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Eaton Corp - ETN - close: 58.51 chg: +0.96 stop: 56.99

Company Description:
Eaton Corporation is a diversified industrial manufacturer with 2004 sales of $9.8 billion. Eaton is a global leader in electrical systems and components for power quality, distribution and control; fluid power systems and services for industrial, mobile and aircraft equipment; intelligent truck drivetrain systems for safety and fuel economy; and automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety. Eaton has 56,000 employees and sells products to customers in more than 125 countries. (source: company press release)

Why We Like It:
We like ETN for a couple of reasons but readers should know this is a speculative, more aggressive play. Car and truck-related stocks have not been doing well the last few weeks with bad news coming out of Ford and GM affecting the whole group. ETN is no exception. The stock was hit hard last week when they announced earnings and guided lower for the second quarter. Shares of ETN crashed through several levels of support on very big volume. The move last week looks like a definite trend-changing event. However, there are a few clues to suggest we can play ETN for a short-term oversold bounce back toward the $62.00-63.00 range. First and foremost the stock is very short-term oversold and due for a bounce. Combine that with an oversold market that is also due for a bounce and odds of a rebound are in our favor. Now add to the mix the P&F chart that shows ETN testing P&F support, which can normally produce a decent bounce. Plus, the weekly chart shows a long-term trendline (see below) that ETN is bouncing from. Now add today's press release that ETN's Board of Directors has approved a stock buy back program of up to 10 million shares with $200 million worth of shares to be purchased "near term". The rest of the press release was pretty vague on when ETN would repurchase the rest of these shares but it remains a positive for the stock. It might be tempting to think that most of the bad news is already calculated into the stock but we're not making any long-term forecasts. This is just a short-term play looking for a quick pop back toward potential resistance. Our stop loss will be $56.99, just under the recent lows.

Suggested Options:
We are going to suggest the July calls although we do see that May and June strikes are available.

BUY CALL JUL 55.00 ETN-GK OI= 0 current ask $5.30
BUY CALL JUL 60.00 ETN-GL OI=2579 current ask $2.45

Picked on April 18 at $ 58.51
Change since picked: + 0.00
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 1.1 million

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Ishares Dow Jones Energy - IYE - cls: 70.78 chg: +1.25 stop: 68.84

Company Description:
Ishares for the Dow Jones U.S. Energy Sector index fund. Companies represented come from the oil production, oil equipment, oil services and oil pipelines.

Why We Like It:
This looks like a short-term bottom in many of the oil stocks. The IYE ishares have been channeling lower in what looks like a bear-flag pattern. Investors bought the dip toward the 100-dma this morning. It's no coincidence that the bottom today was at the bottom edge of its channel. We believe that this looks like a good spot for a speculative bullish play to catch a bounce in the oil sector. We can play the ishares without having to risk holding over any one company's earnings report. We are only targeting a bounce back toward the top of the descending channel in the $74.00-75.00 range. Traders might want to consider this as a longer-term entry point but it wouldn't surprise us to see the bounce to $75 fail and have the IYE retest the $70 level as support again.

Suggested Options:
We are suggesting the July calls.

BUY CALL JUL 65 IYE-GM OI= 0 current ask $7.00
BUY CALL JUL 70 IYE-GN OI=149 current ask $3.50
BUY CALL JUL 75 IYE-GO OI= 82 current ask $1.65

Picked on April 18 at $ 70.78
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 170 thousand
 

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