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Daily Newsletter, Monday, 02/05/2007

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Table of Contents

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

Market Wrap

Bullish Breadth Returns!

The major indexes finished mixed-to-lower to start the week, where despite a plethora of earnings reports and more M & A activity, the broader S&P 500 Index (SPX.X) slid just more than a point, or -0.10% after closing at a new multi-year high on Friday.

While last week's internals improved markedly with both the NYSE Summation Index ($NYSI) and NASDAQ Summation Index ($NASI) reversing back up into columns of X and following their NH/NL ratios higher, today's breadth finished negative with decliners outnumbering advancers by an 18:13 margin at both major exchanges.

At tonight's close, StockCharts.com's $NYSI improves from last Monday's closing reading of +670 to +814 and has reversed up 6 boxes on the 20-point box chart I've been following and commenting on in the Monday Market Wrap. Here a 20-point box chart to the $NYSI.

While the NYSE has been the "stronger" internal and PRICE index relative to the NASDAQ Composite, tonight's closing reading of +58.58 versus last Monday's -76.11 also shows DEMAN (X) building. Here's a 20-point box chart to the $NASI.

In essence, buying, or DEMAND is once again showing some breadth and confirming last week's bullish PRICE action, with both the NYSE Composite ($NYA.X) 9,313.21 -0.12% and NASDAQ Composite ($COMPX) 2,470.60 -0.21% a/d lines bullish on an intermediate-term basis.

Closing U.S. Market Watch - 02/05/07 Close

Last week's (see 5DyNet%) +1.90% and +1.20% respective gains for the NYSE Composite and NASDAQ Composite are impressive, and while not nearly as broad, the frequently quoted S&P 500 Index (SPX.X) 1,446.99 -0.09% tacked on some bullish weight.

Despite some horrific earnings reports and uncertain guidance, the homebuilders as depicted by the Dow Jones Home Construction Index ($DJUSHB) 773.58 -1.45% has fabricated a 7.23% gain since last Monday, while the benchmark 10-year Treasury Yield ($TNX.X) has fallen 8.4 basis points to 4.808% during the same time.

The longer-dated 30-year Yield ($TYX.X) was down 1.6 basis points after sticking its head above the 5.0% yield level early last week.

I didn't see any news regarding "utilities" in today's session, but this group of dividend-paying stocks was among today's sector winners with the Utilities HOLDRs (AMEX:UTH) $131.08 +1.32% continuing to impress after a recent 01/12/07 relative low of $124.25.

Another Merger Monday!

There were plenty of merger and acquisition announcements to start the week.

Triad Hospitals (NYSE:TRI) $49.65 +14.74% gave a notable lift to the RXH.X 484.39 +1.57% after the company said it agreed to be acquired by affiliates of CCMP Capital Advisors and GS Capital Partners for $50.25/share in cash. Including the assumption of $1.7 billion in debt, the deal's total value tops $6.4 billion.

Shares of Investors Financial Services Corp. (NASDAQ:IFIN) $59.80 +27.36% surged after State Street Corp. (NYSE:STT) $67.08 -6.50% offered to buy the financial services administrator in a deal valued at roughly $4.5 billion in stock.

Carl Icahn's affiliate group, American Real Estate Partners (NYSE:ACP) $103.66 -2.18% announced it was offering $36/share, or $2.75 billion for Lear Corp. (NYSE:LEA) $38.64 +11.45%. Lear provides several manufacturing systems to the automotive industry.

After reporting stronger-than-expected earnings on Friday and offering upbeat guidance, shares of American Axle (NYSE:AXL) $23.57 +5.45% traded as high as $24.68 on speculation of further consolidation in the automotive part manufacturing sector.

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The bidding war for Equity Office Partners (NYSE:EOP) $55.46 +0.14% remains feverish as the stock remains one of the more actively traded issues on the big board. Today, Vornado (NYSE:VNO) $125.10 -0.19% said it was accelerating payment of the cash portion of its $23.24 billion offer for the for the Real Estate Investment Trust (REIT). Vornado and Blackstone Group have been in a bidding war for Equity Office Properties. Last week, Vornado bid $56 per share for the Equity Office Properties, topping a $54-per-share bid from Blackstone. However, Blackstone's offer is all cash, while Vornado is offering $31 per share in cash and $25 per share in stock.

Shares of Rambus (NASDAQ:RMBS) $23.50 +24.20% gained more than $4.00/share on heavy volume of 40 million shares as FTC antitrust decisions keep traders active. Today, the memory-chip technology company said it would appeal an FTC ruling which caps royalty rates for the firm. The FTC said that Rambus can collect royalties of 0.25% for SDRAM products, 0.5% DDR SDRAM products, 0.5% for SDRAM memory controllers or other non-memory chip components, and 1% for DDR SDRAM memory controllers or other non-memory chip components. Today's FTC decision said that after three years, the royalty rates would fall to zero.

"The order is designed to remedy the effects of the unlawful monopoly Rambus established in the markets for four computer memory technologies that have been incorporated into industry standards for dynamic random access memory -- DRAM chips," the FTC said in a statement.

Investors appeared to interpret the FTC ruling to be less severe than expected.

Today's economic calendar had the Institute for Supply Management saying its Services Index rose for a 46th-straight month to a 59.0 reading in January, up from a 57.1 reading in December. The 59.0 reading was above economists' forecast of 56.8. Levels above 50.00 signal expansion, while readings below 50.00 show contraction. The Services Price Index eased to 55.2 from December's 59.1. Economists' forecasted a more inflationary 58.0 measure.

Colts Win! Blue Horseshoe says, "2007 should be bullish!"

While upsetting to many of our friends at the CBOT and CME, as well as my brother-in-law, the Indianapolis Colts defeated the Chicago Bears in this year's Super Bowl by the score of 29 to 17 on Sunday.

While January's 20-point, or 1.4% gain for the S&P 500 Index (SPX.X) had the historical "January Barometer" pointing to a bullish year for stocks, this year's "Super Bowl Indicator" was also stacked in the bull's favor as both the Colts and the Bears were NFL teams prior to the merger of the American Football League (AFL) and National Football League (NFL).

For you historians, the "Super Bowl Indicator" has been correct 30 out of 37-times when a pre-merger NFL team wins the Super Bowl. That's an 81% success rate.

However, as fellow analyst and market historian Jack Albin, Harris Bank's Chief Investment Officer, pointed out, most market bulls were likely rooting for the Bears on Sunday, as his research shows National Football Conference (NFC) wins correlate to much stronger years for the S&P 500 (SPX.X).

When National Football Conference teams win (such as the Bears), Ablin said, the average price return for the market is 13.8%, compared with a mere 3% return when an AFC team (such as the Colts) holds the Lombardi trophy.

In 1986, the year Mike Ditka's Bears won Super Bowl XX, the S&P 500 surged 14.6% that year. Not bad considering January's tepid 0.2% gain.

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

With internals measures in order of importance ($BPSPX, $NYSI, $NASI and NYSE as well as NASDAQ NH/NL) measures all back in a column of X, bulls can once again begin shifting from a "neutral" stance per my 12/22/06 commentary at SPX 1,410.

As I "drag up" the 0% retracement to Friday's multi-year closing high, I would think the first "alarming" sign of technical weakness would be an SPX close that is 2-points below 1,405 and the 19.1% retracement.

The action in early November at the 38.2% and now the early December action at 19.1% is interesting, almost as if those two levels were "in play" before Friday's closing high of 1,448.39 were known.

There are additional indications from the institutionally followed MONTHLY Pivot Analysis levels that 1,405 is deemed an important level of support, and into next week's option expiration, be alert for selling at 1,451.

Review the ABOVE chart, with conventional use of fibonacci retracement, then look at the SPX chart below, with January's (just completed) and now February's MONTHLY Pivot retracement, where I like to take a fibonacci retracement bracket from the mathematically derived MONTHLY R2 (resistance 2) to MONTHLY S2 (support 2).

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

For several months now, ANY DIP BELOW the SPX's MONTHLY Pivot (midpoint of prior months High/Low/Close) has been gobbled up by buyers.

On January 24, the SPX surged to its January MONTHLY R1 (1,438) and found sellers. As such, I'd be HESITANT with new bull long entries here, if measuring potential REWARD to 1,451.

With "1,405" as an initial measure of DOWNSIDE RISK for bull entries, it rate 1,437 as a "good buy" entry, 1,428 as a "better buy" entry and 1,419 as a "great buy" entry point. Each better than the next as RISK to 1,405 is smaller for a bull entry and greater potential REWARD to MONTHLY R1 (1,451) is given.

That is... if history repeats itself.
 

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

Cascade - CAE - close: 54.15 chg: -0.13 stop: 52.45

We have been expecting a bullish breakout higher in shares of CAE and the stock almost provided one today. CAE broke out over resistance in the $54.30-54.50 range but the rally failed at $55.00. We are still waiting for a breakout over $55.50. 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. FYI: A move past $56.00 would create a new quintuple top breakout buy signal on the P&F chart.

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

---

Commscope - CTV - close: 32.67 change: +0.11 stop: 29.99

We do not see any changes from our weekend update on CTV. The stock continues to creep higher with short-term technical support at its 10-dma. More conservative traders might want to adjust their stops toward $31.00. 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.

Picked on January 24 at $32.05
Change since picked: + 0.62
Earnings Date 02/22/07 (unconfirmed)
Average Daily Volume: 862 thousand

---

EchoStar - DISH - close: 41.00 chg: +0.62 stop: 38.95

It was a positive day for DISH. The company solved its dispute with HBO and the two companies signed a long-term distribution deal. Shares of DISH reacted by gapping open higher, dipping back to fill the gap, and then rallying higher again. Volume came in strong on today's 1.5% gain. We are suggesting longs with the stock over $40.00. Our target is the $43.50-44.00 range.

Picked on February 04 at $40.38
Change since picked: + 0.62
Earnings Date 03/14/07 (unconfirmed)
Average Daily Volume: 1.5 million

---

Foundation Coal - FCL - cls: 33.81 change: -0.29 stop: 31.49

We do not see any changes from our weekend update on FCL. The short-term trend in FCL continues to look bullish and readers might want to consider buying a dip near $32.00-33.00. More conservative traders might want to put their stop closer to $32.00. We plan to exit on Wednesday, February 14th at the closing bell to avoid earnings the next day. Our target is the $34.75-35.00 range.

Picked on January 29 at $32.11
Change since picked: + 1.70
Earnings Date 02/15/07 (confirmed)
Average Daily Volume: 771 thousand

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Florida EastCo. - FLA - cls: 61.75 chg: -0.56 stop: 59.85

Over the weekend we told readers that our preferred entry point would be on a dip in FLA. The stock slipped 0.89% on Monday and while we would still consider new positions here we really suspect FLA to dip closer to support near $61.00. There is potential resistance at the December high but we're going to aim for the $65.00-66.00 range. The Point & Figure chart points to a $94 target. FLA is due to report earnings on the morning of Thursday, February 15th. Therefore we plan to exit the day before at the closing bell.

Picked on February 04 at $62.31
Change since picked: - 0.56
Earnings Date 02/15/07 (confirmed)
Average Daily Volume: 113 thousand

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Granite Constr. - GVA - close: 54.36 chg: -0.87 stop: 51.99

GVA suffered some profit taking on Monday with a 1.5% gain. The question now is where will the stock find support. Will $54.00 hold as support or will GVA dip toward $53.00. If you're looking for a new entry point we'd wait for a bounce above $53.00 or its 10-dma. Our target is the $57.50 mark. We do not want to hold over the February 14th earnings report.

Picked on January 21 at $52.41
Change since picked: + 1.95
Earnings Date 02/14/07 (confirmed)
Average Daily Volume: 509 thousand

---

Genesee - GWR - close: 27.49 change: -0.34 stop: 26.49

GWR continued consolidating lower and we were disappointed to see the intraday weakness under $27.50 and its 10-dma. We'd wait for a rally past $27.75 or $28.00 before considering new positions. We only have five trading days left before we have to exit ahead of the company's earnings report due out on February 13th. Our target is $32.00-32.50.

Picked on January 31 at $28.19
Change since picked: - 0.70
Earnings Date 02/13/07 (confirmed)
Average Daily Volume: 221 thousand

---

Hansen Natural - HANS - cls: 38.81 chg: -0.79 stop: 37.49

Warning! The play in HANS has been triggered but the stock quickly reversed course. Shares traded to $40.20 this morning and our suggested trigger was at $40.05. Unfortunately, HANS quickly turned lower and closed down almost 2%. Today's move is both a failed rally at resistance and a bearish engulfing candlestick pattern. We would expect a pull back toward $38.00, where the stock might find short-term support. More conservative traders may want to exit early or tighten their stops given today's reversal.

Picked on February 5 at $40.05
Change since picked: - 1.24
Earnings Date 03/05/07 (unconfirmed)
Average Daily Volume: 3.1 million

---

Accr. Home Lenders - LEND - cls: 29.01 chg: +0.41 stop: 25.75

LEND continued to rally on Monday and closed up 1.4%. Today's big volume is a bullish signal. The $30.00 level might be short-term resistance so if you don't feel like chasing it we might see a pull back in LEND back toward $28.00-27.00. The recent rally has broken through multiple levels of resistance and it would not surprise us to see a short-squeeze. The most recent (January) data put short interest at 26% of LEND's small 21.1 million-share float. We're aiming for the $32.00-33.00 range. Please note that we only have six trading days before we plan to exit ahead of earnings.

Picked on February 04 at $28.60
Change since picked: + 0.41
Earnings Date 02/14/07 (confirmed)
Average Daily Volume: 668 thousand

---

PeopleSupport - PSPT - close: 22.80 chg: -0.85 stop: 21.89

PSPT finally experienced some profit taking after its recent rally. The stock lost 3.5% but more importantly it broke down under short-term technical support at its 10-dma and its four-week trendline of support. We would expect a dip toward $22.50 or $22.00. A bounce from either could be used as a new entry point. Our target is the $26.00 level. We do not want to hold over the early March earnings report.

Picked on January 28 at $23.24
Change since picked: - 0.44
Earnings Date 03/07/07 (unconfirmed)
Average Daily Volume: 295 thousand
 

Short Play Updates

Avid Tech. - AVID - close: 32.90 chg: -2.09 stop: 37.41

The post-earnings sell-off continues. AVID plunged another 5.9% and broke down past the $35.00 level. We suggested a trigger to short the stock at $34.65 so the play is now open. Our target is the $30.50-30.00 range. We do expect a bounce near $32.00, around the July lows. The P&F chart points to a $29.00 target. FYI: Readers should note that the most recent (January) data puts short interest at 12.2% of AVID's 40.9 million-share float, which is relatively high and raises the risk of a short squeeze.

Picked on February 05 at $34.65
Change since picked: - 1.75
Earnings Date 02/01/07 (confirmed)
Average Daily Volume: 677 thousand

---

Comverse Tech. - CMVT - cls: 19.67 change: +0.07 stop: 20.05

We do not see any changes from our previous comments on CMVT. Unfortunately, moving to the pinksheets has not really had an affect on the share price. CMVT continues to consolidate sideways. We're not suggesting new positions at this time. Our target is the $18.00-17.50 range. If you're looking for a quote on CMVT try going to pinksheets.com or stockcharts.com.

Picked on January 22 at $19.85
Change since picked: - 0.21
Earnings Date 03/14/07 (unconfirmed)
Average Daily Volume: 4.4 million

---

Safety Ins. Group - SAFT - cls: 48.18 chg: -0.31 stop: 50.05

We do not see any changes from our weekend comments. Today's drop back under $48.50 looks like a new entry point for shorts. We have two targets. Our conservative target is $45.10. Our aggressive target is the $42.50 level. FYI: The latest (January) data put short interest at 6.4% 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: - 0.31
Earnings Date 04/30/07 (unconfirmed)
Average Daily Volume = 83 thousand

---

Teledyne Tech - TDY - close: 37.67 change: -1.64 stop: 40.01*new*

TDY has produced a failed rally and the stock lost over 4.1% on strong volume. Today's weakness also left TDY under its simple 200-dma. This looks like a new entry point for shorts. We're going to adjust our stop loss to $40.01. Currently our target is the $34.25-34.00 range. The P&F chart has a triple-bottom breakdown sell signal with a $33 target. FYI: The latest (January) data has short interest at 3.7% of the company's 31.3 million-share float.

Picked on January 28 at $37.80
Change since picked: - 0.13
Earnings Date 01/25/07 (confirmed)
Average Daily Volume: 197 thousand
 

Closed Long Plays

Anadarko Petrol. - APC - cls: 42.95 chg: -0.88 stop: 41.99

Crude oil traded to a new four-week high of $59.95 before succumbing to profit taking and closing with a 0.4% loss. Shares of APC under performed the commodity and its peers in the oil sector with a 2% decline. It was our plan to exit today at the closing bell to avoid holding over the company's earnings report. Speaking of earnings we still haven't heard or seen the company's results tonight.

Picked on January 31 at $44.05
Change since picked: - 1.10
Earnings Date 02/05/07 (confirmed)
Average Daily Volume: 4.9 million

---

Bankrate Inc. - RATE - close: 38.78 chg: -1.55 stop: 38.25

Ouch! RATE just erased a large chunk of our unrealized gains with a 3.8% sell-off. We could not find anything specific to account for today's weakness so it might just be some pre-earnings jitters. It was our plan to exit tonight at the closing bell to avoid tomorrow's earnings report.

Picked on January 11 at $38.25
Change since picked: + 0.53
Earnings Date 02/06/07 (confirmed)
Average Daily Volume: 334 thousand
 

Closed Short Plays

None
 

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

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