From the Technical Corner

11/03/2006 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Technical guru Bernie Schaeffer offers subscribers to his Option Advisor newsletter detailed investment recommendations, supported by comprehensive research into the equity and options markets. Here, he zeroes in on three companies with upside potential in the near-term.

"Lear (LEA NYSE) recently gapped sharply higher on news that investor Carl Icahn is taking a 16% stake in the company and has continued to run higher along the support of its 10-day moving average. The equity broke through resistance at its declining 40-week moving average, but short sellers continue to flock to LEA. Short interest accounts for roughly 25% of total float and would take nearly eight days to buy back. An unwinding of these pessimistic positions could fuel a short-covering rally. According to Zacks, 13 of the 14 analysts following LEA rate it a "hold" or worse. Any upgrades could lift the shares. Options players have pushed LEA's SOIR higher to 1.48, which is in the 82nd percentile of its annual range. RECOMMENDATION: Buy the June 25 call (LEAFE).

"Brokerage firm Merrill Lynch (MER NYSE) reported third-quarter, ex-items earnings of $2.00 per share, topping expectations of $1.47 per share. The shares rallied sharply and have continued this advance, aided by their 10-day moving average. The equity hasn't notched a close below this trendline since September 11. Traders continue to place bearish bets. Puts outnumber calls in the front three months of options, resulting in a SOIR of 1.29. Short sellers are also betting on a pullback. In October, the number of MER shares sold short shot 21% higher to 13.7 million. This buildup of pessimism is a bullish contrarian indicator. The sector continues to show signs of technical strength, which could also help carry MER higher. RECOMMENDATION: Buy the January 2008 80 call (WZMAP).

"U.S. Airways Group (LCC NYSE) earned $1.09 per share from continuing operations topping the consensus by eight cents per share. The company stated that it expects to post a profit in the fourth quarter, as opposed to its net loss in the third quarter. The stock rallied nearly 2% to once again challenge the round-number 50 level. LCC's 10-day and 20-day moving averages are advancing into the area and could help lift the shares through the 50 region. Pessimism runs high, as the security's SOIR of 2.77 indicates that puts nearly triple calls among the front three months of LCC options, the highest such reading taken during the past 52 weeks. More than 8% of the equity's float is sold short. An unwinding of this pent-up bearish sentiment could provide ample fuel for a short-covering rally for LCC. RECOMMENDATION: Buy the June 40 call (LCCFH).

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