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Daily Newsletter, Monday, 08/14/2006

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Table of Contents

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

Market Wrap

Cease-fire

Energy prices fell Monday with September Crude Oil futures (cl06u) settling down 82-cents, or -1.10% at $73.53 as the U.N.-imposed cease-fire between Israel and Hezbollah helped ease some of the geopolitical unrest responsible for oil's recent historic highs.

An improved production outlook from BP (NYSE:BP) $69.30 -0.02% regarding the Prudhoe Bay field also weighed on energy prices, with September Unleaded futures (hu06u) settling below the $2.00 level ($1.9905/-3.37%). While not certain, BP said it may be able bypass some of the corroded western oil transit line using a 24-inch high pressure gas pipeline, which is what the operator did in March, when BP was able to restart 70,000 bpd of the 90,000 bpd that was being produced at Gathering Center-2 a little over a month after the initial shutdown this spring.

A Reuters news source, close to BP, said output from Prudhoe Bay currently stands at 150,000 bpd and is expected to rise to 200,000 bpd by the end of the month once maintenance on Gathering Center-1 is completed.

Just after today's close, the EIA said U.S. June crude oil imports reached their highest monthly total ever at 10.779M bpd.

The major indices gapped higher at their open, but gains faded toward the close as traders await key economic data early Tuesday morning in form of producer prices for July.

Economists currently see July producer prices rising 0.4% m/m, with the core rate (excluding the volatile food and energy component) to have risen a more tepid 0.2%.

As that data is being released (a gauge on prices at the production level), we'll also get a regional economic report and the August Empire Manufacturing Index, which covers manufacturing activity in New York State. Consensus among economists is for a reading of 14.0 vs. 15.6 previously.

The New York Fed conducts this monthly survey that asks roughly 175 manufacturing executives to rate their business on an assortment of indicators, concerning both the present and future expectations.

U.S. Market Watch - 08/14/06 Close

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 575.21 -1.37% have been quick to relinquish their pre-FOMC gains as the benchmark 10-year YIELD ($TNX.X) is quickly back within 25 basis points of the current Fed Funds target of 5.25%.

For both Treasuries and homebuilders, tomorrow's PPI data will be closely watched. At last week's meeting, it was Jeffrey Lacker, Richmond Fed President that argued for a quarter-point increase in the fed funds rate.

A modest rise in the U.S. Dollar Index (dx00y) and decline in the StreetTracks Gold (NYSE:GLD) $62.25 -0.73% gives hint that tomorrow's economic data is a focal point.

The rise in the dollar hints some market participants still see further near-term tightening from the FOMC in the works, while that potential tightening, combined with a moderately slowing economic backdrop has gold treading water between its recent July 14 and July 24 relative highs and low of $66.42/$59.83.

The S&P Retail Index (RLX.X) held a fractional gain at the close, but was bolstered earlier this morning when Dillard's (NYSE:DDS) $33.08 +5.61% surged to a multi-year high. The department-store operator reported net income of $15.7 million, or $0.20 a share, which included $0.14 of one-time gains. Still, the figures easily surpassed analysts' estimates for a loss of $0.05 per share. Dillard's said revenues rose 1% year-over-year to $1.75 billion, with fewer markdowns helping results.

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In last week's Market Monitor at OptionInvestor.com, I once again began updating traders on this month's "Max Pain Theory" values for some of the major indices as we near August option expiration for the major indexes and stocks this Friday.

Last week, and even today I still see what I believe to be some gyrations and "fine tuning" of indices and stocks toward the mathematically derived "Max Pain Theory" values.

For those that may not be overly familiar with "Max Pain Theory," the simple explanation for "Max Pain" is the theory that a major index may tend to gravitate toward this mathematically derived value, where the value is simply the sum of open interest at various OPTION strikes, which leaves the BULK of call option and put option buyers with as little profit as possible, and the market makers of those options holding the bulk of the profits as time premium erodes into the expiration.

Last week I was jumping around and trying keep traders abreast of "what to look for," and here are some observation relative to "Max Pain Theory" that I feel are important.

There is NO GUARANTEE that an index, or stock will close AT, or NEAR its "Max Pain Theory" value, but I'm going to show you some things I've been seeing, and still see, where I think it would take a BIG SHOCK from some type of economic data, to pull the major indices too far from their "Max Pain Theory" values into the end of the week.

Dow Diamonds (AMEX:DIA) - Daily Intervals

I've placed a fibonacci retracement bracket on the more recent relative high/closes for the Dow Diamonds (AMEX:DIA) $111.15 +0.09%, where August's "Max Pain Theory" is currently tabulated at $111.00. Option strikes are in increments of $1. For those not familiar with this, there are OPTION contracts at $109, $110, $111, $112, $113, etc.. All in $1 increments.

For fibonacci traders, 38.2% and 61.8% tends to define upper-lower near-term ranges of support/resistance, with 50% being an "equilibrium" level. When looking at the DIA, relative to its $111.00 "Max Pain Theory" level, I would say the DIA is range-bound within $110.50-$113.00.

Now, let's look at some of the Dow components. Remember! The DIA is a security by itself that trades with options. But within the INDU/DIA, there are 30 stocks. Some have GREATER weighting than others, and all of these stocks trade with OPTIONS!

Dow 30 Components - Market Cap Weighted Index

The Dow Industrials, or its "tracker" the DIA is a PRICE-weighted index. That means, the stock with the HIGHEST PRICE VALUE carry greater weight that those with SMALLER PRICE VALUES.

What I've done in the above table is simply run through the 11-most HEAVILY-weighted components, jot down their current August "Max Pain Theory" values, and the increments that their options are traded on.

For instance, Altria (NYSE:MO) $80.56 -0.34% is the "most heavily weighted" stock in the DIA right now. It's August "Max Pain Theory" value is $75.00 and that "Max Pain" value is derived from OPTION strikes in $5.00 increments. Will MO necessarily gravitate DOWN to $75.00 just because its "Max Pain" is $75.00?

My answer is NO!

A stock we've traded twice the past couple of days from the short side has been American Express (NYSE:AXP) $51.80 (unch), where some work I've done, and shown in the Market Monitor suggests that should the DIA itself remain "pinned" around $111.00, that AXP might tend to "gravitate" somewhere between $50.00 and $52.50. Split that difference $52.50 - $50.00 = $2.50, then $2.50 divided by 2 = $1.25, I could derive a more "accurate" Max Pain of $51.25.

In Friday's Market Monitor is reviewed AXP's option montage, and all-be-darned if on Friday, the stock didn't trade a session low of $51.19, then bounce right back up to $51.80 by the close.

I thought traders should short it again at $51.85, but with a tight stop at $52.08, should some type of bullish news have the DIA ripping away higher from its "Max Pain Theory" value and perhaps an extensive short-covering rally take hold. While that short in AXP was stopped out this morning on the gap higher open of $52.15, I still sense a "gravitational pull" on the stock.

My point, or observation here, is to illustrate what I feel is the IMPACT of an option expiration into Friday.

33-most Heavily Weighted S&P 100 Components - Cap-Weighted Index

Now let's take a look at some of the same stocks that reside in the Dow Industrials, which also comprise the S&P 100 Index ($OEX.X). However, here we now look at a MARKET CAP WEIGHTED index. It is no long PRICE, but the SIZED of the stock's MARKET CAP that begins to determine some stocks' "importance."

Again, I show some of the August "Max Pain Theory" values, and their increments. PINK-boxed stocks are also components of the NASDAQ-100 Index (NDX.X), or QQQQ.

I do point to the 5-DyNet% to give some observation of "who is driving who" and in which direction. Last week, Cisco Systems (NASDAQ:CSCO) $20.09 +2.81% surged from the $19.50 level on upbeat guidance, and some affirmation that stock option grants to executives had not been backdated.

S&P 100 Index (OEX.X) - Daily Interval Chart

Here is the OEX with similar retracement as shown for the DIA. A little different look, and the OEX actually looks STRONGER than the DIA.

"Key stocks" here would probably be XOM thru MO, or 1-10 weighted stocks in the near-term. If the OEX is going to get "pinned" back towards its August "Max Pain" of 580, and its RISING 200-day SMA, we might look for one of the "big guns" to see weakness.

NASDAQ-100 Trust (QQQQ) - Daily Interval Chart

For the QQQQ, I still follow my "bear fit 38.2%" retracement and the persistent selling at the 06/13/06 relative low close. See the "tie?" June 13 has been "LOW CLOSE" fibonacci retracement for the DIA and OEX, but that "bear fit 38.2%" retracement shows the weakness, and how that broken level of support, still finds some willing sellers at the $37.25 level.

I'm not as convinced as some that the NDX/QQQQ has traded its "summer bottom." Volumes have been light, and with the Labor Day holiday quickly approaching, many expect traders to "head for the beach" after Friday's expiration to get in their last bit of vacation before returning thru Thanksgiving.

Is my "bear fit 38.2%" retracement technique in play? I think so as depicted by the 07/18/06 relative low, which somehow, the resultant 50% of $35.56 found buyers. Most likely, BEARS that had shorted the break and CLOSE below $37.25.

One stock I'd be monitoring CLOSELY again this week, which in all actuality is followed by most NDX/QQQQ traders, is Microsoft (MSFT). The company announced a Dutch auction July 21, where the company is willing to buy up to 808,080,808 shares at a price between $22.50 and $24.75 per share.

Since that Dutch offer, the stock REFUSES to close below $24.20 and at the time of this writing, the Dutch auction deadline is Thursday's close.

For the past couple of weeks, MSFT's shares have been bound between $24.20 and $24.64. A break much above $24.75 could really bring in some short-covering, while a CLOSE much below $24.20, could have the mid-point of the Dutch auction range ($23.63) quickly coming into play.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

None
 

Short Play Updates

Smith A O Corp. - AOS - close: 39.47 chg: -0.17 stop: 42.26

AOS's midday rally failed at $40.40 and shares closed back under the $40 level to hit a new relative low. This looks like a new entry point to short the stock. Our only concern would be the below average volume but that tends to be common this time of year. Our target is the $35.50-35.00 range.

Picked on August 10 at $39.75
Change since picked: - 0.28
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume: 288 thousand

---

Brookefield Homes- BHS - close: 23.40 chg: -0.29 stop: 24.55

The MACD indicator on the daily chart for the DJUSHB home construction index produced a new sell signal with today's decline in the sector. Meanwhile shares of BHS lost 1.2% and its own MACD indicator is nearing a new sell signal. More aggressive traders may want to jump in now and open bearish plays. We're still waiting for a breakdown under $23.00. Our trigger to open positions is at $22.99. If triggered our target is the $20.10-20.00 range. Please note that the latest (July) data puts short interest at 20% of BHS' 26.2 million-share float. That is a high degree of short interest and increases the risk of a short-squeeze!

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 497 thousand

---

Dell Inc. - DELL - close: 21.24 chg: +0.17 stop: 22.15

The market rally today fueled a bounce in DELL to the $22 level but the stock failed to make it any higher. The trend is still bearish but we're not suggesting new positions. DELL is due to report earnings after the closing bell on Thursday, August 17th. We do not want to hold over the announcement so we plan to exit on Thursday at the closing bell. Our target is the $19.25.00-19.00 range. FYI: The Point & Figure chart points to a $16 target.

Picked on August 09 at $21.14
Change since picked: + 0.10
Earnings Date 08/17/06 (unconfirmed)
Average Daily Volume: 25.1 million

---

Eagle Materials - EXP - close: 35.65 chg: +0.28 stop: 39.26

EXP did produce an oversold bounce today (+0.79%) but like most of the major averages shares of EXP pared their gains and closed near their lows for the session. We remain bearish and don't see any changes from our weekend update. Our target is the $31.00-30.00 range. FYI: The Point & Figure chart is projecting a $26 target.

Picked on August 08 at $36.18
Change since picked: - 0.53
Earnings Date 07/24/06 (confirmed)
Average Daily Volume: 1.7 million

---

FMC Corp. - FMC - close: 59.51 chg: +1.07 stop: 60.26

Watch out! FMC is showing a lot more relative strength than we anticipated. Shares rallied to $60.13 before reversing course near its descending 21-dma and its exponential 200-dma. Volume on the session was above average, which is good news for the bulls. We're also cautious following today's breakout over its simple 200-dma. We suspect the stock is rallying higher on the pull back in crude oil. Petroleum can be a major ingredient and cost in chemical manufacturing. We are not suggesting new plays at this time. Wait for a new decline under $58.00. If the markets manage to bounce tomorrow then we would expect FMC to stop us out at $60.26.

Picked on August 08 at $57.20
Change since picked: + 2.31
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume: 298 thousand

---

Juniper Networks - JNPR - cls: 12.44 chg: +0.24 stop: 13.75

We do not see any change from our weekend update on JNPR. Traders may still want to exit early and lock in gains right here. We're not suggesting new positions and it's very possible that JNPR will try and "fill the gap" from Friday morning. Our target has been the $12.00-10.00 range. We will be closing the play if JNPR trades at or below $12.00.

Picked on July 21 at $13.75
Change since picked: - 1.31
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 13.1 million

---

Lamar Adver. - LAMR - close: 48.13 chg: +0.92 stop: 50.05

The market rebound today helped fuel a 1.9% bounce in shares of LAMR and the stock closed back above support/resistance at the $48.00 level. We would probably wait for a move under the Monday afternoon low (near $47.65) before initiating new positions. The P&F chart the bearish price target is at $40.00. Our target is the $45.15-45.00 range.

Picked on August 10 at $47.90
Change since picked: + 0.23
Earnings Date 08/08/06 (confirmed)
Average Daily Volume: 862 thousand

---

Oregon Steel - OS - close: 47.00 chg: -0.39 stop: 50.51

Steel and iron-related stocks continue to look weak. Shares of OS lost 0.8% on Monday and its MACD on the daily chart is nearing a new sell signal. We do not see any changes from our new play description from this weekend. The Point & Figure chart is still bullish but short-term technicals have turned negative. We are suggesting shorts with OS under $49.00. Our target is the $42.50-42.00 range, which is essentially near the bottom of its two-month trading range. The latest (July) data puts short interest at 6% of OS' 35.7 million share float.

Picked on August 13 at $47.39
Change since picked: - 0.39
Earnings Date 10/27/06 (unconfirmed)
Average Daily Volume: 1.1 million

---

Portfol.Recov.Assoc. - PRAA - cls: 40.25 chg: +0.26 stop: 42.05

We see no changes from our new play description on PRAA. The P&F chart is bearish with a $32 target. We are suggesting a trigger at $39.49 (under Friday's low) to open new short positions. If triggered our target is the $36.00-35.00 range.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/02/06 (confirmed)
Average Daily Volume: 166 thousand

---

Steel Dynamics - STLD - close: 51.50 chg: -0.40 stop: 55.21

There are no changes from our weekend update on STLD. The stock is inching closer to our target in the $50.00-49.00 range. The P&F chart shows a triple-bottom breakdown sell signal with a $42 target.

Picked on August 09 at $53.95
Change since picked: - 2.45
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume: 1.6 million

---

Meridian Biosci. - VIVO - cls: 20.08 chg: +0.58 stop: 21.21

The market bounce sparked some short covering in VIVO and the stock out performed its peers with a 2.9% gain today. The close back above broken support and what should be overhead resistance at $20.00 is worrisome. We would wait for a decline back under $19.80 before considering new short plays. Our target is the $18.15-18.00 range since the $18.00 level was support last year. The P&F chart points to a $16 target.

Picked on July 23 at $20.94
Change since picked: - 0.86
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 175 thousand
 

Closed Long Plays

None
 

Closed Short Plays

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.

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
Copyright Option Investor Inc, 2005
All rights reserved

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.

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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