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Daily Newsletter, Monday, 01/22/2007

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Table of Contents

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

Market Wrap

Post Option Expiration Positioning

Some post January option expiration positioning and a late session reversal in into today's February NYMEX Crude Oil futures (cl07g) expiration found the major stock indices finishing in the red to start the week, with decliners outnumbering advancers roughly 2-to-1 at both the NYSE and NASDAQ.

Just as the NASDAQ-100 Trust (NASDAQ:QQQQ) $43.69 -1.08% found some volatility into its January options contract on what I believe was some NAKED call squeeze action, crude oil has witnessed some gyrations in recent sessions and today's February contract expiration was no exception.

Stocks darted lower at the open as the February Crude Oil futures (cl07g) contract jumped more than $1.00 from Friday's settlement to $53.44 just after 10:25 AM EST. The move in oil raised some trader's eyebrows into today's final February contract trade, as many were looking for a lower settlement in the downward trend. Eventually, sellers did overcome buyers with the February contract settling down $0.86, or -1.65% at $51.13. Perhaps today's final trade for the February contract was "calm" considering last Tuesday's 3% decline, Wednesday's 2% rise, Thursday's 3.3% decline and Friday's 3% rise.

Gold prices mirrored today's trade in oil with the StreetTracks Gold Trust (NYSE:GLD) $62.72 -0.44% (approx $627.72 spot) rising to $63.48 despite a higher U.S. Dollar Index (CEC:DXY) trade in the early morning. As oil prices softened, so did the yellow metal.

The U.S. Dollar index (CEC:DXY) finished Friday's trade at 84.91 and from that benchmark, the DXY was flat-to-higher at today's 03:00 PM EST mark of 85.02.

U.S. Market Watch - 01/22/07 Close

Today's economic calendar was light, with no major releases on the docket. The Chicago Fed National Activity Index showed above-trend economic growth for December, the first above-trend reading in four months. The National Activity Index was reported at +0.04, compared with -0.30 the month before.

Fed commentary had San Francisco Fed President Yellen saying current monetary policy may be "well positioned" to cool inflationary pressures.

Buyers nibbled at the major maturities with the 10-year yield ($TNX.X) falling 1.4 basis points to 4.759%, inverting from the shorter-dated 5-year yield ($FVX.X), which fell 1.1 basis point to 4.766%.

Tuesday's U.S. economic calendar is equally light with December's Leading Indicator Index (month-to-month) forecasted to show a 0.2% increase after a 0.1% gain in November.

Calendar fourth-quarter earnings for 2006 continue to roll in and grab the focus of traders and investors alike. In last week's OptionInvestor.com Market Monitor I mentioned that Standard & Poors had noted that while just 11% of the S&P 500 constituents had reported calendar Q4 earnings (Sep-Dec 2006), the early tally was 8.3% higher than analysts' expectations.

Shares of drug giant Pfizer (NYSE:PFE) $26.95 -0.99% finished down $0.27 per share after the company reported adjusted EPS of $0.43/share, which was a penny better than the consensus estimate. GAAP earnings came in at $9.45 billion, or $1.32 a share, boosted by the sale of its consumer division. The company said it plans to cut 10,000 jobs in a restructuring aimed at saving up to $2 billion a year.

American Express (NYSE:AXP) $58.06 -0.05% traded relatively flat. The financial-services firm's net income rose to $922 million, or $0.75/share, which was a penny shy of Wall Street's expectations. Revenue rose 13% to $7.21 billion, helped by record holiday cardmember spending. Analysts were expecting revenues of $7.33 billion.

General Motors (NYSE:GM) $32.35 +2.53%, which was last year's best performing Dow component was a standout again today, hitting a 2-month high. Bulls placed bets that the world's largest auto giant could be poised to announce better-than-expected earnings on January 30th. Current consensus is for the company to earn $1.14/share in the latest quarter on revenue of $42.52 billion.

Shares of Texas Instruments (NYSE:TXN) $28.59 +0.70% rose $0.20 during today's regular session, then jumped to $29.40 in tonight's extended session after the semiconductor maker posted Q4 net income of $668 million, or $0.45/share, which easily surpasses Wall Street's consensus estimate of $0.38/share. The company said Q4 revenue was $3.46 billion, which was slightly above the $3.43 billion consensus.

Tug and Pull Continues; QQQQ whipped at Op-EX

It has been more than a week since my last market wrap, and for the most part, the tug and pull continues.

However, I must now conclude that the action we've witnessed in the NASDAQ-100 (NDX and QQQQ) has largely been due to some NAKED call writers having gotten "squeezed" prior to Friday's expiration, and the recent weakness also looks very much like some of that "squeeze" has subsided, and equilibrium is being found.

I can only say this as I began following the NASDAQ-100 Trust (NASDAQ:QQQQ) $43.69 -1.08% January options montage closely, when on January 10th, the QQQQ lurched sharply above $44.30, a level I had stated "the QQQQ won't see the light of day above" several sessions prior.

In summary, what I started to alert short-term traders to on January 10th, AFTER I had profiled QQQQ Feb. $43 Puts (QQQ-NQ) for $0.50/contract, when the QQQQ was trading $44.26, was that there may well have been a NAKED Call "squeeze" developing, as the QQQQ broke above a key level of near-term resistance at $44.40.

Traders and investors that have followed my commentary and analysis over the years know that when "something goes wrong," I tend to look for answers as to WHY!

I will not show all of the QQQQ option montages that I showed traders since 01/10/07 at 01:38:07, but want to recap some things here. Yes, it may seem "too late" for some, but I think it is important to understand what I (Jeff Bailey) think took place, so you and I can try to grasp why the volatility in the NDX/QQQQ took place (relative to other major equity indices).

Here's the CALL option side of the QQQQ January option montage. At the time of this screen capture, I began to "worry," or alert traders that a NAKED Call squeeze could be in the making should the QQQQ move much above that day's then high of $44.43.

For those not familiar with what a NAKED call is, that is when an option trader/investor has SOLD something, that is un-hedged in the underlying security.

QQQQ Call Options - 01/10/07 01:38 PM EST

I had noted that Open Interest in the QQQQ $44 Calls (QQQ-AR) was the LARGEST open interest for the QQQQ Calls for January expiration (which ended on Friday 01/19/07). I point to the notable 2,112 DnTickVol (Down Tick Volume, which depicts SELLING of that call) even at the time of that screen capture. In essence, there still appeared to be SELLERS of those calls, even as the QQQQ traded ABOVE the $44 strike at $44.36. The Open Interest of 359,168 equates to, or represents 35.9 million shares of QQQQ at $44.00.

I had a bit of a "lump" in my throat, as I had just profiled some QQQQ Feb. $43 Puts, without having looked at the above options montage.

We had witnessed NAKED Call squeezes into option expirations in recent months July, August, September, October and November in some of the major indices. It appeared that one was in the making for the QQQQ!

NASDAQ-100 Trust (QQQQ) - Daily Intervals

Based on the TECHNICALS, and some rather detailed following/monitoring of the QQQQ option montage, as well as the recent action in the QQQQ, I think the recent volatility in this index (NDX.X too) has been largely due to January's option expiration, and some NAKED $44 Call writers having gotten squeezed.

I showed a similar chart of the QQQQ in the 12/27/06 Market Wrap. However, at that time, my PINK 100% retracement level, which I had been dragging up to a relative high Friday close was at $44.65 (a 11/24/06 high Friday close).

While following an Option Montage can be as much of an art, as it is a science, I also have benchmarked the November and December QQQQ option expiration closes ($44.30 and $44.43) with horizontal green.

We can perhaps see how "easy" it had/has been to just SELL NAKED Calls at the $44.00 strike for November and December expiration, keep the BULK of those premiums, then just do it again for January.

Well.... when Open Interest built to notably higher levels than other CALL option strikes and the QQQQ began moving ABOVE $44.00, say $44.50, suddenly a NAKED Call short-squeeze took place.

All is fair in love and war, as it is in trading.

On Friday, 1/12/07, I did "drag up" my PINK retracement from a prior Friday high close from 11/24/06 (see the 12/27/06 Market Wrap) and while today's low didn't quite test the $43.47 level, I get the distinct feeling that that PRICE level, using this simple fibonacci retracement technique, is being TRADED as support by market participants, just as the $42.94 PINK retracement (see the 12/27/06 Market Wrap) was on 12/26/06).

In essence, UNTIL a QQQQ Close below $43.47 (say $43.45) is found, then that PINK level is deemed support. If BROKEN to the downside, then $42.84 becomes the next DOWNSIDE risk level.

For now, the still RISING "bullish resistance" trend is an UPSIDE trend that bears will assess RISK to, and bulls will assess REWARD to.

S&P 500 Index (SPX.X) - Daily Intervals

At tonight's close, I also want to take a moment and update my "neutral" call as it would relate to the broader market, as I believe the S&P 500 (SPX.X) depicts.

At the close of trading on 12/22/06, I thought traders and investors should take on a more "neutral" from "bullish" stance, as some of the internals I follow, which I think hold HIGHER RISK FOR BULLS, and where other internals such as the advance decline ratios at the NYSE and NASDAQ, continue to suggest a more cautious stance among BUYERS of equities.

The advance/decline measure for the NASDAQ that I've been noting, and following here in the Market Wraps and the OptionInvestor.com Market Monitor continue to show some "downside pull." At tonight closing reading, the NASDAQ Summation Index ($NYSI) from StockCharts.com has fallen further to a -84.61 reading.

The advance/decline measure for the NYSE that I've been noting, and following here in the Market Wraps and the OptionInvestor.com Market Monitor continues to show softening, or weakening as it FOLLOWS the NASDAQ a/d weakness. At tonight close, the NYSE Summation Index ($NYSI) from StockCharts.com now reads +679.61.

I continue to follow the major market bullish %, but at the time of this writing, I have not witnessed any MAJOR warning signs that SUPPLY (O) is outstripping DEMAND (X).
 

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

Arch Coal - ACI - close: 28.93 change: -0.15 stop: 27.39

The rally in coal stocks struggled on Monday. The sector appeared to follow the up and down in crude oil during Monday's session. Fortunately, traders bought the dip in ACI at $28.38. Readers can choose to buy the afternoon bounce or wait for additional strength before initiating new long positions. We do not see any changes from our weekend comments. We are suggesting long positions with ACI above $28.50. Our target is the $32.50 level. We do not want to hold over the early February earnings report so we only have a couple of weeks. FYI: The P&F chart is still bearish from the January sell-off.

Picked on January 21 at $29.08
Change since picked: - 0.15
Earnings Date 02/02/07 (confirmed)
Average Daily Volume: 3.1 thousand

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Cascade - CAE - close: 53.19 chg: -1.01 stop: 52.45

We do not see any changes from our weekend comments on CAE. We are still waiting for a breakout over resistance at the $55.50 level. Our suggested trigger to buy the stock is at $55.75. If triggered our target is the $59.76-60.00 range. FYI: We do not want to hold over the early March earnings report.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/08/07 (unconfirmed)
Average Daily Volume: 71 thousand

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Comcast Corp. - CMCSK - cls: 44.03 chg: +0.15 stop: 41.45

Volume continues to decline as CMCSK consolidates sideways. The lack of profit taking in the stock today is a show of relative strength. If you're looking for a new entry point watch for a dip to or a bounce near the $43.00 level, which should be short-term support, bolstered by its rising 10-dma. Our target is the 2000-2001 highs. We'll plan an exit in the $46.00-46.50 range. We do not want to hold over the early February earnings report.

Picked on January 14 at $43.32
Change since picked: + 0.71
Earnings Date 02/01/07 (unconfirmed)
Average Daily Volume: 4.9 million

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Commscope - CTV - close: 30.93 change: -0.69 stop: 29.99

There was no follow through on CTV's bullish rebound from Friday. Instead shares came close to completely erasing Friday's gains. We did note that volume came in pretty low, which is what you would want to see in a consolidation for a stock trying to move higher. Currently we are waiting for a breakout over resistance at the $32.00 level. We are suggesting a trigger to go long the stock at $32.05. If triggered our stop loss will be $29.99 and our target is the $34.85-36.00 range. We do not want to hold over the late February earnings report. FYI: The P&F chart is bearish. Plus, more conservative traders may want to put their stop at $30.49 under the most recent low.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/22/07 (unconfirmed)
Average Daily Volume: 862 thousand

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Granite Constr. - GVA - close: 51.84 change: -0.57 stop: 50.79

GVA suffered some profit taking this morning but bulls stepped in to buy the dip near its 10-dma and above its 50-dma. We do not see any changes from our weekend comments and remain bullish but given the market's weakness today we reiterate our suggestion that conservative traders might want to wait for a rise past $53.00 or $53.15 before buying the stock. Our target is the $57.50 mark. We do not want to hold over the mid February earnings report.

Picked on January 21 at $52.41
Change since picked: - 0.57
Earnings Date 02/12/07 (unconfirmed)
Average Daily Volume: 509 thousand

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Hewlett Packard - HPQ - close: 42.02 chg: +0.02 stop: 40.44

Technology stocks led the decline today but shares of HPQ were resilient and bounced back from their lows near $41.42. The afternoon rebound is encouraging but we hesitate to open new positions at this time, especially with the NASDAQ poised to move lower. If you are looking for a new bullish position consider waiting for a rise past $42.25 or $42.50 as an entry point. A new rally would make the recent consolidation look like a bull flag pattern. We do not want to hold over the February 20th earnings report. Our target is the $46.00 level.

Picked on January 07 at $42.20
Change since picked: - 0.18
Earnings Date 02/20/07 (unconfirmed)
Average Daily Volume: 13.1 million

---

MedImmune - MEDI - close: 34.54 change: -0.12 stop: 32.95

MEDI continues to drift lower toward support near the $34.00-33.75 region. If you're looking for a new entry point consider buying a dip to or a bounce near the $34.00 level. We do not want to hold over the early February earnings report. Our target is the $36.50-37.00 range. FYI: Keep an eye on the BTK biotech index, which may be producing a bearish double-top pattern. We'd also watch the DRG Drug index, which is nearing resistance around its October highs. More conservative traders may want to put their stop loss at breakeven to reduce their risk and worry factor.

Picked on January 05 at $33.98 *gap open entry*
Change since picked: + 0.56
Earnings Date 02/07/07 (confirmed)
Average Daily Volume: 2.3 million

---

Piper Jaffray - PJC - close: 69.88 chg: -0.86 stop: 68.75

Tomorrow is our last day. PJC reports earnings on Wednesday morning so we plan to exit tomorrow at the closing bell. More conservative traders may want to exit tomorrow morning to reduce their risk given the market weakness today.

Picked on January 10 at $69.45
Change since picked: + 0.43
Earnings Date 01/24/07 (confirmed)
Average Daily Volume: 197 thousand

---

Bankrate Inc. - RATE - close: 36.86 chg: -0.10 stop: 34.90

We do not see any changes from our weekend comments for RATE. Readers have a choice. You can look for a dip and bounce somewhere above the simple 200-dma (near $35.70) or wait for a new relative high (above $39.00) as new entry points. Don't forget that this is an aggressive, higher-risk play and we have a wide stop. More conservative traders may want to tighten their stops. Our target is the $41.90-42.00 range. More aggressive traders may want to aim higher. FYI: The most recent (December) data put short interest at more than 35% of RATE's 11.2 million-share float. We do not want to hold over the early February earnings report!

Picked on January 11 at $38.25
Change since picked: - 1.38
Earnings Date 02/06/07 (confirmed)
Average Daily Volume: 334 thousand

---

Raytheon - RTN - close: 51.95 change: -0.35 stop: 50.95

A downgrade for Boeing (BA) this morning suppressed the defensive sector. Shares of RTN pulled back about 0.6% but failed to break its rising 50-dma. We do not see any changes from our weekend comments. Readers can choose to buy the dip or look for a new relative high over $52.50. Our target is the $55.00-56.00 range. The old highs near $54 might offer some resistance. Our stop is at $50.95. More aggressive traders may want to put their stop under the $50.00 mark. We do not want to hold over the February 1st earnings report so we have less than two whole weeks.

Picked on January 21 at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/01/07 (confirmed)
Average Daily Volume: 1.6 million

---

TJX Cos. - TJX - close: 29.95 change: -0.08 stop: 28.95

Retail stocks were a target for profit taking on Monday as the RLX index lost close to 1% and produced a bearish reversal with its bearish engulfing candlestick. The combination of selling pressure in retail and general market weakness pub the brakes on TJX's advance. The stock remains under resistance in the $30.00-30.15 region. We are suggesting a trigger to buy the stock at $30.21. If triggered our target is the $32.50-33.00 range. We do not want to hold over the mid February earnings report.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/13/07 (unconfirmed)
Average Daily Volume: 3.2 million

---

Toll Bros. - TOL - close: 32.31 change: -0.11 stop: 30.89

The market weakness on Monday also put the brakes on the bullish breakout in housing stocks. Bulls bought the initial dip in TOL near $32.00. We see the pull back as a new entry point although more conservative traders may want to wait for a rally past $32.75 before opening positions. Our target is the $34.75-35.00 range. More aggressive traders may want to use a wider stop loss. FYI: Be aware that rival homebuilder DHI is expected to report earnings on January 23rd and their results and guidance could have a big impact on the sector.

Picked on January 21 at $32.42
Change since picked: - 0.11
Earnings Date 03/06/07 (unconfirmed)
Average Daily Volume: 3.3 million
 

Short Play Updates

Comverse Tech. - CMVT - cls: 19.94 change: -0.06 stop: 20.75

Our play in CMVT is now open. Tech stocks continued to be a target for profit taking. Shares of CMVT dipped to $19.78, which was enough to hit our trigger at $19.85. The close under round-number, psychological support at the $20.00 level is another bearish signal. If you missed the entry this morning we would still consider new positions now. Our target is the $17.75-17.50 range. Please note that this play might have an extra risk concerning the company's earnings report. The problem is we can't find one and we can't find when it is due to report next. History would suggest CMVT tends to report in March but we can't support that for 2007. Earnings reports are always a risk because there are too many variables and the stock could move sharply either direction on the news. We did find one source that said CMVT's subsidiaries VRNT and ULCM are due to report in March.

Picked on January 22 at $19.85
Change since picked: + 0.09
Earnings Date 03/14/07 (unconfirmed)
Average Daily Volume: 4.4 million

---

Safety Ins. Group - SAFT - cls: 47.81 chg: -1.15 stop: 50.55

SAFT lost 2.3% and almost completely erased Friday's bounce. Lack of follow through on Friday's big bounce is good news for the shorts! We are suggesting new shorts with SAFT under $48.50. We have two targets. Our conservative target is $45.10. Our aggressive target is the $42.50 level. FYI: The latest (December) data put short interest at 7% of SAFT's 13.1 million-share float. That does raise the risk of a short squeeze.

Picked on January 08 at $ 48.49
Change since picked: - 0.68
Earnings Date 04/30/07 (unconfirmed)
Average Daily Volume = 83 thousand
 

Closed Long Plays

China Mobile - CHL - cls: 47.10 chg: +1.73 stop: 41.85

Target surpassed. A strong day for the Chinese markets and news that CHL was buying a majority stake in a Pakistan's Paktel mobile carrier sent CHL to a 3.8% gain. The stock gapped open at $47.21 and hit an intraday high of $47.34. Our target was the $46.50-47.00 range so we would have exited at the open.

Picked on January 14 at $42.60
Change since picked: + 4.50
Earnings Date 03/07/07 (unconfirmed)
Average Daily Volume: 1.2 million
 

Closed Short Plays

The Andersons Inc. - ANDE - cls: 40.53 chg: +1.48 stop: 40.25

We are giving up on ANDE as a bearish candidate. The stock never produced any sort of follow through on the early January breakdown. It was our plan to short the stock under $37.00 (trigger 36.99). The stock got close but never hit our trigger. Today's rally (+3.7%) on strong volume back above the $40.00 level looks like a sign that the bulls have regained control for now.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/08/07 (unconfirmed)
Average Daily Volume: 333 thousand
 

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

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