Option Investor

Daily Newsletter, Saturday, 08/16/2008

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Table of Contents

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

Market Wrap

Triple Digit Expiration

Market Wrap

The Dow only gained +44 points on Friday but it traded in a triple digit range every day last week. In fact you have to go back to June 23rd to find a day where the Dow did not trade in a triple digit range. The volatility has been extreme but for the last week there was no direction. The only real trend in the markets is the strength in the Russell and Nasdaq. I highlighted them in the graphic above as the only major indexes with four consecutive weeks of gains.

Wilshire 5000 Composite Chart - Daily

Friday had a heavy calendar of economic reports but they were all the equivalent of a mailbox full of junk mail. None had any real importance for the market. The NY Empire State Manufacturing moved back into positive territory for the first time in four weeks. The headline number was an anemic +2.8 but still the highest reading since January. That is a good sign regardless of size of the gain. The prior month was -4.9 making that a +7.7 point gain. However, shipments turned fractionally negative at -0.9 from +13.5 in July. New orders also turned negative at -2.2 from +8.3 in July. There was still plenty of weakness in the internals so I would not expect the headline trend to improve much.

July Industrial Production rose a better than expected +0.2%. Capacity utilization rose to 79.9% and the highest level in four months. Manufacturing production rose +0.4% and mining +0.9% but utilities fell -1.9% dragging the headline number lower. The cooler weather in many parts of the country was responsible for the utility decline. Business equipment production rose +0.8% and the fastest rate of growth since September. Computer and peripheral equipment rose +0.6% and just slightly slower than the +0.7% in June. Despite the gains overall production is still running at recessionary levels.

Friday's Economic Reports Table

August Consumer Sentiment rose for the second month to 61.7 but remains very weak. The current conditions component fell from 73.1 to 69.3 and only 2 points above the June low. The six-month expectations rose to 56.8 from 53.5. Lower gasoline prices provided a burst of improved spirits but the trend quickly faded. This suggests the back to school shopping season is going to continue to be dreary for retailers. Remember, the June low of 56.4 was the lowest level since 1980 and clearly indicates a recession mindset for consumers.

Consumer Sentiment Chart

Internet E-Commerce Sales rose to $34.6 billion in Q2 and the highest level ever. After Q1 sales went nearly dormant at $33.6 this was a solid improvement. E-tailers report that fear of identity theft is growing and concerns over the safety of online shopping are slowing sales. We have seen some very good phishing emails lately that were nearly indistinguishable from real E-tailer advertising complete with authentic looking websites. This makes it even more important that you don't open any unsolicited emails even if they claim to be from major sites like Ebay or Amazon. If you do open them NEVER click on any link. Go to the website by typing the name of the store in your browser. Consider using PayPal as your online payment plan. Retailers never get your credit card info from PayPal and PayPal will not fund scammers. PayPal also has a feature where they can assign a single use MasterCard number to an online purchase for merchants that don't take PayPal directly. I use my Bank America Visa account the same way with single use numbers available on the BAC website.


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On a side note CNN was the victim of a clever phishing program over the last two weeks. Unsolicited mails started appearing with random news headlines. The emails claimed to be from your CNN alert settings. To change your settings or unsubscribe from future alerts click the link below. Of course everyone was hostile at the new spam source and immediately clicked on the link to unsubscribe. The link took you to a page where you had to re-register to access your settings if you could not remember your password. Since it was a bogus site there was no password to remember and everyone had to reregister to obtain their forgotten password. A person filling in their email, name, address and info to get a new password to gain access to their settings just gave the phishers everything they needed to impersonate your identity. The website was very convincing and proved the scammers are getting smarter every day. Within a week a copycat phishing scheme appeared for MSNBC.com. Remember, NEVER click on an unsolicited email link.

CNN Phishing Email

Next week's economic calendar is almost as bland as last week with only the PPI and Philly Fed Survey as highlights. The PPI is expected to show a decline in prices/inflation due mostly to the decline in energy prices. The higher dollar has also pushed commodity prices lower so producer costs over the next 90 days should decline. This week's report may be too early in the cycle for a major dip in prices but it is coming.

The Philly Fed Survey is expected to continue in negative territory but the last three months have seen a minor gain to -16.3 from April's low of -24.9. The improvement is expected to continue but only slightly.

Economic Calendar

The US Dollar continued its monster run to close at 77.18 on the dollar index. The rebound in the U.S. GDP and the perception that the worst is over for the U.S. has been responsible for the move. Oil and commodities in general have been crushed by the dollar rebound. There is also a growing perception that Europe and Asia are accelerating into the economic weakness while the U.S. is slowly recovering. That makes the dollar the investment vehicle of choice rather than the Euro. Over the last two weeks the dollar got another boost from the Russian attack in Georgia. Every time a conflict erupts overseas investors flee those currencies to the safety of the dollar. To the extent that U.S. inflation is slowing that also helps the dollar. The key is going to be that strong resistance at 77.75 on the dollar index. Many analysts expect that to be the end of the current rally followed by weeks of consolidation if not outright decline. That would resurrect the commodity sectors for a brief rebound while the dollar rested prior to its next move.

U.S. Dollar Index Chart

While I am on the topic of a potential halt to the dollar's rise I am going to diverge into gold for a paragraph. I heard two interviews this week on the potential for a rebound in gold. I always listen to the gold bugs with a partially deaf ear because they tend to always believe another $100 move is just around the corner. Both of these guys sounded reasonable and credible. The talking points were potential profit taking in the dollar, a continued growth in global demand, growing economic weakness overseas, the seasonal fall buying cycle and gold at strong support levels. I will be the first to tell you I am not a fan of trading gold. The moves never seem to pan out as the "experts" predict and they always have a hundred reasons why it did not happen. Now that I have painted myself into a corner I will tell you I tended to believe them this week. I must be getting soft in my old age. They actually made a reasonable case for getting long so I am going to test that next week. I would also warn that Goldman recommended selling gold this week as the end of the inflation trade. If inflation is going to decline then there is a good chance gold will as well. Fortunately the chart gives us a clear entry and exit setup. Long over $76 and short a break under $75. That gives us a trade regardless of direction. We don't really care which way it goes just as long as it picks a direction and sticks with it.

Chart of GLD - Weekly

The tech sector and the small caps continue to lead the markets higher. One of the reasons for the tech rally is the growing demand for chips. International Data Corp announced on Friday that worldwide chip shipments grew +3.1% in the second quarter from the first quarter and +16 increase from Q2-07. Analysts credited the strong demand for notebooks and a very aggressive push by Intel in PC chips. Analyst Shane Rau said Intel's processor shipments drove the growth with a 4.3% growth in processors for the quarter and 20.8% year over year. He also said aggressive pricing by Intel in the middle to lower end of the market led market revenue to decline -4.5% sequentially. Intel accounted for more than 80% of the processor market.

The two companies going counter to the trend are Texas Instruments (TXN) and SanDisk (SNDK). TXN has seen its market share erode as Nokia started using multiple vendors for their chips rather than just TXN. SanDisk is tanking because of an extreme glut of flash memory chips. When you can buy 8GB USB flash drives for under $10 you know there is a glut on the market. Hopefully the new flash memory replacement drives for laptops will divert some of that manufacturing capacity away from things like storage cards for cameras and USB flash drives. The low or even negative margin in some of those markets is already doing a job on the marginal producers.

The SOX is butting its head on the 200-day and as you can see by this chart the 200-day rules the SOX. This is a picture perfect example of respect for the 200.

Retail sales for July declined by -0.1% despite the tax rebates, $4 gasoline and $180 billion in aircraft orders. This has led to a list of earnings misses by several big name retailers. Abercrombie and Fitch said profits and sales fell in Q2 and warned that sales would be below analyst estimates for the rest of the year. Where stores like American Eagle and Aeropostale have been focusing on sales to boost revenue and reduce inventories ANF said on Friday the company is taking a longer term view. CEO Mike Jefferies said, "We do not compete on price or promotion regardless of macroeconomic conditions. We will not sacrifice our inventory investment and growth plan for short term results." I guess that is why there were no shoppers in my local ANF store last week. I was at the mall again on Friday and walked by to see if conditions had changed. The mall was packed but there were only two shoppers in ANF. Abercrombie expects same store sales to drop -7% in the fall quarter. I guess if they want to remain stuck on themselves while the rest of the retailers fight for their market share that is their prerogative. That is probably why their stock has fallen from $86 to $50.

Abercrombie Chart - Daily

SunPower (SPWR) shares spiked +14 on Friday after announcing a purchase by PG&E of 800 megawatts of Sunpower and OptiSolar. The company said that was enough energy to power 239,000 homes each year. SunPower also said it was equivalent to a years production by SunPower. The two plants when completed will generate more energy than all the PV solar-electric systems panels installed in the U.S. in 2007. That was 473 megawatts. Privately held OptiSolar will complete their 550-megawatt Topaz Solar Farm project in 2011 and SunPower will deliver their 250-megawatt project to PG&E in 2010. Both are contingent on the renewal of the expiring tax credit by congress.

Wachovia Bank (WB) joined the crowd and announced a settlement on the auction rate security issue. They agreed to buy back $8.5 billion in ARS and pay $50 million in fines. Wachovia is the 5th bank to agree to settle. The others were Citi, UBS, MS and JPM. Merrill is under fire and NY AG Andrew Cuomo said he sent a letter to Merrill notifying them he will sue Merrill next week if they don't settle. Merrill expressed surprise that it received a letter saying they thought talks were continuing. Evidently Merrill was not reading the AG as well as they thought. Late Friday the AG office said they were broadening the probe to include Fidelity and Schwab as sellers of the debt and 25 other companies. I feel a Spitzer clone maturing here.

September Crude Futures Chart - Daily

Oil prices fell to $111.34 intraday on expiration pressures. September crude options expired this week and crude futures expire next Wednesday. Short covering at the close pushed prices back to $113.77. Late Friday tropical storm Fay formed in the Caribbean and is tracking South of Cuba with an expected turn north to move up the western coast of Florida. As long as this track holds it will poise no danger to the gulf oil patch. However, not all forecasters are in agreement with this prediction. Several were posting diverging opinions that Fay could continue westward after passing Cuba and turn north right through the middle of the oil patch and possibly hit New Orleans again. It is not surprising some traders decided to close short positions over the weekend.

Track of Tropical Storm Fay

August option expiration went off without any surprises with most high profile stocks pinned to their critical strikes just like the market makers wanted. This kept the Nasdaq pinned to 2450 and the markets in check for the last two days. Volume on Friday was the lightest since the day before July 4th at 6.7 billion shares. The markets ended the week mixed but with the uptrend still intact.

The Dow moved over the resistance lows from Jan/Mar but then fell back to support on Wednesday. Position squaring into expiration put the Dow right back at prior resistance at 11650. Just based on the Dow chart I would be borderline bearish given its reactivity to the financials. However, with the recent flurry of ARS settlements there are quite a few analysts thinking we are suddenly closer to a bottom in the financials than previously thought. If the financials could break out of their current doldrums the Dow and S&P would have a chance. Since the Dow is not the leader of this rebound we need to concentrate more on the techs for market direction rather than the Dow.

Dow Chart - 120 min

XLF Chart - Daily

S&P-500 Chart - 120 Min

The Nasdaq remains comfortably over support at 2350 by +100 points. Now that August options have expired there will not be any artificial support or resistance by the market makers trying to pin prices at specific strikes. The next major stepping stone for tech stocks will be Hewlett-Packard's earnings on Tuesday. HPQ may not be a Nasdaq stock but their earnings guidance will definitely provide direction for techs. The Nasdaq has risen to long-term downtrend resistance at 2450 but the shorter-term chart looks much more bullish. The Nasdaq has rebounded +13% from the July lows with most of the acceleration in the prior week. I believe it was consolidation from those gains and the OpEx that held it a 2450 last week. Note on the 30-min chart how the Nasdaq used prior resistance as support on Friday.

Nasdaq Chart - Daily

Nasdaq Chart - 30 min

The Russell is the hero of the group with a +6% gain for August. The Russell touched June's resistance high on Friday before sliding back on OpEx congestion. The Russell has been rallying on the strength of tech and the strong dollar. I know that sounds crazy but historically the small caps do well when the dollar is rising. The Russell needs to move over that June high at 763 to attract new buyers. The next hurdle will be 800 and the December resistance high. Initial support has risen to 740.

Russell 2000 Chart - Daily

For next week the support levels to watch would be Nasdaq 2400 as light support and 2350 as solid support. I would be surprised to see 2400 break unless HPQ severely disappoints. The support levels on the Russell would be 740 followed by 720. I would look to buy dips to 2350/720 but hope support at 2400/740 holds. The corresponding levels on the Dow and S&P are much more vague and I recommend ignoring those indexes to focus on the Nasdaq/Russell as the leaders for market direction. We are approaching a critical period for the market as we head towards September. So far there has been no indications of a normal third quarter dip but in reality the market hardly ever telegraphs its plan to crash. With the auction rate security problem being addressed you would think the market would see that as a positive. However, you never know when a major landmine is going to be touched. I doubt it is with Merrill but they are on the hot seat for next week. Hopefully they will announce a settlement on Monday and get it behind them. That would leave the market to focus on the Hewlett-Packard earnings on Tuesday. I am still cautiously bullish as long as those lower support levels are not broken. I am not ready to back up the truck but I feel the urge beginning to grow. I would rather buy a Q3 dip but until one presents itself we have to trade what the market gives us and a continued rally would not be a bad gift to trade.

Jim Brown

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
AMR None

New Long Plays

Company Description:

On its company's website, AMR Corporation describes itself as the largest airline in the world. AMR Corporation is the parent company of American Airlines, Inc. and American Eagle Airlines, Inc. From the big skies of Fort Worth, Texas, AMR Corporation oversees a number of facilities and businesses under the corporate umbrella. The website credits American Airlines with contributing more than $150 billion per year to the U.S. economy. Together with its regional affiliates, it flies to 250 cities in more than 40 countries, with a U.S. market share of 17.8 percent in 2006. About 35 percent of its flying was international in 2006. (Source: Company Website)

Why We Like It:

Everyone hates the airlines, right? Not JP Morgan. On August 12, JP Morgan upgraded AMR to an overweight rating from an underweight one. Don't worry: we didn't base this recommendation on an analyst's upgrade and we don't intend to buy AMR at the current level. This trade will be based purely on technicals, and therefore should be considered an aggressive trade, particularly as we move into a part of the year when equities often hit their lowest levels.

Three weeks ago, AMR broke above a long-term descending trendline on its weekly chart, with that trendline in place since early 2007. It has since charged up to test the simple and exponential 200-day moving averages, with both grouped between $11.00 and $12.00. As it's challenged these moving averages this week, daily candles have shown upper shadows and other signs that there's been some selling into the rally. That's fine. We're waiting for a pullback to $8.40-8.60 to trigger our trade. The 50 percent retracement of its climb off its July low lies at about $8.64. Other potential support, including the simple 30-day moving average is nearby, at $8.40 in the case of the 30-sma. If triggered we will set the stop at $7.20, giving AMR room to pull back to the 61.8 percent retracement of the rally off the July low, but no more room than that. We really don't want to follow AMR if it drops all the way back to $6.00, where it will again retest the top of the channel in which it declined for so long. Our first target will be $14.90, at which point we strongly suggest that readers take partial profits. The second will be $18.90. Expect turbulence if the trade is triggered and AMR rises again toward $10-13, where it has been encountering turbulence over the last two weeks. For the protection of readers entering a risky long trade on a risky stock, we suggest that, if triggered, readers consider collaring the trade. This would be accomplished by selling one long call contract for each 100 shares of stock purchased and using the proceeds to pay most of the premium for a put, one contract per each 100 shares. For example, if readers had bought 100 shares of AMR at Friday's close for $11.74, they could then have sold one contract of the SEP $15.00 call at the bid of $0.55 and used those proceeds to mostly pay for the purchase of one SEP $9.00 put at the ask of $0.70, or alternately, paid for about half of the purchase of the SEP $10.00 put at an ask of $1.05.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/15/2008 (unconfirmed)
Average Daily Volume: 24.6 million

New Short Plays

None today.

Play Updates

Updates On Latest Picks

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Long Play Updates

Axsys Tech. - AXYS - cls: 73.47 change: -1.11 stop: 71.95

AXYS announced big news this week, but that big news wasn't reflected in the daily or weekly charts. Monday, AXYS announced that the U.S. Army's Thermal Weapon Sight II (TWS) Bridge program had awarded it an infrared lens order worth $9.7 million. By Friday, Zacks had added AXYS to its strong-buy list. None of this supposedly good news impacted AXYS's price as it churned just above and below its simple 10-sma. By Thursday that churning had dropped it within a few cents of our stop. The shape of daily and weekly candles concern us, suggesting that readers be alert to the possibility of our stop being hit, but AXYS gradually climbs along with the slightly rising 10-sma, and the candles illustrate indecision and do not prove that a drop is coming. Our stop, although a tight one for a stock currently showing some volatility, appears well placed to take readers out of this long play if AXYS's hesitation produces a pullback instead of a move higher. Through the first half of 2008, AXYS tended to bounce off its 30-sma, and this week's candle presents the possibility that it might either trade sideways while the 30-sma plays catch up or even retreat to that moving average. Today's close back above the 10-sma was, however, encouraging. Our first target is $79.95. Our second target is $84.00. As a review, this week's move over $76.00 has produced a new triple-top breakout buy signal on the Point & Figure chart, and the most recent data available listed short interest at 8.8% of the small 9.1 million-share float.

Picked on August 12 at $75.82
Change since picked: - 2.35
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 207 thousand


Cal-Maine Foods - CALM - close: 45.83 change: +1.01 stop: 41.30*new*

This week, CALM garnered attention from TheStreet.com, CNBC and Motley Fool, and the attention of new buyers benefited our trade. The first profit target was hit on Thursday. By Friday, CALM had added to its gains, but in doing so, it hit the top of a long-term rising price channel seen on its weekly chart, pulling back by the end of the day. What we want to see is for CALM to break out of that channel or else keep rising along with the top of the channel. However, the possibility of either prolonged sideways consolidation or a pullback before another charge higher must be considered. We strongly urge readers who did not take partial profits at the first profit target to consider doing so now. We're raising our stop to $41.30, just below the 8/08 low and well below the simple 10-sma at $42.95. We would like to move it closer to the rising 10-sma, but CALM can be volatile with big down days produced, too, during the climb off the summer low. We don't want to get stopped out just before it zooms higher again. We're not suggesting new positions at this time. As noted earlier, our first target of $44.90 was hit this week. Our second target is $49.00. The P&F chart is bullish with a $56 target. CALM has HUGE short interest. The most recent data listed short interest at almost 92% of the 14.2 million-share float. A new high could spark another short squeeze.

Picked on August 04 at $40.75
Change since picked: + 5.08
Earnings Date 07/28/08 (confirmed)
Average Daily Volume: 1.0 million


Esterline Tech. - ESL - close: 53.58 chg: +0.38 stop: 49.90

No news was good news for ESL this week. After dipping to its simple 200-dma Tuesday and Wednesday, providing a new entry for readers, ESL zoomed to a $53.94 high Friday before pulling back. As we noted in last night's newsletter, however, with the former resistance at that 200-sma and historical resistance near $52 behind us, ESL's next hurdle was the top of its consolidation zone from June, at $53.84. ESL indeed found that next hurdle difficult on Friday, pulling back off that high on Friday. Don't be surprised if ESL trades sideways for a week or two, perhaps even churning between the simple 200-sma at $51.34 and resistance near $54.00. Although the upside target has not been met, conservative traders might consider whether they want to use bounces to lock in at least partial profits. We are aiming for the $57.00-60.00 zone, but this was intended as a short-term, two-week play with an exit before the August 28 earnings report and we don't want to see prices consolidate for a week or two. We know that our target is aggressive given our time frame but the latest data put short interest at more than 9% of the small 29 million-share float. The stock could see a short squeeze ahead of earnings. We would like to raise the stop to just under the 7/24 high but that doesn't give the trade enough room to work yet, especially as the last consolidation zone near this level, seen in early June, had a low of $50.85. Conservative traders who are using bounces to lock in partial profits might consider raising their stops to just below that 6/18 low of $50.85.

Picked on August 12 at $52.30
Change since picked: + 1.28
Earnings Date 08/28/08 (confirmed)
Average Daily Volume: 352 thousand


Graham Corp. - GHM - cls: 100.87 chg: + -6.10 stop: 99.95

Although GHM received some positive buzz this week, price action had begun narrowing into a rising wedge shape by Thursday instead breaking out in a more bullish pattern. We had warned that this was an aggressive, higher-risk trade, but by Thursday were warning that the less aggressive of the aggressive consider tightening their stops. However, for most aggressive traders, the $99.95 level still appears to be the most appropriate level for a stop as it allowed GHM to come down a retest the top of a rising price channel in which it was formerly contained, to see if the former resistance now holds as support. GHM came within four cents of that stop. The weekly candle was doji, presenting the second week in a row of indecision. Since the spring, GHM has resolved such indecision by another bounce, and that's what we hope to see this time, too. As noted earlier in the week, GHM remains a strong candidate for a short squeeze. This stock has an extremely small float of just 4.5 million shares. The short interest is over 10% of the float. Our target is $114.50.

Picked on August 12 at $106.52
Change since picked: - 4.65
Earnings Date 10/27/08 (unconfirmed)
Average Daily Volume: 239 thousand


Harley-Davidson - HOG - close: 42.56 chg: +1.21 stop: 39.45

HOG was another play in which prices came precariously close to our stop this week before rebounding. In HOG's case, that happened Wednesday and Thursday. By the close Thursday, HOG had bounced from its converging simple 200-day and 10-day moving averages. By Friday, it bounced back above its exponential 200-day moving average. On the daily chart, the setup looks bullish, with a nice 200-sma and 10-sma test, as well as a test of the trendline off the July low, and a bounce from that support. The weekly chart shows a doji at resistance, but a new high above this week's should get more going to the upside again. Previously we outlined our concerns about the struggles HOG is facing with a slowing consumer and tighter lending, but according to The Motley Fool, HOG is "enjoying significant investor support." We would like for a bit more of that support to kick in and send it higher still. We are leaving our stop at $39.45 for now as that's just below the rising trendline off the July low and just below the simple 200-sma. That stop certainly worked for us this week. Our target remains the $47.50-50.00 zone, and we suggest that traders begin to lock in profits as the lower edge of that target zone is reached. The latest data lists short interest at 12% of HOG's 232 million-share float. The P&F chart is bullish with a new buy signal.

Picked on August 11 at $42.55
Change since picked: + 0.01
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume: 2.8 million


Juniper Networks - JNPR - close: 26.97 chg: -0.05 stop: 25.99

On CNBC's FAST MONEY, Pete Najarian covered JNPR as a buy in a segment titled "Your First Move for Friday, August 15." Somebody listened. JNPR popped to an early high of $27.65, just high enough for that first move to trigger our $27.55 entry. Price was soon to succumb to the weight of the 200-sma that it had just popped through, however, producing a bearish candle on the daily chart. JNPR did maintain a close near that $27.00 level and MACD turned up with the move, so the possibility exists that the daily candle suggests nothing more than a needed day or two to consolidate near $27.00 or, perhaps, a pullback to the simple 10-day moving average before it charges higher gain. We do not see any changes from our prior comments on JNPR now that the trade is triggered. We are listing two targets. Our first target is $29.45, just below the 5/02 swing high of $29.49. Our second target is $32.50. As always, we suggest you take some money off the table at the first target and maybe even as it's closely approached, in case selling comes in just ahead of that 5/02 swing high. We are starting with a stop loss at $25.99. That is not the best risk-reward ratio for a stop loss but JNPR can be somewhat volatile. You may want to use a tighter stop loss, but this one is near the bottom of a best-fit rising trendline off the July low and also not far below the simple 10-day moving average and exponential 200-day moving average, both near $26.23.

Picked on August 15 at $27.55
Change since picked: - 0.58
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 15.8 million


Monster Worldwide - MNST - cls: 20.32 chg: -0.09 stop: 17.85

On CNBC Friday, David Katz of Matrix Asset Advisors said he liked MNST, but by the day's end, MNST was little changed in price. Wednesday, we had suggested that aggressive traders might want to buy MNST's bounce, and a further opportunity was offered Thursday with a drop to $19.61. Then MNST bounced. We suggested a tighter stop if you did buy the dip, with one possibility being a stop under Wednesday's low or a stop under the simple 10-day moving average, currently at $19.40. MNST was pressured down by the simple 10-day moving average for months and may now bounce from it on the way up. For the official trade, the current entry zone to buy MNST is the $18.60-18.25 range, with this trade offering a better risk/reward parameter for conservative traders. This is especially true since MNST remains in a long-term downtrend on the weekly chart. Our risk here by not buying MNST now for the official trade is that we could miss the move but we'd rather be patient with our entry point, given that long-term descending price channel. If we are triggered at $18.60, our target is the $21.75 mark.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 3.1 million

Short Play Updates

Capital Trust - CT - close: 13.86 change: -0.04 stop: 16.35

After Thursday's downgrade by UBS to a sell rating, CT gapped lower, but left a doji just above the July low. The UBS analyst cited CT's heavy exposure to subordinated and short-term loans. However, volume perked up a bit from recent days while price stayed in a tight range, with such action suggesting an ongoing bear/bull battle, with bulls at least holding their own. The worry had been that CT would gap back up Friday morning, isolating Thursday's doji. That kind of action sometimes occurs when smart money wants to trap bears, but no such gap occurred. CT produced another doji, with the resultant week's candle a regular old bearish, if somewhat small-bodied candle. Daily MACD again approaches the 0.00 line after bumping higher earlier in the week. We mentioned midweek when adjusting our stop that CT is prone to quick rebounds. For that reason, that the stop was left wide and aggressive, but appropriately placed just above a descending trendline that has been pressuring CT lower over recent weeks. More risk-averse traders might consider the fact that CT has been finding resistance on daily closes at a the simple 10-day moving average, even on days when it pierces it intraday. They might consider setting stops just above that moving average, perhaps near $15.55. This would place the stop immediately above a tight, best-fit descending trendline off the 6/05 high and may not give CT much room to consolidate sideways before a next strong move, but would take readers out of the play quickly in case of a strong bounce. Each choice has its pros and cons, and readers should decide whether to stick with the official stop or to set one near $15.55. As noted midweek, the most recent data listed short interest at almost 28% of the small 19 million-share float. That definitely raises our risk for a short squeeze. Target one is $12.55, which seemed achingly close at the end of the week. Since a dip to our first target would likely constitute a test of the support on the long-term descending channel seen on the weekly chart, readers should definitely consider locking in partial profits as that first target is hit. Our second target is $10.25, last seen in May, 2005.

Picked on August 04 at $14.38
Change since picked: - 0.52
Earnings Date 07/29/08 (confirmed)
Average Daily Volume: 278 thousand


Merrill Lynch - MER - close: 26.29 change: +0.31 stop: 28.01

With news that New York Attorney General Andrew Cuomo had reached auction-rate settlements with more banks this week, some financials either stopped their declines or rebounded on Thursday. MER, however, spent a third week consolidating, producing its third weekly doji in a row. Its news wasn't so good, if those settlements could be considered good. On Friday, Attorney General Cuomo announced that although his office had reached settlements with five major banks, the office was preparing to take legal action against MER. MER's spokespeople expressed astonishment, vowing that they thought progress had been made and further talks were in the works. The attorney general doesn't like MER's suggestions and gave MER five days to come up with something better. The deal that's ultimately reached might prompt a renewed way of selling or, alternatively, a relief bounce. With that deal perhaps in the making, we are not suggesting new entries at this time. Our stop is rather tight but will take readers out of the play if that relief bounce begins. We don't need much of a swoon to hit our first target: all that's needed is a drop to test the support of the long-term descending price channel for MER. We suggest that readers lock in partial profits if that first target of $22.50 is hit. Our second target is $20.25. The Point & Figure chart is bearish with a $7.00 target.

Picked on August 07 at $26.10
Change since picked: + 0.19
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 42.2 million

Closed Long Plays


Closed Short Plays

Cincinnati Fincl. - CINF - cls: 28.69 chg: +0.43 stop: 28.35

CINF decided to torture us this week. A day after triggering the trade, CINF turned around and climbed up to within a cent of our stop before retreating. An end-of-day rush brought CINF higher again, with a few 25-contract trades crossing after the official close at a level just above our stop. However, most sources listed Thursday's high at $28.34, a penny below our stop. Our trade was held open with the warning that it might be stopped early Friday morning. It was. This time, the move was decided and persisted into the close of the week. The possibility existed that this was just part of CINF's choppy consolidation pattern, but stops are stops. CINF could instead be preparing for another bounce attempt.

Picked on August 13 at $26.99
Change since picked: + 1.70
Earnings Date 10/29/08 (unconfirmed)
Average Daily Volume: 2.2 million

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


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