From the Technical Corner

09/01/2006 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Technical expert Bernie Schaeffer is also known as the guru of options. Here, he analyzes three companies in very different sectors and gives investors two bearish and one bullish recommendation to add to their portfolios…

 

“Transocean (RIG NYSE) breached support at its ten-month moving average and is poised to close below this trendline for the first time since November 2003. We now expect this to serve as resistance against any rally attempts. RIG has slipped below the 70 level, which served as support on three different occasions earlier this year. Short sellers believe the shares have put in a near-term bottom, as short interest dropped nearly 19% in August. At the stock’s average daily trading volume, it would take less than three days to buy back these shares, leaving little in the way of short-covering support for RIG. The street remains rather bullish on RIG. Should this group issue downgrades, the shares could move lower thanks to considerable downside pressure. Buy the January 2008 70 put (.YDRMN ).

 

“UnitedHealth Group ( UNH NYSE) is trying to show signs of life, but it has met staunch resistance at its 20-month moving average. The shares also face potential options-related resistance from heavy call open interest at the 55 strike among near-term options. The stock has lagged behind its peers in the Morgan Stanley Healthcare Payors Index (HMO) on a monthly basis since March 2003. The speculative options crowd eschews UNH’s technical struggles, as indicated by its SOIR of 0.42, which is lower than 69% of all readings taken during the past 52 weeks. Meanwhile, short interest declined 19% in August, resulting in a short-interest ratio of roughly one day to cover, leaving little potential short-covering support for UNH. Analysts are also bullish toward UNH. Any downgrades could spell trouble for the shares. Buy the March 55 put (.UHBOK).

 

“Whole Foods Market ( WFMI NASDAQ) was upgraded last week by J.P. Morgan to “neutral” from “underweight.” Currently, eight of its 13 analysts rate it a “hold” or worse, leaving room for upgrades. Short sellers continue to bet against the equity, as nearly 7% of its float is sold short. It would take more than eight days to buy back these bearish bets, allowing plenty of fuel for a potential covering rally. WFMI is rebounding from support at its rising 40-month trendline. This support has helped bolster the stock since April 2001. The aforementioned upgrade helped WFMI reclaim round-number support at the 50 level as well as its 20-day moving average. This combination of technical strength and pessimism has bullish implications from a contrarian perspective. Buy the January 2008 47.50 call (.YDUAC).”

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