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Daily Newsletter, Saturday, 07/22/2006

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Table of Contents

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

Market Wrap

Dell Rings the Bell!

The market opened lower on Friday after Dell rang the earnings bell before the open with a strong earnings warning. Dell's weakness offset gains in Microsoft and sent techs sliding once again with the Nasdaq closing at a 14 month low. Slowing purchases by both corporations and consumers is producing growing weakness in the tech sector. The earnings picture is becoming clearer and the picture is not pretty.

Dow Chart - 180 min

Nasdaq Chart - Weekly

S&P-500 Chart - Weekly

This was a very rocky week for the markets. The Wednesday short squeeze was quickly forgotten and negativity began to increase its grip on the markets as the week came to a close. Inflation is rising despite hopes from the Fed that it will slow. Economic indicators are slowing and slowing more rapidly than previously expected. Fears are growing that stagflation, a period of rising inflation without growth, is on the way and the Fed cannot do anything about it.

The Fed says inflation will slow as the economy slows but the Consumer Price index posted a +0.3% gain in the core rate for the fourth consecutive month. Core CPI is up +2.6% for the year and over the Fed's comfort level. Bernanke led investors to believe that the Fed was nearing an end to the rate hikes but the CPI suggests they are not yet done. Bernanke indicated again that the Fed was data dependent for future hikes and the data indicates inflation is still rising. The Fed is also counting on an economic slowdown to further depress inflation. As long as inflation does slow along with the economy that would produce the highly desired soft landing. That scenario is showing cracks in the foundation due to high-energy prices, high commodity prices, falling home values and slowing consumer spending. Rising energy prices are rapidly slowing consumer sales and it appears the market is beginning to price in a crash landing.

Based on market reaction you would think the current earnings cycle was much worse than it is. With 30% of the S&P reported 66% have beaten estimates, 20% matched estimates and only 14% missed earnings. The missed percentage was well within normal ranges. The challenge is simply the high profile earnings misses in that 14% and the guidance for future quarters. As you can see in the table below the overall earnings growth for the S&P companies already reported has dropped substantially from just a week ago. The current 14% average should receive a boost next week as most of the energy sector reports. The sector is expected to post better than +30% growth and that will offset slower growth in other sectors.

EEarnings Snapshot Quarter to Date

The markets are reeling under earnings misses and more importantly lowered guidance. Better than expected reports from companies like Microsoft, Google, Caterpillar, Motorola, Nokia and United Technology are being overshadowed by results from companies like Yahoo, Intel, AMD, Capital One, Dell and 3M. The disappointing results from high profile companies are combining with weak expectations in retail, housing and autos to generally sour investor sentiment. Next week should not be any different with the exceptions of earnings from the energy and materials sectors.

Very few companies reporting decent earnings are seeing any benefit in their stock prices. Caterpillar was a prime example with earnings that beat the street by a dime and guidance that was very good. The CEO said business was very strong with record backorders through 2007. He also felt the boom had 2-4 years left to go. They had strong cash flow, better than expected sales, higher margins and raised guidance significantly. What more could you ask for? CAT closed down for the day and nearly -$3 off its highs.

Nucor Steel (NUE) beat estimates by +12 cents and said orders and backlogs across all product lines were healthy and earnings will continue to be "VERY" strong. NUE closed -$6.20 off its Thursday high.

CSX Corp, a leading transport stock, posted earnings that beat the street by 51 cents and was +127% over the same quarter in 2005. They also announced a 2:1 stock split, a 10 cent post split dividend (+54%) and a $500 million buyback program over the next 12 months. They said business was so strong they expected to raise prices up by +6% this year and again in 2007. They did receive some insurance payments related to hurricane losses that inflated earnings slightly but were roughly equivalent to the profits they would have made without the hurricanes. The company said business was booming for as far out as they could see. CSX lost -5.34 from the post earnings spike to Friday's close at $62. What is wrong with this picture? The fears of an economic slowdown and higher oil prices combined to push the entire transport sector lower. Transports hit a high of 4722 after the CSX news lifted the entire sector on Thursday but fell to 4362, or -7.6% to Friday's low, a -360 point drop!

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To put it as clear as I can the market is going defensive as growth slows and inflation rises. Investors are not just afraid of growth slowing in the US but across the globe. China saw its GDP grow by +10.9% in the first half of the year, +11.3% in Q2 alone. The Chinese central bank is reacting strongly to squelch that growth to a more reasonable level. This week they raised the reserve requirement for banks by +50 basis points to curb loan growth. They raised rates by 50 basis points in early July as well. Analysts expect the reserve requirement, currently 8.5% to rise to 10% by year end. By raising the reserve requirement it reduces money available for loans and slows growth. Analysts estimate that each 50-point hike removes 170 billion yuan in liquidity from the banking system. In the first five months of 2006 new bank loans had reached 87% of the governments target for the entire year. Investment in fixed assets rose by 30.9% compared to the target of 18%. Analysts feel current interest rates in China are at least -3% below what is going to be needed to slow growth to a reasonable pace.

China is the number one consumer of raw materials in the world. Any significant slowdown in growth would slow earnings at any company that is selling into that growth. That included companies like Caterpillar and Nucor Steel. The US is the largest consumer of finished goods. If the US is headed for a crash landing or the stagflation scenario then analysts are worried what that would mean for global growth. Currently there is very strong growth in almost every country and a ripple down wave from a crashing US economy could impact that global growth. This is the scenario analysts are painting and investors are fleeing. Defensive stocks like Colgate, Johnson and Johnson and Altria are benefiting from this flight to defensive issues while retail, housing, transports and tech stocks are getting pummeled.

Warnings from the housing sector grew even more negative last week. D.R. Horton (DHI) posted earnings that fell -12% and the CEO sent chills through the sector with his predictions. Don Tomnitz said the current downturn could be longer and deeper than we have all imagined. He said home sales in June fell off the Richter scale accompanied by very strong cancellations. Builders have given up trying to predict the bottom and Tomnitz said "the market is going to get softer going forward and that view is without any rose colored glasses." Analysts are now predicting a 17-20% drop in profits for 2006 and a 47-50% drop in 2007. Housing makes up nearly 25% of the US economy. Ryland also dampened expectations after saying it suffered a drop of -40% in new orders.

Dell shares fell to nearly a five-year low at $19 after cutting its Q2 outlook. Nearly $5 billion in market cap was erased. Dell said aggressive price-cutting and a slowing global market was to blame as well as slowing demand in the enterprise server market. More than 124 million shares were traded. Dell cut its profit estimate to between 21-23 cents compared to 32 cents expected by analysts. Projected revenue was only slightly below the $14.2 billion analysts expected with margin pressures accounting for the large drop in profits. Margins are expected to slide to the 15% range compared to 17.4% in Q1 and 18.6% in 2005. In another marked change from the past Dell elected to NOT hold a conference call to discuss the change in outlook. According to Gartner Group Dell is under pressure from other companies grabbing market share. Sales growth at Dell is rising only +11.6% compared to HPQ +13.8%, Lenovo +13.5%, ACER +34.7% and even Apple saw a +61% rise in notebook sales and its strongest unit sales ever at 1.35 million units. Dell has been able to leverage its low cost model for the last ten years but the law of decreasing returns has finally come home to roost. Other companies have finally mastered the model and the consumer is reaping the benefit. The profit available in Dell's current offering of a 2.5GHZ desktop PC with a 17" monitor for $299 is very slim. Shipping has got to run $50 at least and the Windows XP operating system another $50 bucks even with their volume discount. Add in another $50 for the Intel processor and that does not leave much for the rest of the components. That 15% margin encompasses all their products including the high margin printers, servers and gaming computers. That means they have to be selling those entry-level systems at or near cost as bait to get customers to the website. They hope you will switch once you see the higher priced toys. Unfortunately customers being pressured by high gas prices are buying the entry-level system.

Some financials are also being hurt by disappointing results. Capital One Financial (COF) lost -$8.47 (-9.7%) on Friday after posting results of +1.78 per share compared to consensus estimates of +2.06 per share. The company blamed the drop on fewer late fees as credit card customers paid their bills on time and higher reserves due to worsening credit in its overseas operations. The higher reserve impact to earnings was 16 cents. North Fork Bank, currently being acquired by Capital One, saw earnings fall -9% on a -20% drop in mortgage lending and rising interest rates. Analysts were not scared off and many reiterated their buy rating on COF, most with a 12 month price target of $100. COF closed at $77.71.

Capital One Chart - Weekly

The oil sector and oil prices have disconnected over the last week. Oil closed at $74.40 and -$4 off its high reached last Friday. Much of the volatility was related to the expiration of trading on the August contract on Thursday. The September contract (CL06U) became the front month contract on Friday. Profit taking as the contract expired and on the cooling fears that Iran and Syria would enter the Israel/Hezbollah conflict helped to push prices lower. With Israel poised to invade Lebanon this weekend the price of oil traded briefly over $75 but settled at $74.40. No hurricanes have appeared around the Gulf and supplies remain at high levels. Next week should be a critical week for oil prices as driving demand slows and traders decide what side of the futures trade they want to take going into August. Energy stocks benefited from the short squeeze on Wednesday but the bounce was brief. Stocks appear to be factoring in a fall from $75 oil despite continued analyst projections for $80 before summer is out. We are also seeing traders exit stock positions ahead of next week's energy earnings. After seeing the massacre many stocks experienced this week even after reporting decent earnings it appears traders are taking profits early.

Haliburton (HAL) continued its weeklong post split plunge to close at $30 on more than 50 million shares traded. HAL had been extremely weak since the split for no apparent reason. That reason appeared on Friday as HAL announced it was backing away from an IPO of its KBR unit citing weak market conditions. HAL said it could still do the IPO but it is no longer a first step in the process. HAL asked the IRS for a tax-free ruling on spinning it off to existing HAL shareholders. CEO Dave Lesar said HAL does not want to delay any longer the timing of the KBR separation. KBR has been under fire from several directions and it appears HAL now wants to dump it to avoid future liability. KBR is worth an estimated $8 billion so HAL still wants to extract that value in some form. Investors dumped HAL stock to the tune of -$8 since the $37.93 high last week. Sometimes the best laid plans of mice and men ultimately go astray.

Next week is another strong week for earnings and economic reports. The economic calendar is full but the only really important report is the Q2 GDP on Friday. Earnings will still take center stage and a repeat of this week's results is almost assured with more than 500 companies reporting. The graphic below shows the top 20 winners and losers on Friday.

Table of Winners and Losers

Weekly Internals Snapshot

The internals snapshot for the week shows volume rising into the Wednesday short squeeze and remaining strong for the two days following the rebound when the markets were weak. The lack of follow through and the quick return to the prior levels indicates a complete lack of confidence in the bounce. Note that the 52-week highs and lows had already returned to their pre bounce levels on Friday.

The Dow closed with only a -59 point loss on Friday held up mostly by the gains in MO, JNJ and Microsoft. Microsoft rose +$1 on its $40 billion stock buyback plan. With most of the big guns in the Dow already reported there may be little left in the form of additional earnings support. 3M is the most notable ahead and they report on Tuesday. They have already warned and are trading at strong support at $70. It would take strong new revelations of additional problems to push it much below $70. The Dow is probably going to be a follower rather than a leader next week and the leader will be the Nasdaq. The Dow was weak post bounce but thanks to the defensive issues not as weak as the Nasdaq. The Dow closed at 10870 with 10850 as intraday support. Without peace in the Middle East or a cure for cancer I find it hard to believe we won't retest 10700 next week.

The Nasdaq completely erased its midweek gains and returned to 2020 to close at a 14 month low. With most of the big techs already reported there is little in the way of a positive event in our future. The next support level is 1900 and we could reach that level quickly with a couple more high profile disappointments. The SOX is dragging the Nasdaq lower with AMD, Broadcom, Freescale and Marvell leading the list of losers. The SOX declined to close at 385 on Friday for a -174 drop from its 2006 highs or -31%. The good news is that 385 should be support but it may take a goal line stand to make that support hold.

SOX Component List

SOX Chart - Weekly

The S&P returned to past support at 1240 to wait out the weekend. The bounce to 1262 was quickly sold and the decline to 1240 simply put the S&P back into the bottom portion of its prior range. 1220 remains strong support and 1280 and 1290-1295 strong resistance. This is still well above the predictions by the Hirsch organization of 950 by year end. I believe we will see lower lows somewhere in the 1175 range but it is too hot today for me to drag my bear coat out of the closet for the proper attire to focus on 950. Let's take this one week at a time and let the market tell us where it is going.

Economic Calendar

It is too early to tell if this post bounce bearishness is just left over selling from the May dump or a symptom of a more serious disease. Friday was option expiration and we definitely saw plenty of options related volatility over the past week. The earnings next week should provide plenty of earnings volatility and we have a nice wide range in which to play ahead of the Fed meeting. Last Sunday I had hoped we would have a directional market by this weekend. The oversold rally I was expecting came right on schedule but its duration was far shorter than I expected. I figured we would have several days of hang time to plan our next move as earnings progressed. That hang time was measured in milliseconds on Thursday morning and it has been downhill ever since. The pause at support, S&P 1240 and Nasdaq 2020 was just enough of a tease to make me think the bulls are still alive and buying the dip. If those levels break on heavy volume it will be time to start backing up the cattle hauler for a run to the slaughterhouse. My bias is now bearish and will probably remain overall bearish until October. I am sure we will have several monster short squeezes along the way but there is little incentive for investors to buy and hold stocks today. After the Fed meeting volume should begin to decline even further as traders try to compress their unused vacation time into the remaining three weeks of summer.

The Fed meeting on August 8th is only 11 trading days away and I believe there will be plenty of positioning ahead of that meeting in hopes of a Fed pass or language indicating they are done. Any material dip between now and that meeting is sure to be bought. I would look to buy the dip for a pre meeting trade but be ready to bail once the meeting is over. After the meeting is when the summer doldrums will really appear. The next FOMC meeting is Sept-20th and after traders come back from vacation. Try not to trade the post meeting doldrums for many have tried and few have been successful. After the meeting we want to wait for the fall buying opportunity during the normal Sept/Oct dip. While waiting on the Fed you could nibble sparingly on recent gifts from the market. COF and HAL would be a couple that quickly come to mind. Avoid trying to catch those falling knives. Wait for signs of returning buyers.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None CAE
  USU
  VIVO

New Long Plays

None today.
 

New Short Plays

Cascade - CAE - close: 35.69 change: -0.76 stop: 36.76

Company Description:
During the past 60 years, the field of materials handling has developed into a highly sophisticated and important part of industry. Cascade has played a significant part in this growth and development. From our beginnings as a small machine shop in the early 1940's to the leading worldwide manufacturer that we are today, Cascade continues to grow as the premier supplier of lift truck attachments and related products. (source: company press release or website)

Why We Like It:
Industrial goods and more specifically heavy or construction machinery stocks have not been doing so great. Even Caterpillar (CAT), which had a pretty good earnings report, saw investors sell the news. Shares of CAE have been struggling ever since the big sell-off following its April earnings report. More recently the stock has produced a bearish reversal/failed rally pattern under its 50-dma in the last few days. We think CAE may be poised to breakdown into a new leg lower. Our plan is to use a trigger at $34.90 to catch any breakdown under support in the $35 region. If triggered our target is the $31.50-31.00 range. The Point & Figure chart is more bearish with a $22.00 target. We do not want to hold over its earnings report in September.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/07/06 (unconfirmed)
Average Daily Volume: 87 thousand

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USEC - USU - close: 10.84 change: -0.33 stop: 11.26

Company Description:
A global energy company, is a leading supplier of enriched uranium fuel for commercial nuclear power plants. Revenues in 2005 were $1.56 billion. USEC headquarters are in Bethesda, Maryland. (source: company press release or website)

Why We Like It:
Long-term we're actually bullish on uranium fuel providers but short-term the whole non-metallic mining industry has been pretty weak. In the last couple of weeks USU has produced a failed rally near $12.00 and again last week near its 50-dma and under its 200-dma. The technical picture is bearish. The Point & Figure chart is very bearish with a projected $6.50 target. We don't have a lot of time if we're going to avoid the early August earnings report but we suspect that USU will dip to the $10.00 level again. We're suggesting shorts with USU under $11.00. Our target is the $10.05-10.00 range. More aggressive traders may want to use a wider stop loss. Please note that the short interest is relatively high making this a higher-risk play. The most recent (June) data put short interest at 11.6% of the 86 million-share float.

Picked on July 23 at $10.84
Change since picked: + 0.00
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 1.0 million

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Meridian Biosci. - VIVO - close: 20.94 chg: -1.02 stop: 23.05

Company Description:
Meridian Bioscience, a fully integrated life science company, manufactures, markets and distributes a broad range of innovative diagnostic test kits, purified reagents and related products. (source: company press release or website)

Why We Like It:
VIVO's upward momentum began to stall in April and since then the stock has been trading mostly sideways with a bearish trend of lower highs. That changed this past week. The company reported earnings on July 20th and revenues came in under analyst estimates. Plus, the company guided lower for the next quarter under analyst estimates. The reaction has been sharp with big volume on the sell-off. VIVO has broken down under support near $22.00 and its simple and exponential 200-dma's. The Point & Figure chart has produced a new triple-bottom breakdown sell signal with a $16 target. We are suggesting shorts with VIVO under $22.00. Our target is the $18.15-18.00 range since the $18.00 level was support last year. We would not be surprised by an oversold bounce so readers can use a failed rally under $22.00-22.50 as a new entry point for bearish plays.

Picked on July 23 at $20.94
Change since picked: + 0.00
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 175 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

None
 

Short Play Updates

Alex. & Baldwin - ALEX - cls: 40.15 chg: -0.10 stop: 41.75

Our bearish play in ALEX is now open but we are suggesting caution! We added ALEX to the newsletter on Thursday night with a suggested trigger to open shorts at $39.95. The stock did breakdown under support at $40.00 on Friday morning but quickly rebounded and closed back above the $40 level. The move looks like a short-term bullish reversal. We would watch for a bounce back toward the $41.00 level or its simple 10-dma near 41.75. Both of these levels should be short-term overhead resistance and a failed rally near either could be used as a new entry point although more conservative traders may want to wait for a new decline under $40 again before considering new positions. Our short-term target is the $37.50-35.00 range. We're calling it short-term because we do not want to hold over the July 28th earnings report (an unconfirmed date). FYI: The latest (June) data put short interest at 6.5% of the 43 million-share float. The amount of short interest seems a little high.

Picked on July 21 at $39.95
Change since picked: + 0.20
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume: 354 thousand

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Phazar Corp. - ANTP - close: 8.68 change: -0.05 stop: 9.27

It was close but no cigar! ANTP dipped to $8.50 on Friday and tested that level for a while before producing a minor bounce on Friday afternoon. The move on Friday actually produced a new Point & Figure chart sell-signal. It is our suggested strategy to short the stock with a trigger at $8.49. Thus we remain on the sidelines as a spectator. However, if the major U.S. averages continue to sink on Monday then odds are good that ANTP may finally breakdown to new, significant lows. If triggered our target will be the $7.00-6.75 range. We want to remind readers that this is an aggressive play. ANTP can be volatile and the most recent data puts short interest at over 10% of the 2.1 million-share float. That's a relatively high degree of shorts and a very, very small float. To make this play even higher risk we cannot find the company's next earnings report. Last year they reported in August so it stands to reason that they might report again in early August.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/04/06 (unconfirmed)
Average Daily Volume: 89 thousand

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Coach Inc. - COH - close: 26.31 change: -0.26 stop: 28.01

There has been a lot of pressure on retailers. June retail sales came in below estimates. Target (TGT) recently lowered its sales forecast. Investors are worried that high gasoline prices are putting pressure on the consumer and a falling house market definitely makes people fell less wealthy. That's why luxury goods maker COH has been sinking. The stock produced a bearish failed rally under its 10-dma on Thursday and it looks like a new entry point for shorts. Our only complaint is that volume has been below average for the last two days straight. Our target for COH is the $22.75-22.25 range. We do not want to hold over the early August earnings report so that gives us six trading days left.

Picked on July 16 at $26.43
Change since picked: - 0.12
Earnings Date 08/01/06 (confirmed)
Average Daily Volume: 4.1 million

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Centex Corp. - CTX - close: 44.61 chg: +0.41 stop: 46.25*new*

Time is just about up for our bearish play in CTX. The company is due to report earnings on Monday, July 24th after the closing bell. While earnings report from the homebuilders have not been very inspiring we still don't want to hold over CTX's report. It is our plan to exit on Monday near the closing bell. In an effort to reduce our risk we're lowering the stop loss to $46.25. FYI: Traders should note that both the DJUSHB index and CTX appeared to produce a very short-term (bullish) double-bottom pattern in the past four days.

Picked on July 13 at $47.37
Change since picked: - 2.76
Earnings Date 07/24/06 (confirmed)
Average Daily Volume: 2.5 million

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Juniper Networks - JNPR - cls: 13.63 change: -0.43 stop: 15.01

JNPR is a new bearish candidate from our Thursday night newsletter. The stock lost another 3% on Friday and hit our suggested trigger to open shorts at $13.75 so the play is now open. We do not see any changes from our play description from Thursday so we're reposting it here:

We are going to play JNPR again. The company's recent earnings report did not inspire any buying interest. What the report did spark were a few analyst downgrades. Volume over the last couple of sessions has been pretty strong and Thursday's trading saw JNPR produce a bearish failed rally near its falling 10-dma. We are going to suggest a trigger to short JNPR at $13.75, which is under the July 18th low. If triggered our target is the $12.00-10.00 range. Conservative traders can exit near $12 with us and more aggressive traders can aim lower. Speaking of conservative traders you might want to put your stop just above Thursday's high (14.76). The P&F chart is still very bearish with an $8.50 target. FYI: The latest (June) data put short interest at 5.7% of the float.

Picked on July 21 at $13.75
Change since picked: - 0.12
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 13.1 million

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MTS Systems - MTSC - close: 33.04 change: -1.09 stop: 36.05*new*

The Wednesday-Thursday failed rally from last week under its descending 10-dma has produced a breakdown to new eight-month lows. We're not suggesting new plays because we're running low on time. The company is due to report earnings on July 26th after the market's closing bell. We're planning to exit on Wednesday at the close to avoid holding over the report. Please note that the stop loss has been adjusted to $36.05. Our target is the $31.00 mark. FYI: the latest data puts short interest at 4% of the stock's 18 million-share float.

Picked on July 17 at $34.19
Change since picked: - 1.15
Earnings Date 07/26/06 (confirmed)
Average Daily Volume: 105 thousand

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Maxim Integrated - MXIM - close: 27.39 chg: -0.81 stop: 30.01*new*

Continued weakness in the semiconductor sector has MXIM nearing our target in the $27.00-26.75 range. We're not suggesting new shorts at this time. Please note our stop loss has been adjusted to $30.01. FYI: The Point & Figure chart points to a $13 target so more aggressive traders may want to aim lower than our $27 target.

Picked on July 09 at $29.75
Change since picked: - 2.36
Earnings Date 08/04/06 (confirmed)
Average Daily Volume: 5.5 million

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Teva Pharma. - TEVA - close: 29.76 change: -0.45 stop: 31.65

Our new bearish play in TEVA is now open. The stock broke down under support at the $30.00 level and under the June low to hit our trigger at $29.79. We do not see any changes from our play description from Thursday so we're reposting it here:

TEVA got FDA approval on a new arthritis drug (Meloxicam) Thursday but the news failed to stop the stock from producing a big bearish engulfing candlestick pattern today. The stock has been weak for several weeks but right now TEVA is poised to breakdown under significant support at the $30.00 level. Thursday's candlestick pattern is normally viewed as a bearish reversal. We want to see some confirmation so we're suggesting a trigger to short the stock at $29.79, which is under the late June low. If triggered we're suggesting two targets. Our conservative target is the $27.00 level. Our aggressive target is the $25.50 level. We do not have a lot of time since we don't want to hold over the company's earnings report in early August. The fact that TEVA is headquartered in Israel probably doesn't inspire a lot of confidence in buyers considering the current Israeli-Hezbollah conflict. FYI: The number of shares short as a percentage of the float appears to be less than 1% but this is June data.

Picked on July 21 at $29.79
Change since picked: - 0.03
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 7.4 million

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Watson Wyatt Wld - WW - close: 32.26 chg: -0.54 stop: 34.01*new*

Thursday's failed rally near the falling 10-dma lead to a 1.6% decline on Friday. We are going to adjust the stop loss to $34.01. We don't see any other changes from our previous updates on WW. The trend remains bearish and the next level of support looks like the simple 200-dma near $31.00. Our target is the $31.10-31.00 range. We do not want to hold over the early August earnings report. FYI: the most recent data put short interest at 6.9% of WW's 41 million-share float.

Picked on July 16 at $33.19
Change since picked: - 0.93
Earnings Date 08/10/06 (confirmed)
Average Daily Volume: 216 thousand

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XM Sat.Radio - XMSR - close: 11.20 change: -0.72 stop: 13.51*new*

The sell-off in XMSR is picking up speed. The stock lost another 6% on Friday with volume coming in above average. Since we added XMSR to the play list the stock has fallen more than 13.5%. More conservative traders may want to lock in some profits right here. We are going to adjust our stop loss to $13.51. Please note that we're also adjusting our target to the $10.50-10.00 range. We do not want to hold over the July 27th earnings report. FYI: the latest data puts short interest at 15% of XMSR's 222 million-share float. That's relatively high and increases the risk of a short squeeze.

Picked on July 14 at $12.95
Change since picked: - 1.75
Earnings Date 07/27/06 (confirmed)
Average Daily Volume: 7.7 million
 

Closed Long Plays

Consolidated Graphics - CGX - cls: 50.19 chg: -1.21 stop: 50.99

The sell-off continues in CGX and the stock has broken down from its three-week trading range. While shares still have potential round-number support at $50 and potential technical support at the 200-dma the stock has broken under its 50-dma and the MACD on the daily chart has produced a new sell signal. It was our plan to go long the stock at $53.01 but CGX never hit our trigger so we're dropping the stock as a bullish candidate.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume: 500 thousand

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NCI Bldg Sys. - NCS - cls: 49.09 change: -1.09 stop: 49.75

The bullish breakout over the $52.00 level, its 200-dma and its trend of lower highs never materialized. Instead NCS has reversed lower and on above average volume. There is a chance that NCS could bounce from support near $48.00 but we think traders might want to watch for a breakdown under $48.00 as a new entry point for shorts! It was our suggested plan to open longs with a trigger at $52.25 but we are now dropping NCS as a bullish candidate.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/31/06 (unconfirmed)
Average Daily Volume: 370 thousand
 

Closed Short Plays

Medtronic - MDT - close: 47.81 change: -0.14 stop: 48.51

This is pretty simple. MDT's downward momentum has stalled and we're suggesting that readers exit early before an oversold bounce erases any remain "gains".

Picked on June 21 at $49.49
Change since picked: - 1.68
Earnings Date 08/22/06 (unconfirmed)
Average Daily Volume: 10.8 million

---

Patterson-UTI - PTEN - cls: 22.55 chg: -0.36 stop: 25.01

Target achieved. As expected shares of PTEN continued to slide on Friday and shares hit our target in the $22.65-22.45 range. More aggressive traders may want to aim lower but be aware that we see potential support near $21.50.

Picked on July 14 at $24.90
Change since picked: - 2.35
Earnings Date 08/03/06 (confirmed)
Average Daily Volume: 3.2 million
 

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

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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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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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

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