From the Technical Corner

09/22/2006 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Options guru Bernie Schaeffer finds immediate opportunities-long or short-in which his subscribers can pocket profits. Here, he comprehensively analyzes the trading activity of three such companies and finds them just ripe for taking home some cash.


"Cummins (CMI NYSE) has added roughly 450% since March 2003, thanks to the staunch support of its ten-month and 20-month moving averages.The speculative options crowd has turned a blind eye to CMI's impressive performance, as its Schaeffer's put/call open interest ratio (SOIR) of 2.19 is higher than 90% of those taken during the past year. Short sellers are also confident that CMI has reached a top, as short interest increased 43% during August. This accounts for 13.6% of the company's float, and it would take nearly six days to buy back these shorted shares at the stock's average daily trading volume. A short-squeeze situation could buoy the shares. According to Zacks, analysts covering CMI rate it a "hold" or worse, leaving the door open for potential upgrades. Buy the March 115 call (CMICC).


"eBay (EBAY NASDAQ) recently lost the support of the 30 level, a site of former resistance, but also the site of heavy call open interest in the front three-month options series, which could strengthen the resistance in the area. Also, any rally faces overhead resistance from EBAY's ten-month, 20-month, and 20-week trendlines. The last time it finished a week above both its ten-week and 20-week trendlines was early January. Despite these technical struggles, options players are expecting the shares to bounce back. EBAY's SOIR sits at 0.50, as call open interest doubles put open interest. This reading is also lower than 78% of those taken during the past 52 weeks. Zacks reports that one half of the 18 analysts covering EBAY rate it a "buy" or better. If this bullish bunch issues downgrades, the stock could succumb to further downside pressure. Buy the April 30 put (XBAPF).


"Pacific Ehtanol (PEIX NASDAQ) in the process of rebounding off support at its 20-month moving average, a trendline it has not finished a month below since March 2004. In addition, this trendline currently intersects with potential support at the 15 level, which acted as resistance in the past. Often, prior resistance will switch roles and act as support when given the chance. PEIX's solid long-term performance meets with short sellers' disdain. The company's short interest increased by 11% in July, resulting in 27.5% of its float sold short and could provide the means for a substantial short-covering rally. According to Zacks, only two analysts rate PEIX, leaving ample room for fresh positive coverage, which could serve to push the shares higher. Buy the March 15 call (PFQCC).

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