Option Investor

Daily Newsletter, Saturday, 08/25/2007

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Table of Contents

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

Market Wrap

Bottoms Up?

The Dow rebounded 300 for the week but that does not mean the bottom is behind us. I would love to believe it and some individual stock prices are definitely finding buyers but the volume has been very light. The leaders are definitely stretching their gains but the majority of the pack is still lagging. The Russell 2000, the fund manager sentiment indicator, is very weak and has not been participating in the rebound. Is the bottom in? I believe it is too early to make that determination.

Dow Chart - Daily

Nasdaq Chart - Daily

Friday's economics may have thrown a monkey wrench in the works for a potential Fed rate cut at the September meeting. Neither of Friday's reports were potentially critical reports for the Fed but both were strongly positive and suggest the economy is not as weak as most expected.

The Durable Goods report for July had a headline gain of 5.9% growth in orders compared to estimates for a minimal 1.1% gain. Orders for June were revised up to 1.9% from 1.4%. Shipments also exploded by 3.8% compared to a drop of -1.1% in June. That was the strongest shipping number since early 2004. The gains in orders were the strongest since last September and suggest momentum is building. The numbers were substantially weaker at 3.7% once you remove the high dollar transportation orders but that was still well above estimates. Backorders rose 2.4% and the highest level since last September. The entire report was a strong indicator of underlying economic strength that could give the Fed a reason to not cut rates at the September meeting. However, this was for the July period and the ISM for August will be much more important when it is released on Sept-4th.

The other economic surprise came from the New Home Sales, which rose to 870,000 for July. This compares to estimates for a drop to 825,000 from the June level of 850,000. That 45,000 difference between actual and the estimate and that was a strong surprise. An even bigger surprise was a 3.57% jump in the median home price to $245,668 from the prior months low of $237,208. Sales are still down -10% from year ago levels. Inventory levels fell slightly to a 7.5-month supply. The strength came mostly from the West with support from the South. The Northeast was the weakest region. Months on the market rose to 6.1 months and a high for this building cycle. The higher prices may be deceiving since builders are throwing in every extra they can find to close the deal rather than impact their market by lowering prices. If you sold 250 houses in a subdivision for $125 a foot and then drop prices to $75 a foot to sell the next 250 homes you will have a buyer revolt on your hands. The recent sales at $75 devalue the ones you sold at $125. It also makes it hard to get a higher appraisal once the glut is over and you start raising the price again. Future appraisals will be based on the $75 price not the $125 price. It will take a long time to overcome that price drop. Builders would rather give you anything you can name as a freebie including no payments for a year, decks, pool, landscaping, etc, to entice you to buy at the listed price. Since this was a July report it also captured the last of the summer relocation crowd. August closings should drop since most families want to be moved in well before school starts. I view this as a blip on the screen and expect the new mortgage rules and the change in mortgage availabilities in August to have severely hampered sales.

Last week was a very light week for economics and the market was left to wander on its own driven only by news events. Next week has a heavy economic calendar with several high profile reports. Two Fed surveys, FOMC minutes, NAPM, PMI and Factory Orders will produce plenty of analyst discussions. With only two weeks before the FOMC meeting every report will be weighed against its impact on the Fed rate bias. Currently there is a 100% chance of a rate cut at that meeting based on the Fed funds futures. However, there are a surprising number of analysts now predicting no change in rates. The market has definitely priced in a rate cut and no cut now could be dangerous. With many high profile individuals including the CEO of Countrywide predicting a recession if the Fed does not act fast the analyst community is definitely polarizing. I will wait until next Sunday to provide further rate analysis after the week's heavy economic schedule. Anybody with an opinion today can change it several times before next weekend. Bernanke will speak at the annual Jackson Hole conference next Friday at 10:AM on monetary policy and housing.

Economic Calendar

The various events in the debt market appear to be pointing to an easing of the debt wreck. The Fed's discount rate cut, $2 billion in borrowings from that window and Bank America's $2 billion infusion into Countrywide appear to have had an impact. Corporations sold $23 billion in bonds this week to make it the busiest week since May-2006. The events leading to these sales narrowed the spreads significantly over the prior week and corporations holding off on their planned sales jumped at the chance to collect the money. Elsewhere everything was not as rosy. Over the past two weeks nearly $200 billion in leverage debt sales have been postponed due to no buyers or high rates. Home Depot reported on Friday that it will have to cut the price of its Home Depot Supply unit by -$1.2 billion and guarantee part of the debt in order to obtain financing for the sale to a group of private equity firms. Reportedly three banks were reluctant to fund the debt given the recent credit concerns in the market. Home Depot had already delayed the closing by a week in hopes of finding a resolution. The next big deal in the pipeline is the $28 billion acquisition of First Data (FDC) by KKR with the debt expected to close on Sept-4th. This is considered to be a "covenant light" deal and those will have a much harder time getting funded. Other deals rumored to be in trouble include the $8.2 billion management buyout of Affiliated Computer Systems (ACS) for $59.25 per share. The stock is now trading at $50 and well below the deal price. That suggests there is trouble brewing. Other troubled deals include $5.3 billion for Ceridian (CEN) for $36 with the stock now at $32. Also, United Rentals $6.6 billion sale for $34.50 with the stock at $30.50 today. The $44 billion buyout of TXU by KKR is also thought to be at risk along with the $8.2 billion for Tribune (TRB) and $25 billion for Sallie Mae (SLM). The credit default swaps, insurance on the deal debt, have risen dramatically on SLM to 287 basis points or $2.87 million per year to insure $100 million of debt against a default. This is about twice what the broader market gets for insurance suggesting there is a lot of implied risk in the deal. That is still chicken feed compared to the $8.75 million per year required to insure $100 million of Sam Zell's debt on the Tribune acquisition. This swap is rising fast and signaling the deal may not close despite Zell's claim on Aug-14th that he is committed to the transaction. Citigroup said the major brokers had increasing exposure to unsold LBO debt. According to Citigroup, JP Morgan had $40.76 billion in unsold debt, Goldman $31.88B, Deutsche Bank $27.27B and Credit Suisse $27.16B.


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Countrywide appears to be out of trouble but not yet out of the woods. The CEO was interviewed on CNBC on Thursday and he said all of the right things while denying Bank America was going to buy the company. He admitted to selling 40 million shares for $142 million over the last year saying, "I am getting old and I need to diversify." With BAC now a 16% shareholder and AllianceBerstein 11% and Fidelity, T.Rowe Price, Legg Mason and Vangard other major holders it appears they are in good hands. AllianceBerstein bought 37 million shares on July-31st as the crisis began, bringing their holdings to 64 million shares. The Countrywide CEO said a lot of people volunteered to help and BAC was not the only offer of money. Angelo Mozilo already had a working arrangement with BAC since they loaned him the $75,000 to start CFC in 1969. The conversion price for the $2 billion BAC investment is $18 so the $18-$20 level should be support as the mortgage mess continues to unwind.

After the bell on Friday the Fed clarified that it would accept investment grade asset-backed commercial paper as collateral at the discount window. The Fed also said it would accept subprime mortgages as long as they are performing loans and not in default. They also said they would accept collateralized debt obligations (CDO) containing subprime mortgages. This would be a "get out of trouble free" card if those holding the subprime debt were all banks. Unfortunately most of those financial institutions holding debt that can't be sold are not banks and are not eligible for the discount window. There are plenty of banks that are eligible so the window could be very busy next week. I view this as very market positive and a sign the worst of the debt wreck is probably behind us.

The rescue did not come fast enough for Lehman Brothers. On Wednesday it announced it was shutting down its subprime mortgage unit BNC Mortgage and laying off 1,200 people. Lehman will take a $50 million charge for the closure. Relatively speaking that is chicken feed. When Capital One closed its Greenpoint unit last week they took a charge of more than $800 million. More than 50,000 jobs have been cut in the mortgage arena in the last year with 25,000 of those in August alone. The table below outlines only those big name companies and there were dozens of smaller firms that closed completely.

Job Cuts in Mortgage Sector

There are still some big problems in the pipeline. Merrill is on credit watch for its exposure to the subprime mess. Merrill bought subprime lender First Franklin late in 2006 and they are expected to confess some problems with their next update. Merrill may have to take a hit on more than $1 billion in subprime loans held by First Franklin. Merrill also has $1 billion in good will on its books from the First Franklin acquisition and analysts expect that to be written off as well. Bear Stearns bought subprime lender ECC Capital in a deal that closed in February. I bet they wish they could do that over again. Morgan Stanley bought Saxon Capital for more than $700 million in December. Subprime loans were hot because of the higher interest rates and fat fees. These loans have now rotted the portfolios of the parent lenders. On Friday S&P slashed the ratings on seven classes of Bear Stearns Asset Backed Securities, citing increasing delinquencies and erosion of credit quality. When the credit ratings are cut it can sometimes force a sale of the securities by the current holders. The vast majority of pension funds cannot hold other than investment grade paper. Once the grade is cut the paper must be flushed. This results in massive margin calls on whoever initially sold the paper to them. The debt wreck may be easing but it is far from over. Earnings from BSC and LEH are Sept-13th and MS on Sept-19th.

The main earnings cycle may be over but there are still a few stragglers. Dell will report on Thursday and has already warned they will miss earnings due to a series of charges for their accounting scandal. They will also have to give an update on the SEC probe and several other legal problems. Meanwhile Hewlett-Packard is beating them like a rented mule in the PC sector. Dell said last week it was having trouble getting parts because Hewlett-Packard was buying them up. What a difference 5-years makes. Dell used to be the PC king using its just in time component acquisition strategy to keep PCs at the lowest cost possible. Now HPQ is buying up the parts and squeezing Dell from both ends.

The rebound for the week came from techs, networkers, energy, materials and metals. The metals and miners rebounded 12% led by BHP Billiton (BHP), Rio Tinto (RTP), Southern Copper (PCU) and Freeport McMoran (FCX). Steel and aluminum stocks rebounded strongly but are still down -20% to -24% from their recent highs. Still plenty of room for the sectors to move higher on the strong global economy.

Energy stocks roared back to life after the post hurricane dip. Dean had not even made it into Mexico before oil dropped to $68.64 on excess supply fears. Inventory levels rose 1.9 million barrels for the first gain in six weeks. That should be bearish but prices rose instead. Feeding the price was a major fire at the Chevron refinery in Pascagoula Mississippi. CVX declared force majeure on its purchase of crude to feed the refinery. Unable to actually refine crude, stockpiles at the refinery quickly became filled to maximum. The 325,000 bpd refinery is only running at 50% and could be offline for many weeks from fire damage. Shell said it would return its Deer Park refinery in Texas to operation this weekend after closing it ahead of hurricane Dean. These refinery outages provided support for gasoline prices but both outages should have added to crude inventories backing up in the system while they are shutdown. This should produce another build in inventory levels for next week, bearish for prices, but low and behold crude was still gaining right into Friday's close. Crude closed at just over $71 for a gain of $1.26. This was powered by short covering after the stronger than expected economic reports suggested growth had not slowed and demand would continue to be robust. I believe it is just a blip in a downward trend while we wait for the OPEC meeting and the peak of hurricane season two weeks from now. OPEC will meet in Vienna on Sept 11th to decide if they need to raise output.

Crude Oil Chart - Daily

There are cracks beginning to form in the coalition's output restrictions given the high price of crude and the special deal given Angola when they joined OPEC a year ago. When they joined OPEC said they were exempt from the quota system until they completed some planned projects. Angola produces about 1.8 mbpd and once those projects are completed they could produce as much as 3.0 mbpd by 2010. This puts them right up there in the top ranks of OPEC producers and they are now saying unofficially now they will never agree to any production quota. This is not setting well with other OPEC members with Nigeria, Libya and Iran already complaining and lobbying for their own quota relief. Since OPEC cheating is a fact of life you can bet cheating will be increasing soon, especially if OPEC decides not to increase production on the 11th.

The markets, with the exception of the Russell-2000, rallied into Friday's close to cap a decent week after the Fed's discount window move. With the Fed funds futures pointing to three cuts by year-end it appears traders are already pricing in those cuts starting with the meeting on Sept-18th. A 300 point gain by the Dow and 71 on the Nasdaq compared with a miniscule 12 point move on the Russell. Small cap buyers, primarily funds, are nowhere to be found. Those betting on the Fed are doing it with the highly liquid large caps where a quick exit is guaranteed. The various ETFs are booming because they are also liquid and you don't have to go through the brain damage of picking a specific stock. These things make me think investors are not convinced the bottom is behind us but don't want to miss the move just in case the rally continues. September is normally a bad month in the market and that is weighing on market sentiment.

Internals for the week were mixed with very low volume. Friday's volume at 4.6 billion shares across all markets was the lowest volume since the Memorial Day holiday. This is well below the record of 11.769 billions shares set on the prior Thursday's drop. The Commodity Futures Trading Commission (CFTC) reported on Friday that short interest in the S&P futures hit record levels again on Tuesday. According to several hedge fund traders many of the funds shorted the 50% retracement of the July drop at roughly 13250 on the Dow, 1460 on the S&P. We saw the markets come to a screeching halt early in the week after the big rebound. The indexes barely moved as the week progressed but did maintain a slight upward bias. On Friday sellers tried to take the market down at the open but when it became obvious the market was not going to crumble the short covering began. That short covering lasted right into the close taking us roughly 100 points over that 50% retracement level. Shorts were throwing in the towel ahead of the weekend and what could be the lowest volume week of the year next week.

Dow Chart - Daily with Retracement

S&P-500 Chart - Daily with Retracement

The last week of August is vacation week. Everyone who did not take a vacation while the markets were imploding and volatility was hitting 4-year highs will try and squeeze in a vacation next week. It is a holiday week ahead of the Labor Day weekend, non-Farm payrolls and the FOMC meeting. With September normally a bad month in the markets this is the last week for traders to take time off. There is a lot of anguish in the fund community about bonuses. With the markets flat for the year and many positions blown out in July/August there are a lot of managers under pressure to find some profits as the year comes to a close. This is going to increase trading and increase volatility.

Barton Biggs was asked last week if the markets were going to retest their lows in September as everyone expected. He said, the market is a very mean master and it could easily just crawl higher while giving signals that it might roll over at any time. This would have 25% of the funds trying to short it and 25% of funds waiting in cash for the dip that never comes. All will eventually end up chasing prices higher. Unfortunately nobody knows what scenario to pick in advance of the event.

After the Fed news on Friday offering to accept subprime paper and CDOs at the discount window I feel market sentiment, especially in the credit markets, will improve even further. If the Fed does cut rates on the 18th it will improve even further. However, no rate cut would be a disaster since the markets are already pricing in more than one cut. Traders will be focused on the Bernanke speech on monetary policy next Friday. Hopefully this will give the markets a clue as to Fed direction two weeks before the meeting. Personally I would not hold my breath. I believe Bernanke will not give any clues OR guide to a continued no cut bias. The Fed is making it clear they will provide liquidity to anyone in need with almost any kind of paper for collateral. Bernanke might see this as all that is needed to fix the debt wreck and the Fed can remain neutral on rates. Contrary to this view was the statement by the Fed last week that the risk to the economy had changed significantly. Traders are hanging on each of those words as a guarantee the Fed is going to cut rates. This makes any Fedspeak next week very critical for market sentiment.

Russell-2000 Chart - Daily

I have been recommending readers wait for the Russell 2000 to break resistance at 800 before racing back into long positions. After spending all week in the 790-800 range the Russell closed on an uptick at 798.93 and right at that resistance line at 800. If we do move over 800 next week I would definitely be a buyer. It is going to be a low volume week and the shorts will likely be on vacation. Longs play all the time but shorts do take vacations. At this point on the calendar I would have a long bias over 800 and a short bias under 790. We saw a week of consolidation on the Russell and the shorts were unable to knock it down. That is slightly bullish. I believe fund managers will jump on board the 850 express once 800 is broken. You can play this directly with the Russell ETF (IWM). Calls are cheap with strikes at every dollar increment. Just be faithful to the 790/800 suggestions above.

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
CCJ None

New Long Plays

Cameco Corp. - CCJ - cls: 39.74 chg: +1.17 stop: 37.40

Company Description:
Cameco, with its head office in Saskatoon, Saskatchewan, is the world's largest uranium producer. The company's uranium products are used to generate electricity in nuclear energy plants around the world, providing one of the cleanest sources of energy available today. (source: company press release or website)

Why We Like It:
We believe the sell-off in CCJ is overdone. They are the best play in the uranium market and the price and demand for uranium is only going to rise. The stock is bouncing from support near $35.00. Currently shares are testing resistance near $40.00. We are suggesting a trigger to buy the stock at $40.26. However, we would suggest that nimble traders be on the look out for an alternative entry point with a dip and bounce near $38.00 if one is provided. If we are triggered at $40.26 our target is the $44.50-45.00 range. There is potential resistance at the 200-dma and the 50-dma. The P&F chart is still bearish given the sharp summer sell-off.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/30/07 (unconfirmed)
Average Daily Volume: 3.6 million


EON AG - EON - cls: 54.55 change: +0.86 stop: 51.99

Company Description:
E.ON is on track to becoming the worlds leading power and gas company. With annual sales of just under EUR68 billion and roughly 81,000 employees, we are already the worlds largest investor-owned energy service provider. (source: company press release or website)

Why We Like It:
EON has a strong, long-term bullish trend. More recently the stock has spent the last few weeks building a new base between $52 and $54. Friday's rally saw EON breakout through resistance near $54.00 and its 50-dma. This looks like a new entry point for long positions. We have two targets. Our first target is the $57.40-57.50 range near its July highs. Our second target is the $59.85-60.00 range.

Picked on August 26 at $54.55
Change since picked: + 0.00
Earnings Date 08/15/07 (confirmed)
Average Daily Volume: 406 thousand


Global Ind. - GLBL - cls: 24.02 chg: +0.69 stop: 22.39

Company Description:
Global Industries provides offshore construction, engineering, project management and support services including pipeline construction, SURF installations, platform installation and removal and diving to the oil and gas industry around the world. (source: company press release or website)

Why We Like It:
We are labeling this an aggressive play. Crude oil futures are bouncing and this is giving a lift to the oil services sector. Yet crude could easily reverse and continue with its end-of-summer correction. What's tempting about GLBL is the bullish reversal. The stock bounced from support near $19.00 and its 200-dma, which just happened to be near its 61.8% Fibonacci retracement level of its bullish run. The stock has a short-term trend of higher lows and traders have been buying dips to its 10-dma this past week. Friday saw a breakout over potential resistance at the 21-dma, 100-dma and the $24.00 mark. The MACD is bullish and GLBL has broken its two-month trendline of lower highs. Aggressive traders may want to go long the stock now over $24.00. We see potential resistance near $24.50 so we're suggesting a trigger to buy it at $24.65. Be aware that GLBL also has potential resistance at its 50-dma near $25.50. Another observation that would suggest caution is the lack of volume on the rebound. We're listing a wide (aggressive) stop loss on this play but more conservative traders may want to start with a stop loss just under $23.00 or its 10-dma. Our target is the $28.00-29.00 range.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/30/07 (unconfirmed)
Average Daily Volume: 2.5 million


Intel Corp. - INTC - cls: 24.79 change: +0.56 stop: 23.24

Company Description:
Intel, the world leader in silicon innovation, develops technologies, products and initiatives to continually advance how people work and live. (source: company press release or website)

Why We Like It:
The semiconductor sector looks like it more room to rebound before running out of steam. If the semis can keep the rally going it will definitely have a positive impact on the NASDAQ. Shares of INTC have rebounded sharply and the technical indicators have improved dramatically over the last several days. We're suggesting long positions now but traders can be patient. A breakout over $25.00 or another dip into the $24.25-24.00 zone could be used as potential entry points. There is potential resistance near the bottom of the July gap down around $25.30 and then again near $26.50. We're aiming for a rally into the $27.40-28.00 range.

Picked on August 26 at $24.79
Change since picked: + 0.00
Earnings Date 10/16/07 (unconfirmed)
Average Daily Volume: 67.8 million


Radian Group - RDN - cls: 21.82 chg: +0.89 stop: 19.49

Company Description:
Radian Group Inc. is a global credit risk management company headquartered in Philadelphia with significant operations in New York and London. Radian develops innovative financial solutions by applying its core mortgage credit risk expertise and structured finance capabilities to the credit enhancement needs of the capital markets worldwide, primarily through credit insurance products. The company also provides credit enhancement for public finance and other corporate and consumer assets on both a direct and reinsurance basis and holds strategic interests in credit-based consumer asset businesses. (source: company press release or website)

Why We Like It:
This is a speculative, higher-risk play. The last three months have seen RDN fall from $62 to an intraday low of $15.20. A couple of weeks ago the stock put in a short-term bullish double-bottom type of pattern and the oversold bounce rallied to $25.75 before correcting. Before considering this play readers need to realize that there is the potential for headline risk. The potential merger between RDN and MTG is struggling to the point where MTG has actually filed a lawsuit against RDN requesting additional information from the company. MTG could be looking for some sort of way out from the merger, especially now given the market's aversion to anything related to sub-prime. Yes, we said the "s" word - sub-prime. RDN's implosion is a direct result of the sub-prime slime. RDN deals in mortgage insurance and is facing significant losses from the sub-prime meltdown. The question investors have to ask now is whether or not the risk has been priced into the stock and shares can try to rally or is this just a speed bump bounce on the way to further lows. It is worth noting that RDN has relatively high short interest and any further gains could spark some additional short covering. On a technical basis the stock is very oversold and traders were buying the dip near $20.00 on Friday. The stock will be prone to some volatility given the industry it's in. We have two targets. Our first target is the $25.50-25.75 range. Our second target is the $29.50-30.00 range. FYI: If you want a tighter stop loss consider $19.79, just under Friday's low. Plus, if you check out the Point & Figure chart you'll see that RDN has produced a triple-top breakout buy signal with a $43 target.

Picked on August 26 at $21.82
Change since picked: + 0.00
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume: 3.6 million


Synalloy - SYNL - cls: 20.79 change: +1.34 stop: 18.95

Company Description:
Headquartered in Spartanburg, South Carolina, Synalloy Corporation has been in business since 1945 and employs over 440 people with operations in South Carolina, North Carolina, Tennessee, and Georgia. The Company is a diverse manufacturer comprised of two major operating segments: metals and chemicals. (source: company press release or website)

Why We Like It:
SYNL suffered a seven-week stretch of losses from mid-June through July. The stock finally found some support in the $17.00-17.50 zone and now the stock is building on a potential bottom. SYNL has a short-term pattern of higher lows and after such a big drop it doesn't take much to turn the technical indicators bullish. There is plenty of room for an oversold bounce and we are suggesting long positions with SYNL's rally past $20.00 on Friday. More conservative traders may want to wait for a rise past $21.75 or $22.00 before initiating positions (but if you do use a tighter stop loss). Our target is the $24.75-25.00 range. More aggressive traders may want to aim for the 50 or 200-dma overhead. FYI: A move over $22.00 would reverse the P&F chart into a new buy signal.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/07 (confirmed)
Average Daily Volume: 374 thousand


XenoPort - XNPT - cls: 42.29 change: +0.69 stop: 39.75

Company Description:
XenoPort, Inc. is a biopharmaceutical company focused on developing a portfolio of internally discovered product candidates that utilize the body's natural nutrient transport mechanisms to improve the therapeutic benefits of existing drugs. (source: company press release or website)

Why We Like It:
The BTK biotech index has rallied right to resistance at its 50-dma, 200-dma and its multi-month trendline of lower highs. A breakout from here would be very bullish for the sector. Meanwhile shares of XNPT have rebounded with its peers over the last few days. Short-term technicals for XNPT have turned bullish again and the stock is already cracking resistance near $42 and its trendline of lower highs. We are suggesting long positions now although more patient traders may want to wait for a potential dip back towards the $40.50-41.00 zone. Be aware that the 50-dma still overhead could be resistance. Our target is the $47.25-47.50 range. You'll also want to keep an eye on the BTK biotech index. If the BTK fails to breakout then XNPT could struggle. We want to remind readers that trader biotech stocks always carries a higher-level of risk. There is always a chance that some test result or FDA decision could send shares gapping either direction making our stop loss useless.

Picked on August 26 at $42.29
Change since picked: + 0.00
Earnings Date 08/08/07 (confirmed)
Average Daily Volume: 198 thousand

New Short Plays

None today.

Play Updates

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Long Play Updates

LM Ericsson - ERIC - cls: 37.04 change: +0.44 stop: 34.59*new*

ERIC rallied again on Friday. The stock rose 1.2% and posted its fifth gain out of the last six sessions. Volume has been improving the last couple of trading days but remains below average. Friday's gain was encouraging because ERIC had some potential resistance in the $36.75 region. We are adjusting the stop loss to $34.59. More conservative traders might want to consider a tighter stop closer to $35.00. Another positive from last week was the new bullish signal on the daily chart's MACD indicator. While we remain positive on ERIC the stock does look short-term overbought and due for a pull back. The $36.00 level should be short-term support. Our target is the $37.90-38.00 range. More aggressive traders may want to aim higher like the 200-dma or the $40 zone. FYI: Keep an eye on Sweden's main index the OMXS. Shares of ERIC are following the same pattern in the Stockholm market with a big bounce from its recent test of support.

Picked on August 19 at $35.53
Change since picked: + 1.51
Earnings Date 10/18/07 (unconfirmed)
Average Daily Volume: 2.6 million


L.B.Foster Co. - FSTR - cls: 38.50 change: +0.60 stop: 34.59

FSTR gave bulls a scare last week with Tuesday's big bearish reversal. Fortunately the stock did not see any follow through lower on last Tuesday's turnaround. Thus far buyers have been stepping in near the rising 10-dma. This remains an aggressive, higher-risk momentum play and we're not suggesting new positions at this time. More conservative traders may want to tighten their stops even further. We have two targets. Our first target is the $39.90-40.00 range. Our second target is the $42.00-42.50 zone.

Picked on August 14 at $37.33
Change since picked: + 1.17
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume: 150 thousand


Pediatrix - PDX - cls: 58.99 change: -0.01 stop: 55.90

PDX failed to participate in the market's widespread rally on Friday. This is worrisome and should send up caution flags for the bulls. The larger pattern is still bullish with last week's breakout over $58 and the $59 levels. At this time we would still consider new positions here but nimble traders may want to wait and watch for another dip near $58.00 and its rising 10-dma. More conservative traders may still want to wait for a rally past the April 2007 high at $60.35 as an entry point to avoid potential resistance at $60.00. Our target is the $64.50-65.00 range.

Picked on August 20 at $59.15
Change since picked: - 0.16
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume: 219 thousand


Patterson-UTI - PTEN - cls: 21.67 change: +0.46 stop: 20.74

Crude oil futures bounced sharply on Friday and this lifted both the OIX oil index and OSX oil services index. Shares of PTEN participated with a 2.17% rebound. Friday's bounce looks like another bullish entry point to go long the stock given its proximity to significant support near $21.00. We would consider new positions here. However, it's worth noting that PTEN has not broken its bearish trend of lower highs yet. Our first target is the $24.85-25.00 range.

Picked on August 12 at $22.36
Change since picked: - 0.69
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume: 4.6 million


Starbucks - SBUX - cls: 27.59 chg: +0.07 stop: 25.95

The rebound in SBUX has not made any progress the last couple of days but thus far investors are buying the midday dips. Shares look poised to challenge resistance near $28.00 again soon. We're not suggesting new positions at this time. Our target is the $28.35-28.50 range. Readers should note that the 100-dma near $28.35 could be overhead technical resistance. More aggressive traders may want to aim higher.

Picked on August 16 at $26.61
Change since picked: + 0.98
Earnings Date 11/15/07 (unconfirmed)
Average Daily Volume: 17.0 million


Vertex Pharma - VRTX - cls: 37.34 change: +0.96 stop: 33.99

Traders bought the dip near $36.00 again on Friday and VRTX rallied to a 2.6% gain. This looks like another bullish entry point to buy the stock although we would strongly consider raising the stop loss toward the $35.00 level. VRTX does have short-term resistance at $38.00. The P&F chart is bullish with a $66 target. Our target is the $39.80-40.00 range. FYI: We reiterate our suggestion to tighten stop losses. Many of the technical indicators still look bearish after last week's midweek pull back.

Picked on August 19 at $36.87
Change since picked: + 0.47
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume: 2.2 million


XOMA Ltd. - XOMA - cls: 2.30 change: +0.03 stop: 1.99

The sideways consolidation in XOMA seems to be coiling more tightly, which suggests a breakout is coming soon. Given the short-term trend of higher lows the breakout should be higher. We would continue to suggest new positions here. However, waiting for a breakout over resistance near $2.35 would still be a good plan. We have a wide stop loss on this aggressive, high-risk play. More conservative traders might be able to get away with a tighter stop near $2.10 or even closer to $2.20. When trading a biotech, traders should remember that there is always headline risk of some unexpected news event sending shares the opposite direction. Our target is the $2.70-2.75 under the 200-dma. Be aware that the 50-dma is falling fast and could be overhead resistance. Plus, the $2.50 level looks like potential resistance. FYI: The latest data shows that short interest is about 9% of the 95 million-share float. That's a high amount of short interest and raises the risk of a short squeeze, which of course would be good news for us!

Picked on August 19 at $ 2.25
Change since picked: + 0.05
Earnings Date 08/08/07 (confirmed)
Average Daily Volume: 1.9 million


Yahoo - YHOO - close: 23.59 change: +0.46 stop: 22.45

Tech stocks enjoyed a strong session on Friday. Shares of beleaguered YHOO rose almost 2% albeit on very light volume. The move on Friday is a small bullish engulfing candlestick pattern, which is normally seen as a one-day bullish reversal signal. We are suggesting new long positions here but some traders may want to wait for more confirmation higher. We are aiming for the $25.85-26.00 range but keep a wary eye on the falling 50-dma, which could be trouble for us. You can also see on the weekly chart that the $25.00 level may be tough resistance so we're setting a conservative target at the $24.95-25.00 range.

Picked on August 19 at $23.54
Change since picked: + 0.05
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume: 25.6 million

Short Play Updates

Motorola - MOT - cls: 16.74 change: +0.14 stop: 17.05 *new*

We seriously considered dropping MOT as a bearish candidate. Traders bought the dip near $16.50 on Friday morning and MOT closed near its highs for the day. The stock is now challenging short-term resistance near $16.75 and looks poised to trade near $17.00 soon. More conservative traders may want to go ahead and exit early. We're choosing to tighten our stop loss to $17.05. The larger trend still looks bearish but short-term the rebound looks like it still has some steam left. The technical picture is mixed. We're not suggesting new positions at this time. Our target is the $15.10-14.50 range.

Picked on July 29 at $16.95
Change since picked: - 0.21
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume: 25.7 million

Closed Long Plays

Tellabs - TLAB - cls: 10.85 change: +0.54 stop: 9.39

Target achieved. TLAB had been slowly creeping higher all of last week. Then just before 11:00 a.m. on Friday traders bought the dip near $10.18 and TLAB never looked back. The stock broke through technical resistance at its 200-dma and hit an intraday high of $10.91. Shares closed up 5.24%. Our target was the $10.90-11.00 range. Really aggressive traders may want to aim higher (maybe around $11.50) but watch out for resistance near $11 and its 50-dma.

Picked on August 19 at $10.00
Change since picked: + 0.85
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume: 8.4 million

Closed Short Plays

Akamai - AKAM - close: 32.86 change: +2.03 stop: 33.05

Ouch! AKAM produced a big 6.5% rally on Friday. Something happened about 15 minutes before noon on Friday and AKAM spiked sharply higher. This lead to what appears to be a short squeeze and AKAM broke through resistance near $32.50. The stock hit our stop loss at $33.05 late on Friday afternoon. We had been targeting the $28.00 level and AKAM almost got there on August 16th.

Picked on August 14 at $32.35
Change since picked: + 0.51
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume: 6.2 million

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


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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