Option Investor

Daily Newsletter, Saturday, 04/12/2008

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Table of Contents

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

Market Wrap

GE, We Bring Good Things to Life

GE has brought us many things to improve our lives over the years but Friday's earnings surprise was not one of them. GE stunk up the markets with a nasty earnings miss and lowered guidance for the entire year. Once thing GE has always been known for was no downside earnings surprises. They manage their earnings with clockwork precision or at least they had in the past. GE was known as being rock solid on earnings guidance and they affirmed that guidance as recently as March 13th. That all changed on Friday morning.

CEO Jeff Immelt had to step up and confess on Friday that GE only posted earnings of 44 cents compared to analyst estimates of 51 cents. Immelt blamed the implosion in the financial markets after the Bear Stearns collapse for the earnings miss. Reportedly they were unable to conclude some asset sales because the market had gone back into gridlock. GE lost a lot of credibility with that excuse and the magnitude of the miss. If it was a one-time thing related to the Bear Stearns event then why did they lower the full year earnings estimates to between $2.20 and $2.30 per share from their prior guidance of $2.42? It appears GE has more wrong under the hood than a simple miss in the earnings engine. They lost 3 cents from a failure to sell some real estate assets, 2 cents from mark-to-market asset write-downs, 1 cent from slowing appliance sales and 1 cent from slowing healthcare sales. Reportedly the problems in the municipal finance area are keeping hospitals from buying big ticket items like MRI machines until they can sell bonds to pay for them.

GE Business Segment Earnings Table

GE lost $4.70 for the day and that equates to a market cap loss of $46.9 billion. That is the equivalent to the entire market cap of EBAY or Target (TGT). It was the largest single day loss for GE since the 1987 crash. Volume on GE was more than 367 million shares. As a Dow component GE knocked was responsible for -36 Dow points but that is just the direct impact. GE is a major component in many of the ETFs for the Dow and S&P. When a company of their market cap take such a serious header it causes serious selling in all the associated ETFs. Indirectly you could say GE was easily responsible for the majority of the early morning declines as stops on ETFs were hit. Once those stops are triggered the rest of the day is on autopilot as investor sentiment fails along with the stops.

GE's dramatic failure to meet earnings estimates calls into question the capability for the rest of the stock market to meet theirs. If the strongest U.S. company stumbled badly then what about the 7,000 weaker companies to report? Can investors expect them to do better than the bluest of blue chips? GE has excellent management and a pristine balance sheet. If business was unexpectedly bad for them then the smaller, less well-managed companies may have had an ugly quarter.

GE was not the only bad news on Friday morning. The Consumer Sentiment number for April fell -6.3 points to 63.2 and a 26-year low. The expectations component fell -6.7 points to 53.4 and current conditions fell -5.8 points to 78.4. Inflation expectations spiked to 4.8% from 4.3% in March. The decline in sentiment is not only consistent with a recession but at these levels and acceleration it is indicative of a severe recession. The headline number is already below the level we saw back during the 1990 recession. The last time sentiment levels were this low was the 1981-1982 recession. Rising food and energy expenses were seen as the biggest drivers. Talk of $4 gasoline in May has nearly caused a panic among consumers whose budgets are already stretched to the breaking point. Add in the plunging housing market and nearly impossible loan requirements and you have a 26-year low in sentiment.

Consumer Sentiment Chart

On the economic calendar for next week we have the two main inflation reports in the Producer Price Index (PPI) and the Consumer Price Index (CPI). The PPI is Tuesday and this will show us how the rising energy prices are filtering through at the producer level. Expectations are for a rise of 0.5% to 0.8%. With oil hovering around $110 the odds are good there will be a sharp increase in those products related to crude. The CPI on Wednesday is also expected to show a sharp increase of 0.3% to 0.5% with last months zero gain an anomaly soon to be forgotten. The wild card for both would be a drop in prices due to a drop in demand as the recession worsens.

The Fed Beige Book on Wednesday will also give us a look at economic conditions in all 12 Fed regions. Last months report showed conditions were worsening in almost all regions and all components. Odds are good this report will be significantly worse given the recent change in posture by the Fed.

Ending the week we will see the Philly Fed Survey on Thursday and you may remember it actually rose in February rather than the months of consecutive declines we had seen. The March number rose to -17.4 from -24 so it was not an earthshaking change just a minor improvement. Analysts expect the April number to improve to -15.0 but I think that is wishful thinking. Either way it would still be deep in contraction territory.

Economic Calendar

The big events for next week will come from the earnings calendar rather than the economic calendar. In the list below I highlighted the important ones with orange the most important. Intel on Tuesday is going to be a very critical report. They continue to say business is good but did lower expectations for the quarter. Their guidance for the rest of the year will be far more important than their actual earnings. IBM will follow on Wednesday and they will be just as important as Intel if not more so since they deal directly with large corporations. If their guidance suggests those corporations are slowing their spending then the market could begin a new leg down.

There are several major banks/brokers due to report next week and that includes JPM, USB, WFC, MER, C, AMTD and ETFC. These will obviously be scrutinized for new write-downs and more assets moving to level 3 status. Analysts expect cautious guidance, higher delinquencies, higher level 3 balances and the need to raise more capital. Assets that cannot be valued by normal means because they are not currently trading are moved to level 3 status where the banks assign a value based on what they think they are worth rather than an actual market value. An independent analysis of the financial sector was released on Friday suggesting that up to 200,000 jobs could be cut by year-end due to falling profits.

I included mortgage insurer MGIC Investments (MTG) on the important list after ratings downgrades in the sector this week and potential problems in generating new business. Google reports on Thursday and there are plenty of people who think they could disappoint again given their constant hiring practices. They hired thousands of workers last quarter and continue to hire by the hundreds for their various new projects. This is a big cash drain and with web advertising slowing with the economy Google could be seeing a profit squeeze.

Earnings Calendar

Two weeks ago I wrote a long commentary in the LEAPS newsletter on the impending crisis in the airline sector. Since I wrote that article four airlines have filed bankruptcy. Those are Aloha Airlines, ATA, Skybus and now Frontier. The first three halted flights but Frontier is going to continue flying their normal schedule. Champion Air plans to shutdown and Maxjet Airways went bankrupt in December. Mesa is rumored to be considering bankruptcy. Northwest, Delta and American have announced cutbacks and fare increases. American announced on Friday it was adding another $30 to ticket prices to offset the cost of fuel. This matched the United increase earlier in the week. This was the 11th major fare increase by an airline in 2008. The Merrill Lynch airline analyst said this week that with oil prices at $110 for the rest of 2008 it would add $12 billion to the cost of fuel for those airlines still flying.

FRNT Chart - Daily

The straw that broke Frontier's back was a change in the way First Data was giving them money for credit card purchases of tickets. With three airlines going bankrupt in the last two weeks and halting flights immediately the credit card companies are inundated with charge backs from flyers with worthless tickets. First Data then has to collect the money it advanced the airline for the tickets. If the airline is in bankruptcy they can't get the money back or at least First Data has to wade through bankruptcy court for months to get the refund assuming the larger secured creditors have not already grabbed it. First Data told Frontier that starting on April 11th they would begin withholding a significant portion of the credit card proceeds until the travel was completed. Frontier depends on that cash flow to keep flying and filed bankruptcy to keep First Data from implementing that action. You can bet that all the other smaller airlines are getting the same notices from their credit card processors after last week's string of failures. Mesa could be the next domino to fall but at 67-cents per share there is no play there. AirTran (AAI) dropped -35% on Friday on worries that they would have the same credit card problem as Frontier. AAI quickly issued a press release saying they had no holdbacks at all and were in much better financial shape than Frontier. Greg Greenberg at TheStreet.com along with airline analyst Ted Reed were on TV with a buy call on the airline sector on Wednesday saying they had bottomed and specifically recommending AAI. Good call guys! Other airlines include ALK, AMR, CAL, DAL, JBLU, LCC, LUV, NWA, SKYW, UAUA and XJT.

The FedEx CEO Fred Smith said on Friday there was currently "no growth" in the U.S. economy but it was hard to tell if it had fallen into recession. That is political speak in its purest form. He also said if fuel prices began to decline he was expecting the economy to grow slightly in the second half of the year. UPS lowered its guidance last week due to higher costs and falling volume. My daily UPS delivery had been getting later almost every day for the last two weeks moving from about 2:PM to as late as 5:30. I thought that was strange given the UPS warning about lower volume. I asked the driver on Friday why business was so good in this area given the UPS warning. He said it was NOT good, volume had dropped off considerably and they had been combining routes to take trucks out of service. Now he has twice the route size and half the packages on each one. I would expect UPS to lower guidance even further when they report earnings on Apr-23rd. Under $70 UPS is a short.


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AMD announced their Chief Technology Officer, Phil Hester, resigned and he would not be replaced. He joined AMD in 2005 and was responsible for crafting AMD's technological roadmap over the last three years. I am surprised they did not have him executed given their many mistakes over the last three years. That he is not going to be replaced is an even stranger event.

United Technology reports earnings on Thursday and they are considered a smaller copy of GE. After GE's earnings UTX was quick to issue a press release saying they were comfortable with the quarter. It was an attempt to prevent a guilty by association massacre in UTX stock as GE plummeted.

Another sector that was crushed by the GE earnings miss was the hospital equipment makers like GE. That includes Siemens AG and Phillips Electronics. GE said that sales of equipment like CT scanners to community hospitals dropped 18% in March and that cost them $100 million in profits. The problem came from the lack of funding. These not-for-profit community hospitals sell bonds or auction rate securities to get the money for major purchases. According to one hospital CEO interviewed on CNBC the auction rate securities were rolling over every week at about a 3% annual interest rate in February. As the banking crisis increased and culminated with the Bear Stearns implosion those roll over auctions went to 6%, 9% and even as much as 17-20% before the market locked up completely. Those hospitals can't afford to pay those kinds of rates and they were forced to put upgrade plans on hold until the market returns to normal and that could still be months away. Other companies that make components for this high dollar equipment were hammered with ISRG falling -$20 on the news.

Friday was troubling for me. There were so many cross currents it was tough to decide which were really a problem and which were just noise. First, the unexpected stumble by GE triggered a massive squeeze on those who were long just like the April 1st squeeze crushed those who were short. Whenever the market goes sideways for several days the number of directional positions increases as traders bet on how the stalemate will end. We saw shrinking volume every day for a week leading up to Friday's implosion. The market had been easing off its highs for 3 days and Thursday's opening rebound energized the bulls to some extent. Going long the rebound and putting a stop under Wednesday's lows would have been a common strategy.

Friday's gap down open to a point well below those stops created the first wave of selling. Those with a little higher risk profile probably had stops at 12400. Those without stops would probably have either sold at the open or rushed to put a stop under the opening dip to 12405 in hopes an instant rebound would appear. After 2.5 hours that 12400 level broke at 12:00. That triggered a new wave of stops and just like a row of dominos they fell one by one the rest of the day. Once the cascade starts it rarely ends in a rebound. It was simply a short squeeze in reverse for the bulls.

Volume was minimal at only 6.4 billion shares of which GE totaled more than 366 million. A down day on low volume after a news event would normally be a potential buying opportunity. This time I am not so sure. The miss by GE is troubling on many counts. This shows dramatically how the credit crunch is still a problem. It also shows how the recession is slowing demand. GE is still a great company with something like $52 billion in order backlogs but they still missed. The bright spots that were overlooked in the hysteria were a +23% increase in infrastructure revenue, +12% increase in infrastructure orders, +41% backlog in major equipment and +38% jump in emerging market revenue. GE is still growing at a strong clip and it may have been just a single event, the Bear Stearns failure, that cost them the billion dollars in unfunded deals. It is tough to sell multimillion dollar equipment to people that suddenly can't get funding. That market has relaxed considerably since the Bear Stearns event with the Fed going to extremes to provide liquidity so that should not happen again unless somebody else goes under.

The cut of their full year estimates by as much as -22 cents bothered me initially. After thinking about it all day I believe it was simply a case of under promise and over deliver. Jeff Immelt had just been smacked with the biggest earnings miss in over a decade after affirming guidance only a couple weeks before the quarter end. He had so much egg on his face he could have made omelets for all the analysts on the conference call. He did not want to go through this experience again. Not knowing what the next six weeks of financial earnings will hold or how bad the recession will be he picked a number that was so low GE could make it the rest of the year without breaking a sweat. I could be so far off base it is laughable but that is my assumption and I am sticking with it

Unfortunately even if I am right that may not solve our market problem until mid July when they report again. Now traders are gun shy over next week's earnings. Nobody expected them to be good despite the minimal number of warnings we have seen. As of Wednesday Q1 earnings for the entire S&P were expected to decline by -13.2%. That was 2% worse than three days earlier and -5% worse than ten days before. After the GE news that forecast has probably fallen to a decline of more than -15%. If that was the bottom line I think the market could live with it given the already low expectations.

The GE miss has created new worries that the banks will report some new surprises. It is the financial uncertainty that will be the overriding worry next week. Locked up financial markets create serious uncertainty for earnings and survivability as BSC proved. The financial uncertainty coupled with recession worries could put a cloud over next week's earnings.

Here is another wild card. Three of the last four months have seen a -200 point loss on the Friday before expiration week. I think this is a function of traders being very cautious about expiring option positions and keeping very tight stops heading into expiration week. Funds typically roll positions forward the week before expiration. All of these factors were complicated by the GE miss. Ordinarily I would expect a rebound next week from the event driven drop. I am not so sure this time. I think traders will stay on the sidelines until the big boys report. That would be Intel, IBM, the handful of major financials, Ebay on Wednesday and Google on Thursday. This is probably not a week you want to be long into an earnings cycle.

The Dow hit 12732 on Monday and closed at 12325 on Friday for a range of 407 points. Initial support at 12525 and 12475 was broken on the gap down open on Friday. That makes 12200 the next material support for the Dow and a level we are likely to hit next week. The key will be volume. If it remains extremely light then that 12200 level could hold. However, the chart looks bearish given the triple failure at resistance over the last three months. That makes me question the current decline as more of a longer-term failure than just a GE event. GE may have triggered additional selling and accelerated the decline but it is also possible that decline was already in the cards.

Dow Chart - Daily

Nasdaq Chart - Daily

The Nasdaq also performed an almost perfect failure at strong resistance at 2400 and declined to close under 2300 on Friday. The almost perfect failure on the chart suggests there is no conviction that tech stocks will post decent earnings. Nasdaq 2275 is the next support level and that is less than 20 points away from Friday's close. I don't have a lot of confidence it will hold until Intel's earnings gives a direction to techs.

We have been keying on 1320 on the S&P as our long/short indicator. I have been suggesting buying dips back to 1320 and that has not changed. If we are going to rebound into earnings that is where the bounce should occur. If support at 1320 breaks I think we are going back to 1270 or lower. If you have to be in the market next week I would be short under 1320 and buy dips to that level.

S&P-500 Chart - Daily

With Consumer Sentiment at 26-year lows we are definitely in a consumer slowdown. Consumers simply don't spend when sentiment is that low. That will take several months to correct. As I said above I fear the earnings from techs and financials next week. If GE, with a spotless balance sheet, can't get transactions financed then these banks with significant counterparty risk should have trouble as well. The Fed's various programs to increase liquidity may have solved the problem but we need to see the earnings to be sure. It may have been just the gridlock in the 2-weeks following Bear Stearns that killed GE but we just don't know today. Intel already lowered estimates and IBM has been very quiet. The risk of being in the market is extremely high.

This earnings volatility will produce some excellent lottery plays or strangles on earnings candidates. I call them lottery plays because they will either win big if you guess right or lose it all if you guess wrong. Ebay would be one possible play and Google another. Both could move 10% on an earnings surprise. Guessing which way is the key. Personally I would short them both but that is only a gut feeling and not a technical or fundamental recommendation. Ebay spammed so many "special offers" to users in March it appeared they were desperate to get auctions. If they were unsuccessful then earnings could be ugly. If they were successful then a positive surprise would evaporate your put premiums in an instant. I love earnings plays in expiration week but you have to realize the risk is 100% when using April options. Good luck!

Jim Brown

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays

New Long Plays

Terra Ind. - TRA - close: 44.80 chg: +2.50 stop: 39.74

Company Description:
Terra Industries (TRA) is a leading international producer of nitrogen products. The company employs approximately 870 people in North America and is headquartered in Sioux City, Iowa. (source: company press release or website)

Why We Like It:
TRA soared on Friday out performing the S&P 500 by a wide margin. We didn't see any news or catalyst for the rally and suspect it could just be a short squeeze on the technical breakout over the 50-dma. We're bullish on the sector and TRA is definitely showing relative strength. We are suggesting readers buy a dip in the $42.50-42.00 zone. If triggered our target is the $49.00-50.00 range. FYI: The latest data puts short interest at more than 20% of the 88.8 million-share float. We do not want to hold over the late April earnings report. This industry has seen a lot of volatility so watch your stops carefully!

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume: 4.1 million

New Short Plays

Financial Sector SPDR - XLF - close: 25.13 chg: -0.49 stop: 26.51

Company Description:
This is the Financial Select Sector SPDR (spiders), which is an exchange traded fund (ETF) focused on banks, insurance, real estate, and diversified financials.

Why We Like It:
Wall Street will see a parade of earnings this week and many of them will be from the financial sector. We suspect that the news will be worse than investors think and thus the group could retest its lows. We're suggesting shorts now with the XLF under $26.00. We'll try and limit our risk with a stop loss at $26.51. Aggressive traders could put their stop above $27.00 and more conservative traders put their stop closer to $26.00. We're setting two targets. Our first target is the $22.50 mark. Our second target is the $21.00 mark.

Picked on April 13 at $25.13
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 139 million

Play Updates

Updates On Latest Picks

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Long Play Updates

DuPont - DD - close: 49.33 chg: -0.31 stop: 47.45

You could say DD displayed relative strength on Friday. The S&P 500 lost 2% while shares of DD only slipped 0.6%. Investors are still buying the dips and DD looks like it could breakout past the $50.00 mark if only the market would cooperate. Our target is the $52.50-54.00 zone. We are inching up our stop loss to $47.74. We don't want to hold over the late April earnings report. FYI: The Point & Figure chart has a bullish triple-top breakout buy signal and a $63 target.

Picked on April 02 at $48.84
Change since picked: + 0.49
Earnings Date 04/22/08 (unconfirmed)
Average Daily Volume: 7.2 million


Energen - EGN - close: 66.50 chg: -0.77 stop: 63.45 *new*

After three weeks of gains EGN held up pretty well on Friday and only suffered a 1.1% decline. A dip near $65.00 and its 10-dma could be used as a new entry point for bullish positions. Broken resistance near $64.00 should be new support so we're raising our stop loss to $63.45. Our short-term target is the $69.50-70.00 zone. If we have time we'll consider a secondary, more aggressive target above $70. The P&F chart is bullish and the upside target just jumped from $77 to $80. We do not want to hold over the late April earnings report.

Picked on April 07 at $64.65 *triggered
Change since picked: + 1.85
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 657 thousand


Gerdau S.A. - GGB - close: 35.94 chg: -0.90 stop: 34.64

GGB is a new bullish candidate from our Thursday night newsletter. Iron and steel related stocks have been some of the market's best performers recently. We are still suggesting new positions at current levels or on a dip near $35.00 and its 10-dma. Our first target is the $39.75-40.00 range. We'll place a secondary, higher-risk target at $42.00. The P&F chart is bullish with a $57 target. We do not want to hold over the early May earnings report (unconfirmed).

Picked on April 10 at $36.84
Change since picked: - 0.90
Earnings Date 05/03/08 (unconfirmed)
Average Daily Volume: 3.1 million


Corning Inc. - GLW - close: 24.86 chg: -0.51 stop: 23.90 *new*

GLW paced the market's move lower and broke down under its rising 10-dma. This week's performance definitely looks bearish. At this point we would look for a convincing bounce in the $24.50-24.00 zone before considering new positions. We'll try and reduce our risk by raising the stop loss to $23.90. Shares of GLW should find support near $24.00, which should be bolstered by its 50-dma and 200-dma. Odds are still pretty good that GLW will benefit as consumers spend their tax rebates and stimulus checks on flat panel items but this boost could take months to play out. Our first target is the $27.00 level. Our second target is the $29.00 level. We do not want to hold over the late April earnings report. FYI: Last week's move over $26.00 has produced a brand new Point & Figure chart buy signal with a $39 target.

Picked on March 25 at $25.14
Change since picked: - 0.28
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 14.7 million


Hormel Foods - HRL - close: 40.97 change: -0.87 stop: 40.65

HRL doesn't move very fast so Friday's 2% loss looks a little overdone. Investors were trying to lock in gains during the market's sell-off. Volume spiked to above average levels but HRL managed to rebound off its 50-dma. This is probably a new bullish entry point to buy the dip but you'll want to use our stop loss at $40.65 or just under Friday's low at $40.73 (not much difference really). We did note that the MACD on the daily chart has now produced a new sell signal. Plus, we want to point out that this week's performance has painted a very clear bearish engulfing candlestick (reversal) pattern on the weekly chart. That's definitely a warning sign for the bulls! Readers may want to wait for a new rally past $41.50 again before considering long positions. Our target is the $45.75-46.00 range. We anticipate holding this stock on the newsletter for about six to eight weeks. The Point & Figure chart is bullish with a $64 target. FYI: HRL declared a quarterly cash dividend of 18.5 cents per share payable on May 15, 2008 to shareholders of record on April 19th. HRL has been paying quarterly dividends for almost 80 years.

Picked on March 31 at $41.83 *triggered/gap open
Change since picked: - 0.86
Earnings Date 05/22/08 (unconfirmed)
Average Daily Volume: 513 thousand


iShares Telecom - IYZ - close: 23.36 chg: -0.32 stop: 22.89

The close under $23.50 is bearish for IYZ. There is still potential support at $23.00 but we're definitely turning more defensive here. Wait for a clear bounce from the $23.00 level before considering new positions. More conservative traders might just want to abandon ship right here. We have two targets. Our 1st target is the $25.85-26.00 range. Our second target is the $27.85-28.00 zone.

Picked on March 25 at $23.50 *triggered
Change since picked: - 0.14
Earnings Date 00/00/00
Average Daily Volume: 429 thousand


Coal ETF - KOL - close: 41.19 change: -0.81 stop: 38.69 *new*

The coal stocks ETF paced the market's move lower with a 1.9% decline. We're going to keep our suggested entry point in the $40.00-39.50 zone but more patient or more conservative traders might want to wait for a dip into the $39.50-39.00 zone instead. We're upping our stop loss to $38.85 to reduce our risk but it raises the chance that we'll be stopped out on an intraday spike. If triggered at $40.00 our target is the $44.75-45.00 range.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 240 thousand


Agribusiness ETF - MOO - close: 58.90 chg: +0.03 stop: 54.75 *new*

The MOO continues to show relative strength but we don't want to chase it here. The $60.00 level looks like resistance. We are sticking with our plan and suggesting readers wait for a dip into the $56.00-55.00 zone. However, we are raising our stop loss to $54.75. If triggered our target is the $59.85-60.00 range. The Point & Figure chart is bullish with a $72 target.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 1.0 million


Nintendo Co - NTDOY - close: 67.15 chg: -1.35 stop: 63.95

NTDOY might be in for a rough day on Monday. Asian markets are likely to trade lower in reaction to the U.S. decline on Friday. Shares of NTDOY will then gap open in reaction to how its stock traded in Japan. We would watch for a dip or bounce near $65.00 as a potential entry point, which should still be inline with the rising trend of higher lows. More conservative traders might want to consider upping their stop loss closer to the $65.00 level. Our target is the $74.00-75.00 zone. Keep in mind that NTDOY is traded as an ADR here in the United States and shares will gap open up or down every day as they adjust to trading overseas. FYI: Some quote services might ask you to use the symbol NTDOY.PK to pull up data on NTDOY.

Picked on April 07 at $68.50 *triggered/gap open
Change since picked: - 1.35
Earnings Date 00/00/08 (unconfirmed)
Average Daily Volume: 312 thousand


Teleflex Inc. - TFX - close: 50.00 chg: -0.54 stop: 49.49

TFX held up pretty well during the Friday weakness. Traders bought the dip near $50.00 and shares maintained their short-term trend of higher lows. Aggressive traders might be tempted to buy this dip and just use a tight stop (say 49.59) but we are sticking to our plan. We are suggesting a trigger to go long at $51.05. Our short-term target is the $54.75-55.00 range, which should intersect with the stock's longer-term trendline of lower highs. The long-term trend is still bearish. We're just trying to play the oversold bounce. We do not want to hold over the late April earnings report.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/30/08 (unconfirmed)
Average Daily Volume: 319 thousand

Short Play Updates

Cognizant Tech - CTSH - cls: 26.53 chg: -1.46 stop: 30.26

CTSH is still showing relative weakness. The stock lost 5.2% on Friday and closed at its low for the day. That is usually a bearish sign for the next session's open. CTSH is quickly approaching our first target in the $26.25-26.00 zone. More conservative traders may want to tighten their stops. We would expect some sort of oversold bounce near $26.00. Our second, more aggressive target is the $24.25-24.00 range. The P&F chart is bearish with an $18 target. More aggressive traders may want to aim for the $22.00-20.00 region.

Picked on March 30 at $29.18
Change since picked: - 2.65
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume: 5.1 million


Dell Inc. - DELL - close: 18.50 chg: -0.27 stop: 19.55

DELL dipped to a new multi-year low with the morning trade under $18.50. The trend is clearly bearish and this past week's breakdown from its trading range is forecasting a significant leg lower. We're suggesting a stop loss at $19.55 but you could try a stop closer to $19.25 or $19.05. The P&F chart already points to a $7.00 target and the move under $18.50 has produced a new triple-bottom breakdown sell signal on the P&F chart. We're going to be aggressive and list two targets. Our first target is the $16.00 mark. Our second target is the $13.50 mark

Picked on April 10 at $18.77
Change since picked: - 0.27
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume: 29.3 million


Freddie Mac - FRE - close: 23.49 chg: -0.42 stop: 27.55 *new*

The sell-off in financials and FRE continues. Shares lost another 1.7% on Friday and closed near their lows. We are adjusting the stop to $27.55 but this is still a wide, aggressive stop loss. More conservative traders may want to tighten theirs. This week's earnings from the financial sector could have a big impact on shares of FRE. Our first target is the $20.50-20.00 zone.

Picked on April 09 at $24.90 *triggered
Change since picked: - 1.41
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume: 20.8 million


Longs Drug Stores - LDG - cls: 38.35 chg: +0.70 stop: 40.16 *new*

The news reports on Friday are suggesting that the Friday morning spike in LDG was fueled by the company's better than expected March sales figures (we mentioned them on Thursday). What we want to point out is that the rally ran out of steam under $40.00 and produced a very clear failed rally pattern. We're inching our stop loss down to $40.16. LDG has already hit our target at $38.25 and Friday's trading looks like a new entry point for shorts. Our second target is the $35.25-35.00 zone. The P&F chart is bearish with a $29.00 target.

Picked on March 30 at $41.30 /1st target hit 38.25
Change since picked: - 2.95
Earnings Date 05/15/08 (unconfirmed)
Average Daily Volume: 596 thousand

Closed Long Plays

Honeywell - HON - close: 56.99 chg: -1.81 stop: 55.95

We are hitting the eject button on this bullish play. Rival GE reported earnings on Friday and the results were worse than expected. Shares of HON plunged 3% in a guilty by association move. The stock could trend lower as investors bail ahead of HON's earnings on the 18th. We were aiming for the $59.90-60.00 level but shares only got to $59.31 on Thursday.

Picked on March 25 at $56.00
Change since picked: + 0.99
Earnings Date 04/18/08 (confirmed)
Average Daily Volume: 6.7 million

Closed Short Plays


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


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