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Daily Newsletter, Saturday, 08/19/2006

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Table of Contents

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

Market Wrap

Market Wrap

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
EBAYNone
LU 
MXIM 
SM 
STXS 

Editor's note: We are adding several new bullish candidates to the play list this weekend. However, we want to remind readers that August and September are historically two of the worst months for stocks. While this August has not followed traditional patterns we would not get married to your positions. Stay prepared to exit early!


New Long Plays

eBay Inc. - EBAY - close: 27.25 chg: -0.42 stop: 24.49

Company Description:
eBay is The World's Online Marketplace, enabling trade on a local, national and international basis. With a diverse and passionate community of individuals and small businesses, eBay offers an online platform where millions of items are traded each day. (source: company press release or website)

Why We Like It:
It was tech stocks and the NASDAQ that really led the rally higher last week. EBAY also enjoyed quite a surge and shares managed to breakout over resistance at $25.00, 25.50 and its 50-dma. This rebound higher might be signaling that EBAY's sideways consolidation over the past month could be a significant bottom in the stock price. We noticed that the stock had already achieved the P&F chart's bearish target at $26.00. Plus, a bullish sign last week was the big volume on the breakout over the 50-dma. We suspect that EBAY will continue higher but the major market averages, and EBAY, look a little short-term overbought. It's our plan to try and go long EBAY on a dip. Our preferred entry point would be a pull back into the $26.25-25.25 range. We're going to set a trigger to open the positions at $26.25. If triggered our short-term target is the $29.85-30.00 range. More aggressive traders may want to aim higher.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume: 19.6 million

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Lucent Tech. - LU - close: 2.31 change: +0.04 stop: 2.14

Company Description:
Lucent Technologies designs and delivers the systems, services and software that drive next-generation communications networks. Backed by Bell Labs research and development, Lucent uses its strengths in mobility, optical, software, data and voice networking technologies, as well as services, to create new revenue-generating opportunities for its customers, while enabling them to quickly deploy and better manage their networks. (source: company press release or website)

Why We Like It:
LU is another beaten down tech stock that is seeing a very strong revival. Shares had been trying to build a base or bottom with its sideways consolidation above the $2.00 level for the past few weeks. The market's rally sparked some short covering and now LU has broken out above resistance near $2.15, 2.20 and its simple 50-dma. The move also marks a bullish breakout from its bearish, descending channel. Readers should note that there is potential resistance near $2.40, which is the top of the July gap. Traders can choose to go long LU right here or look for a dip back towards the $2.25-2.20 region. Anyone going long the stock should know that there are differing views on the current Lucent-Alcatel (ALA) merger. Some analyst see the deal falling through while other believe any bad news has already been priced into the stock. According to the various news articles it seems like most analysts agree that the two companies would be better off together than going it alone. Alcatel members are set to vote on the merger on September 7th. Traders should definitely keep an eye on shares of ALA since weakness in ALA will affect LU. We're going to target a rally into the $2.50-2.60 range.

Picked on August 20 at $ 2.31
Change since picked: + 0.00
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume: 42 million

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Maxim Integrated - MXIM - close: 29.39 chg: +0.06 stop: 27.95

Company Description:
Maxim Integrated Products is a leading international supplier of quality analog and mixed-signal products for applications that require real world signal processing. (source: company press release or website)

Why We Like It:
We hesitate to add another semiconductor stock to the newsletter when we already have NVLS and TER as bullish candidates. However, shares of MXIM look like an attractive candidate now that the stock is poised to breakout through the top of its seven-month bearish channel. The flip side is that MXIM has rallied right back to resistance and the next move could be back toward the bottom of the channel. We suspect that MXIM will continue higher given the bullish breakout in the semiconductor sector but semis could take a day or two of rest to consolidate late week's gains before moving higher. We are going to suggest a trigger to go long at $30.15 so MXIM will need to actually push through resistance at the channel and the $30.00 level before readers initiate positions. We're going to try and keep our risk reduced with a stop loss at $27.95 but more aggressive traders may want to put their stop under $27.00. If triggered our target is the $33.00-34.00 range, which is under the falling 200-dma.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume: 6.0 million

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St. Mary Land Expl. - SM - close: 40.97 chg: +0.61 stop: 39.95

Company Description:
St. Mary Land & Exploration Company was founded in 1908 and incorporated in 1915. We are engaged in the exploration, development, acquisition and production of natural gas and crude oil in five core areas in the United States. (source: company press release or website)

Why We Like It:
In the last couple of weeks crude oil has fallen sharply from $77 to $70 a barrel. The current cease-fire along the Israel-Lebanon border and the quickly fading summer driving season are just a couple of reasons for the downturn in crude oil prices. Yet oil managed to bounce on Friday from historical and psychological support at the $70.00 level. Oil could definitely be headed lower as summer ends but short-term we suspect the commodity will bounce and that could push shares of SM higher. Shares of SM consolidated back toward its two-month trendline of support and round-number support near $40.00. This looks like a low-risk entry point to go long the stock. We're going to stock our stop loss at $39.95 and our short-term target is the $43.85-44.00 range. Something to consider about oil is the fast approaching August 31st deadline for Iran to stop enriching uranium. We don't believe Iran will comply with the U.N.'s demands and that could keep a bid under oil prices.

Picked on August 20 at $40.97
Change since picked: + 0.00
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume: 642 thousand

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Stereotaxis - STXS - cls: 10.11 change: +0.51 stop: 9.24

Company Description:
Stereotaxis designs, manufactures and markets an advanced cardiology instrument control system for use in a hospital's interventional surgical suite to enhance the treatment of coronary artery disease and arrhythmias. The Stereotaxis System is designed to allow physicians to navigate catheters and guidewires through the blood vessels and chambers of the heart to treatment sites. (source: company press release or website)

Why We Like It:
We are listing STXS as an aggressive, higher-risk bullish candidate due to the stock's recent volatility. The stock spiked higher on August 10th after the company's recent earnings report and an analyst upgrade. Shares reversed course with a failed rally near $10 and its exponential 200-dma but a few days later traders bought the dip near its 10-dma (see chart). Now in the last couple of sessions STXS is surging higher on stronger volume. Friday's session produced a breakout over round-number, psychological resistance at $10.00 and its exponential 200-dma. Yet STXS still has technical resistance directly above it at the 100-dma and simple 200-dma around $10.30. Looking at the chart is appears that STXS may have produced a real bottom with the bounces from the $8.00 level over the last couple of months. The recent surge has probably got the shorts scared. The most recent data listed short interest at over 14% of STXS' 28.4 million-share float. That's relatively high short interest and a breakout over the 200-dma could easily see more short covering and a potential squeeze. We are going to suggest a trigger to go long at $10.31. If triggered our target is the $11.85-12.00 range. Unfortunately, due to the volatility we feel the need to use a wide stop loss, at least initially.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/09/06 (unconfirmed)
Average Daily Volume: 272 thousand
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

JDS Uniphase - JDSU - close: 2.51 change: +0.05 stop: 2.24

Thus far shares of JDSU are cooperating. We suggested that traders look for a dip into the $2.40-2.35 range as the next entry point to go long. JDSU delivered just such a dip on Friday with an intraday low of $2.37. Bulls did buy the dip and the stock closed back above what might be considered round-number resistance at the $2.50 level. This past week saw JDSU breakout past significant resistance in the $2.30 level and its simple 50-dma. We suspect that shares will be able to trade toward the 200-dma near $2.87 although the 100-dma that just crossed under the 200-dma might be a problem for us. Our target is the $2.85-2.90 range. We do consider this an aggressive, higher-risk play due to JDSU's volatility. Please note that we do not want to hold over the August 30th earnings report.

Picked on August 16 at $ 2.50
Change since picked: + 0.01
Earnings Date 08/30/06 (confirmed)
Average Daily Volume: 42.3 million

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Novellus - NVLS - close: 27.60 change: +0.44 stop: 24.99

Shares of NVLS continue to show great relative strength. The stock added another 1.6% on Friday posting its third big gain in a row on above average volume. This week saw a big rally in the semiconductors (almost +10%) and shares of NVLS managed to out perform its peers on Friday. We remain bullish given the breakout past resistance at $26.00 and its April highs but we would probably not chase NVLS right here. Look for a dip before considering new bullish positions. Our target is the $29.50-30.00 range. Our time frame is four to six weeks. Please note that NVLS has announced its mid-quarter update for August 30th, 2006. FYI: The P&F chart points to a $49 target.

Picked on August 16 at $26.65
Change since picked: + 0.95
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume: 2.8 million

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Teradyne - TER - close: 13.81 change: +0.19 stop: 12.69*new*

TER is another semiconductor stock that managed to out perform the SOX on Friday. The SOX lost 0.05% on Friday after a huge rally this past week. TER added another 1.39% on Friday. More importantly traders bought the dip in TER near 13.40 and its simple 50-dma. This looks like a new entry point to go long the stock. We're going to raise our stop loss to $12.69. Our target is the $14.75-15.00 range, which is under the simple 200-dma.

Picked on August 16 at $13.53
Change since picked: + 0.28
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume: 2.4 million
 

Short Play Updates

Brookefield Homes- BHS - close: 24.86 chg: -0.09 stop: 24.55

We may have to consider switching gears with BHS. The homebuilders are still trying to bounce and traders bought the dip in BHS near $23.98 on Friday morning. The stock is starting to look poised for a strong upside breakout. For the moment we're going to keep BHS on the play list as a short candidate with our trigger to short it at $22.99. However, if BHS near $26.00 or breaks out over $26.00 we may consider going long, especially now that the markets believe the Fed may be on hold (to not raise rates) for the rest of the year. 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

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Portfol.Recov.Assoc. - PRAA - cls: 41.49 chg: -0.24 stop: 42.05

It has been a week and we're still waiting on PRAA to confirm its bearish breakdown. The market's strength inspired a bounce back toward $42 but PRAA was unable to build on the rally. Shares remain in a bearish pattern (channel) and the P&F chart points to a $32 target. Not only is the pattern on the daily chart bearish but PRAA is flirting with a major breakdown below support on its weekly chart. We are suggesting that traders use a trigger at $39.49 to open 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

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Steel Dynamics - STLD - close: 53.62 chg: +0.72 stop: 54.66*new*

We are starting to worry that STLD may not make it to our target in the $50.00-49.00 range. Several steel stocks have produced much stronger rebounds this past week and the group could see further interest from buyers. STLD is still under performing a number of its peers but the stock is somewhat oversold and the recent bounce is turning the MACD toward a new buy signal soon. We are not suggesting new short positions at this time. More conservative traders might want to think about an early exit to prevent any losses. We're going to lower our stop loss to $54.66, which is just above last week's high. The P&F chart still looks very bearish with the triple-bottom breakdown sell signal and the $42 target.

Picked on August 09 at $53.95
Change since picked: - 0.33
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume: 1.6 million
 

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.

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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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