Shares of ASVI have been slaughtered over the last couple of months. The stock is way oversold and due for a bounce and it looks like the rebound has begun. ASVI broke out from its bearish channel and Friday saw shares breakout past round-number resistance at the $20.00 level on strong volume. Readers can choose to go long the stock right here. However, our preferred entry point would be to wait for a dip back toward the $20.50-20.00 region. Broken resistance at $20.00 should now act as new support. We are a little concerned about the simple 50-dma (currently 24.43) acting as overhead resistance so we're going to target the $23.50-24.00 range for now. We do not want to hold over the company's earnings report in late July.

Picked on June 18 at $21.20
Change since picked: + 0.00
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 463 thousand

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Syneron Med. - ELOS - close: 21.05 change: +0.55 stop: 19.99

Company Description:
Syneron Medical Ltd. develops, manufactures and distributes medical aesthetic devices that are powered by elos, the combined-energy technology of bi-polar radio frequency and light. Founded in 2000, the corporate, R&D, and manufacturing headquarters for Syneron Medical Ltd. is located in Israel. (source: company press release or website)

Why We Like It:
ELOS is another stock that looks significantly oversold but appears to have put in a bottom. The stock has spent the last three weeks under resistance at the $21.35 level. We want to catch any upward breakout but we want some confirmation so we're suggesting a trigger to go long the stock at $21.51. If triggered our target will be the $23.85-24.00 level. We may have to adjust this target to account for the descending 50-dma, which may act as resistance.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume: 615 thousand

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Energy Transfer - ETP - close: 44.25 chg: +1.07 stop: 41.99

Company Description:
Energy Transfer Partners, L.P. is a publicly traded partnership owning and operating a diversified portfolio of energy assets. The Partnership's natural gas transportation and storage operations include natural gas gathering and transportation pipelines, natural gas treating and processing assets located in Texas and Louisiana, and three natural gas storage facilities located in Texas. This includes approximately 11,700 miles of pipeline in service, plus an additional 550 miles under construction. The Partnership is one of the three largest retail marketers of propane in the United States, serving more than 1 million customers from approximately 440 customer service locations in 40 states extending from coast to coast, and Alaska. (source: company press release or website)

Why We Like It:
We're adding ETP as a bullish candidate due to its relative strength. The stock has ignored the market's weakness and the profit taking across much of the oil and energy sectors. Instead traders used the recent dip toward $42.00 and its rising 50-dma as an entry point. Friday saw ETP push past its short-term trendline of lower highs (resistance) on above average volume, which is bullish. There is short-term resistance at $46.00 but our target is the $47.50-48.00 range. We do not want to hold over the company's earnings report in July but unfortunately we don't have a confirmed date yet. It could be July 10th through the 20th.

Picked on June 18 at $44.25
Change since picked: + 0.00
Earnings Date 07/10/06 (unconfirmed)
Average Daily Volume: 149 thousand

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Verizon Comm. - VZ - close: 32.54 change: +0.35 stop: 31.24

Company Description:
Verizon Communications Inc., a Dow 30 company, is a leader in delivering broadband and other wireline and wireless communication innovations to mass market, business, government and wholesale customers. Verizon Wireless operates America's most reliable wireless network, serving 53 million customers nationwide. Verizon Business operates one of the most expansive wholly-owned global IP networks. Verizon Telecom is deploying the nation's most advanced fiber-optic network to deliver the benefits of converged communications, information and entertainment services to customers. Based in New York, Verizon has a diverse workforce of more than 250,000 and generates annual consolidated operating revenues of approximately $90 billion. (source: company press release or website)

Why We Like It:
The rally continues in VZ. The stock spent the last couple of weeks consolidating sideways between support at $31.25 and resistance at its 200-dma just north of $32.00. Now in the last two days VZ has broken out above the $32.00 level, its 50-dma and its simple 200-dma on volume well above its daily average. All of this is in addition to a breakout from its bearish channel (see chart). The stock may still have resistance between $32.50 and $33.00 at its exponential 200-dma and the 100-dma but we're going to suggest bullish positions here above $32.00. More conservative traders can choose to wait for further confirmation. A dip and bounce near $32.00-31.75 could also be used as a new entry point. Our target is the $34.75-35.00 range. We do not want to hold over the company's late July earnings report.

Picked on June 18 at $32.54
Change since picked: + 0.00
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 9.8 million
 

New Short Plays

Cntrl Vermont Pub.Srv - CV - cls: 17.02 change: -0.22 stop: 18.01

Company Description:
CVPS, founded in 1929, is Vermont's largest electric utility, serving more than 151,000 customers. (source: company press release or website)

Why We Like It:
If you read the market wrap this weekend then you already know about the Russell index rebalancing. After the market close on Friday CV appeared on the list of stocks that were removed from the Russell 3000. Funds that track the Russell will now need to sell shares of CV making the stock an attractive bearish candidate. Even without the removal from the Russell shares of CV were looking weak with a steady trend of lower highs. The MACD is flirting with a new sell signal and the Point & Figure chart already sports a triple-bottom breakdown sell signal with a $12.00 target. We are suggesting shorts here under $17.50. More conservative traders may want to wait for a move under $16.50 first. We would NOT open positions if CV gaps down on Monday under $16.45. Our target is the $15.50 level.

Picked on June 18 at $17.02
Change since picked: + 0.00
Earnings Date 08/07/06 (unconfirmed)
Average Daily Volume: 46 thousand

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4 Kids Enter. - KDE - close: 15.66 change: -0.26 stop: 16.05

Company Description:
Headquartered in New York City with international offices in London, 4Kids Entertainment, Inc. is a global provider of children's entertainment and merchandise licensing. 4Kids, through its wholly owned subsidiaries, provides domestic and international merchandise licensing; product development; television, film, music and home video production and distribution; media planning and buying; and Web site development. For further information, please visit the Company's Web site at www.4KidsEntertainment.com and www.4Kids.TV. (source: company press release or website)

Why We Like It:
KDE is another stock on the list of equities removed from the Russell 3000. Here's the link:
http://www.russell.com/US/Indexes/US/Reconstitution/recon_deletions.asp
Shares of KDE were already looking weak and flirting with a breakdown under significant support in the $15.50 region. Now that it's being kicked off the Russell indices the stock should feel more selling pressure. The P&F chart is already bearish and points to an $11.50 target. We are suggesting a trigger to short KDE at $15.45. If triggered our target is the $12.60-12.50 range. We do NOT want to open positions if KDE gaps down on Monday under $15.00.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/09/06 (unconfirmed)
Average Daily Volume: 113 thousand

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Medtronic - MDT - close: 50.25 change: -0.28 stop: 51.01

Company Description:
Medtronic, Inc., headquartered in Minneapolis, is the global leader in medical technology - alleviating pain, restoring health, and extending life for millions of people around the world. (source: company press release or website)

Why We Like It:
The oversold bounce in MDT appears to be rolling over under the $52.00 level. Technicals have turned sour again with a new MACD sell signal. The P&F chart is bearish and points to a $36 target. We suspect that MDT will soon breakdown again under $50.00 and its 50-dma. Thus we're suggesting a trigger to short the stock at $49.49. We do expect a bounce near support at $48.00 but our target is going to be the $45.50-45.00 range. We do not want to hold over the August earnings report.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/22/06 (unconfirmed)
Average Daily Volume: 10.8 million

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Middlesex Water - MSEX - close: 17.22 change: +0.05 stop: 17.75

Company Description:
The Middlesex Water family of companies is committed to providing quality water and wastewater service to residents in parts of New Jersey and Delaware. (source: company press release or website)

Why We Like It:
MSEX is another stock being kicked off the Russell indices. Shares were already looking weak with a drop toward significant support at the $17.00 level. We are going to suggest a trigger at $16.90 to catch a breakdown under support. The weekly chart shows a big bearish head-and-shoulders pattern that points to an $11.00 target. We're going to target a decline into the $15.15-15.00 range. The P&F chart is bearish with a bearish triangle breakdown sell signal pointing to a $12.00 target. Please note that we do NOT want to open positions should MSEX gap down on Monday morning under $16.50.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/08/06 (confirmed)
Average Daily Volume: 28 thousand

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NitroMed - NTMD - close: 5.07 change: -0.14 stop: 5.71

Company Description:
NitroMed of Lexington, Massachusetts is an emerging pharmaceutical company and the maker of BiDil (isosorbide dinitrate/hydralazine hydrochloride), an orally administered medicine available in the United States for the treatment of heart failure in self-identified black patients. (source: company press release or website)

Why We Like It:
NTMD is another stock being removed from the Russell indices and we expect to see renewed selling pressure. The stock was already in a very defined bearish pattern and shares are in the process of rolling over (failed rally) under resistance at its 50-dma. We are suggesting shorts with NTMD under $5.50. More conservative traders may want to use a trigger at $4.95. Our target is the $3.70-3.60 range. More aggressive traders may want to aim lower. We do NOT want to open positions if NTMD gaps down on Monday morning under $4.75.

Picked on June 18 at $ 5.07
Change since picked: + 0.00
Earnings Date 07/31/06 (unconfirmed)
Average Daily Volume: 710 thousand

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Redback Networks - RBAK - cls: 20.39 chg: -0.31 stop: 21.01

Company Description:
Redback Networks Inc., a leading provider of next-generation broadband networking systems, enables carriers and service providers to build Smart Broadband Networks that are personalized, adaptive and efficient. (source: company press release or website)

Why We Like It:
We suspect that the recent bounce in RBAK is just that - a bounce. The stock has broken its longer-term up trend and now the rebound is starting to fail under the $21.00 level and its 10-dma. We don't believe the sell-off is over yet. We are suggesting a trigger to short RBAK at $19.75. If triggered our target is the $16.50 level, which is where we expect RBAK to find support with its rising 200-dma. The P&F chart is bearish and points to a $12.00 target. We do not want to hold over the mid July earnings report.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume: 1.8 million

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Sun Hydraulics - SNHY - cls: 18.10 chg: -0.22 stop: 18.51

Company Description:
Sun Hydraulics Corporation is a leading designer and manufacturer of high performance screw-in hydraulic cartridge valves and manifolds for worldwide industrial and mobile markets. (source: company press release or website)

Why We Like It:
SNHY is another stock being removed from the Russell indices. Funds tracking the Russell will need to sell their shares of SNHY creating new downward pressure on the stock. We're a little concerned about the bullish reversal candlestick on the weekly chart so we're going to suggest a trigger. Our trigger to short SNHY will be $17.45. We do not want to open positions should SNHY gap down on Monday morning under $17.00. Our target is the $15.10-15.00 range. The P&F chart looks pretty bearish with a $7.00 target.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 89 thousand

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Tellabs - TLAB - close: 14.32 change: -0.19 stop: 15.01

Company Description:
Tellabs advances telecommunications networks to meet the evolving needs of end-users. Broadband solutions from Tellabs enable service providers to deliver high-quality voice, video and data services over wireline and wireless networks around the world. (source: company press release or website)

Why We Like It:
TLAB is an aggressive short play. We're labeling it aggressive because the P&F chart is still in a buy signal and the weekly chart's newest candlestick is a potential bullish reversal. We're going to suggest shorts with TLAB under $14.50. Our target is the $12.50 mark just above the simple 200-dma. More conservative traders may want to wait for a decline under $14.00 before opening plays but then we'd use a tighter stop if you wait for more confirmation. If TLAB doesn't trade lower right away we might pull the plug quickly. We do not want to hold over the company's July earnings report.

Picked on June 18 at $14.32
Change since picked: + 0.00
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 5.9 million
 

Play Updates

Updates On Latest Picks

Long Play Updates

Archstone - ASN - close: 49.92 chg: -0.22 stop: 48.74

ASN is still consolidating sideways around the $50.00 level. The lack of selling during the market's weakness can be seen as relative strength but ASN is having trouble building on any breakout attempts. The MACD on the daily chart is turning bearish while the MACD on the weekly chart is turning bullish. Meanwhile the Point & Figure chart is bullish with a triple-top breakout buy signal and a $70 target. We would wait for a move past the $50.25 level before initiating new long positions. Our target is the $53.85-54.00.

Picked on June 05 at $50.21
Change since picked: - 0.29
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 989 thousand

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Potlatch - PCH - close: 38.64 chg: +0.00 stop: 36.99

We do not have anything new to report on for PCH. The stock tried to breakout past the $39.00 level on Friday and failed. The next move looks like a decline into the $38.00 region, maybe back toward support around $37.20. Given Friday's failed rally we would definitely wait for a move over $39.00 before initiating new plays. More conservative traders might feel better to wait for a breakout past $40.00 and its 100-dma (40.11). Currently our target is the $43.00-43.50 range.

Picked on June 04 at $39.39
Change since picked: - 0.75
Earnings Date 07/17/06 (unconfirmed)
Average Daily Volume: 362 thousand

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Ryanair - RYAAY - close: 52.27 change: -0.13 stop: 49.95

We would be cautious here with RYAAY. The XAL airline index produced a failed rally pattern on Friday with a reversal under its exponential 200-dma and a decline back under its 50-dma and 200-dma. While RYAAY has been and still is out performing its peers in the airline sector a decline in the XAL index could weigh on the stock. We are not suggesting new bullish positions at this time. Our goal is the $53.90-54.00 range, where we expect RYAAY to have resistance at its trendline of lower highs (see chart).

Picked on June 08 at $51.34
Change since picked: + 0.93
Earnings Date 07/31/06 (unconfirmed)
Average Daily Volume: 304 thousand

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Starbucks - SBUX - close: 36.61 chg: -0.18 stop: 34.98

On Friday shares of SBUX tried to breakout past $37.00 and its 50-dma but failed. Investors might be spooked by news out on Friday that SBUX is the latest company that could be sued for its high-fat content in its products. Overall we don't see any changes from our new play description on Thursday night so we're reposting it here:

We are going to switch directions with SBUX. Recently we tried to play the breakdown under technical support at its 100-dma and it did not pan out for us. Now the stock is breaking out higher from its sideways consolidation. Volume was not very impressive on Thursday as the stock hit a new three-week high. We want to see some confirmation. We are suggesting a trigger to go long the stock at $37.05. If triggered we'll target a rally into the $39.95-40.00 range. We are beginning the play with a wide (aggressive) stop loss at $34.98. This feels a little aggressive given some of the bearish trendlines on the chart below. Please note that we would be extra careful about considering new bullish positions right now. Yes the markets are bouncing but stocks were very oversold and due for a bounce. The major indices remain inside their intermediate bearish trends and the market bounce could be nothing more than a correction on the way lower.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume: 6.0 million

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Watson Wyatt - WW - close: 34.23 chg: -0.48 stop: 33.80

Uh-oh! Friday's lack of follow through on the bounce from the $34.00 level and its 50-dma is bad news! Volume was WAY above average on Friday and that could suggest that a big investor has decided to get out. We are NOT suggesting new bullish positions at this time. Wait for a move past $34.85 or better (maybe $35.00) before considering new long plays. Right now, after studying the intraday charts, it looks like we will be stopped out on Monday at $33.80. If WW trades under $33.75 nimble traders might want to switch directions and short the stock! WW is sporting a double-top pattern. A 38.2% Fibonacci retracement of its October-June rally would be about $32.00.

Picked on June 15 at $34.71
Change since picked: - 0.48
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 183 thousand
 

Short Play Updates

Avid Tech. - AVID - close: 35.60 change: +0.46 stop: 39.01 *new*

AVID tried to bounce on Friday and while shares did close up 1.3% the upward momentum stalled at the $36.00 level. Almost everything about AVID is bearish. The stock has a consistent trend of lower highs, a bearish MACD sell signal, a bearish P&F chart, a recent breakdown under support to close at new three-year lows. Our only concern is that AVID looks short-term oversold and due for a bounce. The short-term technical oscillators are suggesting the same thing - that AVID is due for a bounce. Wait for a failed rally under $38.00 or its 10-dma as the next entry point to short the stock. More conservative traders may want to lock in some profits right here. Our target is the $32.50 mark. Please note that we are lowering the stop loss to $39.01.

Picked on June 11 at $37.35
Change since picked: - 1.75
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume: 763 thousand

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The Geo Group Inc. - GGI - cls: 33.41 chg: -0.78 stop: 35.65

The oversold bounce from GGI's lows this past week appeared to fail on Friday at GGI's descending 10-dma. This is good news for the bears. It's hard to say if the bounce is really over. We are concerned that the weekly chart has now produced a "hammer" style bullish reversal candlestick. If shares trade under $33.25 then aggressive traders might want to short the stock with a target at $30.25 but we'd suggest a tighter stop loss. Currently our stop at $35.65 is just above the 50-dma. We're targeting the $30.25 level because the $30 mark and its rising 100-dma (30.22) will probably act as support. The Point & Figure chart points to a $22 target.

Picked on June 11 at $34.14
Change since picked: - 0.73
Earnings Date 05/04/06 (confirmed)
Average Daily Volume: 135 thousand

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Blue Nile - NILE - close: 29.60 chg: +0.32 stop: 31.55

Traders need to be on alert here. NILE managed better than a one percent bounce on Friday. Shares look poised to climb toward $30.00 and potentially to the $31.00 level. The stock does look oversold so almost any strength will begin to turn the technical indicators positive. The P&F chart is bearish and points to a $15.00 target. We would wait and watch for a failed rally, preferably under $30.00, as a new entry point for shorts. Readers should remember that NILE has a high amount of short interest and that raises the risk of a short squeeze. Our target is the $25.50-25.00 range.

Picked on June 08 at $29.45
Change since picked: + 0.15
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 212 thousand
 

Closed Long Plays

None
 

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Jim Brown 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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