You really didn’t believe Microsoft (MSFT, $29.56, down $0.42) was totally “walking away” from Yahoo (YHOO, $27.85, up $0.19) did you? In case you haven’t heard, Microsoft has entered into discussions again about a deal with Yahoo. Although this doesn’t mean a full buyout is expected, Microsoft said it “reserves the right to reconsider that alternative depending on future developments and discussions.”

The timing of the announcement comes on the heels when many believe Yahoo is still trying to work out something with Google (GOOG, $583.71, up $3.64) perhaps as soon as this week. It is clear with the latest developments that Microsoft is trying to block a Yahoo/ Google partnership.

No doubt, things are heating up and Microsoft seems to be racing to the finish in its attempt to battle Google. It’s no surprise either that Yahoo’s call options are active today. The June 27.50 calls (YHQFY, $1.57, up $0.15) have traded over 18,000 contracts thus far and the June 30 calls (YHQFF, $0.52, up $0.08) have seen 14,000 contracts trade by lunchtime.

Rick Rouse
Rick@OptionsMentoring.com

Earnings season is slowing to a crawl but there are still a few big names left to report. With 94% of the S&P 500 companies already reporting, visibility or lack thereof has been the common theme for the remainder of 2008. First-quarter earnings are down nearly 18% from last year’s quarter yet the market has had a decent run over the past five weeks. Keep this in mind as we head into the summer. (Quotes are from Friday’s close).

Monday

DryShips (DRYS, $110.74, up $4.24). There was some buying in the June 120 calls (DQRFZ, $6.90) on Friday ahead of the company’s earnings today (after the close).

Lowes (LOW, $24.89, down $0.25). Reports before the market opens this morning.

Tuesday

AutoZone (AZO, $127.21, down $1.14). This stock normally makes a big move either way after announcing earnings.

Hewlett-Packard (HPQ, $47.29, up $0.56). HP has made a slight comeback after falling from $52 to $43 to start the year. However, serious resistance is ahead at $49.

Home Depot (HD, $29.10, down $0.43). The company reports earnings before the bell. Lowe’s and Home Depot have been hurt by the housing slump and at some point they will be good buys again.

Intuit (INTU, $27.78, down $0.18). This is normally the company’s biggest quarter as tax season comes full swing. Professional tax preparers use Intuit’s tax forms, tax return presentation folders, and other supplies to prepare taxes.

Target (TGT, $54.88, down $0.22). I think Target has had trouble keeping up with Wal-Mart and I wouldn’t be surprised if this stock traded lower after announcing earnings.

Wednesday

BJ’s Wholesale Club (BJ, $39.26, down $0.76). Believe it or not, BJ’s hit a 52-week high on Friday before retreating. The stock is up nearly 50% for 2008 and a strong earnings report could keep the stock rolling.

Thursday

Dick’s Sporting Goods (DKS, $29.12, down $0.36). The stock was at $25 back in March when Dick’s lowered expectations for the current quarter. At the time, the company said earnings would be $0.16 to $0.19 a share versus expectations of $0.23 a share.

Gap (GPS, $18.43, down $0.75). Nothing to get excited about here.

Toro (TTC, $41.06, down $0.45). Like Lowe’s and Home Depot, the housing slowdown has really hurt this stock which is hoovering around its 52-week low of $38.

Rick Rouse
Rick@OptionsMentoring.com

The market bounced back with a solid week despite the fact that oil prices nearly reached a record-high of $128 a barrel. The price of oil seems to be the biggest dominating factor in holding the market down and preventing it from setting new highs. Oil hit $127.82 a barrel on Friday after Goldman Sachs said prices could continue to rise through the end of the year due to thin supply.

There is a bevy of factors that is influencing the price of oil but it still comes down to supply and demand. With larger countries like China and India getting into the mix the demand has helped push prices to record levels. Who knows when oil will retreat but one thing to keep in mind…Memorial Day marks the start of the summer driving season.

Nonetheless the market did manage to put up some decent numbers. The Dow added 240 points, or 1.9% to close at 12,986. The S&P 500 jumped 2.7%, or 37 points, to finish at 1,425. The Nasdaq was the clear winner though, adding 3.4%, or 83 points to finish at 2,528. For the year, the Nasdaq is down 4.7%, the S&P is down 2.9% while the Dow has cut its losses to 2.1%.

Once again, key resistance lies at 1,450 for the S&P 500, 2,600 for the Nasdaq and 13,500 for the Dow. These levels are becoming increasingly difficult to break and some fear a market “correction” is just around the corner. I can’t say I see a “correction” in the cards near-term but I am keeping an eye on the VIX (16.47, up 0.17).

Rick Rouse
Rick@OptionsMentoring.com

We had a few more retailers report earnings today. Nordstrom (JWN, $38.44, up $1.15), and Abercrombie & Fitch (ANF, 76.19, up $0.11) each announced better-than-expected earnings results for the most recent quarter while Kohl’s (KSS $49.27, down $1.22) reported a decline in its 1Q results.

ANF reported earnings of $62 million, or $0.69/ share, compared to $60 million, or $0.65/ share, last year. Total revenue jumped 8% to $800 million from $742 million. The company beat on earnings per share but came up short in sales from what Wall Street was expecting.

Nordstrom said its sales fell 3.8% to $1.9 billion as profits came in at $119 million, or $0.54/ share, a 10% drop compared to last year. However, because Nordstrom bought back some of its shares over the quarter, they beat Wall Street’s estimates of $0.49/ share.

Kohl’s reported income of $153 million, $0.49/ share, versus $209 million, or $0.64/ share a year ago. Although Kohl’s had sales of $3.6 billion, an increase of 1.5% for the quarter, the company lowered earnings per share for the year to $2.95 to $3.15.

The theme was common all week in what the Retailers are saying. All of them are proving vulnerable to higher food, gas, and commodity costs.

Rick Rouse
Rick@OptionsMentoring.com

I profiled Chipotle Mexican Grill’s (CMG, $95.47, down $3.22) earnings about three weeks ago after the company beat Wall Street’s expectations by four cents a share. However, the stock fell 10% that day and closed right around $100.

The breakdown was significant and technically speaking, the stock broke through its 20 and 50-day moving averages. Though moving averages aren’t a tell-all for making a trade, these breakdowns usually attract the attention of investors who are bearish.

The May 105 puts (CMGQA, $9.60, up $3.70) were profiled at $4.50 when I noticed the put option activity building going into Chipotle’s earnings announcement. Sure enough it was a good sign of things to come for the bears as the puts more than doubled by expiration.

Chipotle even said it was going to be tougher for them to hold gross profits at current levels due to the continuing rise in food costs. Although some stores have increased prices with the introduction of the company’s naturally raised beef, management does not plan on a company-wide price increase at this point. That’s great for us but without higher prices, gross margins will get squeezed.

If you take another look at Chipotle’s chart you will see $90 as a key support level. If the stock falls below this level, momentum could take it to the lows $80’s where the next level of support lies. Some options traders may be seeing the same thing and with the May options expiring today, they may be rolling their profits into the June 95 puts (CMGRS, $4.98, up $1.08).

Rick Rouse
Rick@OptionsMentoring.com

After flirting with $600 earlier this month, Google (GOOG, $581.00, up $4.70) seems destined to fall short of that mark before the May options expire on Friday. Although a $20 move either way is not out of the norm for Google, option traders seem to be locking in on two prices.

Today’s close at $580 (roughly) kept the May 580 strike prices busy, naturally, but it was the action in the May 590 calls (GOOER, $1.05, down $0.35) and the May 570 puts (GOPQQ, $0.75, down $2.05) that option traders placed their chips on.

With the May options expiring on Friday, there is a lot of bets on Google making a $10-$12 swing. If Google is at $592 then the may 590 calls would represent a double because they would be $2 in-the-money. If Google is at $568-$569 then the May 570 puts would be $1-$2 in-the-money.

Then again, if Google stays flat on Friday then both parties are wrong. Either way, it is going to be an interesting showdown between the bulls and bears over where Google settles by tomorrow’s closing bell.

Rick Rouse
Rick@OptionsMentoring.com

It’s official, Carl Icahn confirmed he’s got a “team” in place for a proxy fight with Yahoo (YHOO, $26.98, down $0.18). It was revealed that Icahn acquired nearly 60 million shares of Yahoo stock over the past 10 days. Talk about a “Dream Team”, Icahn’s new board would include himself, Adam Dell (brother of Michael Dell) and Mark Cuban (famous sports owner of the Dallas Mavs).

In a letter to Yahoo, here is what Icahn wrote: “It is quite obvious that Microsoft’s bid of $33 per share is a superior alternative to Yahoo’s prospects on a standalone basis. I am perplexed by the board’s actions. It is irresponsible to hide behind management’s more than overly optimistic financial forecasts. It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo’s closing price of $19.18 on the day before the initial Microsoft offer.”

Good stuff no doubt but can you ride this upcoming rally in Yahoo? What it boils down to is if Yahoo will get bought out at $30 or higher. I can tell you this, Icahn isn’t going to keep his money locked up for long. No way. Yahoo’s annual shareholder meeting is set for July 3 so there you go.

The action on Yahoo’s June 27.50 calls (YHQFY, $1.20, down $0.32) is ridiculous. So far, 42,000 contracts have traded. I can see the logic with this one. Option traders are betting $120 to make $250. If Yahoo is at $30 by June 20 then they double their money.

The July 27.50 calls (YHQGY, $1.91, down $0.12) have traded 15,000 contracts and these don’t expire until July 18.

I’m not getting on a soap box and yelling that these are good bets, all I’m saying is that the crowd seems to be following Icahn once again.

Rick Rouse
Rick@OptionsMentoring.com

Once again it was “name that tune” for another company that reported a solid quarter yet was cautious when giving future guidance. Sometimes Wall Street just doesn’t get it and they punish a stock for all the wrong reasons. What gets me is that the Street should get this by now and reward companies for their solid earnings and worry about future earnings in three months.

Of course, the market never listens to anything which creates exciting opportunities for those of us who aren’t afraid to swim with the sharks. One such stock that got hammered yesterday based on the aforementioned comments was Deere (DE, $81.25, down $8.94).

The company is center stage when it comes to business within the Agricultural industry. Given the increase in demand for equipment across the globe to work the land, Deere has been one of the industry standards for years. The stock was within spitting distance of its 52-week high ($95) and was poised to crack that level when it announced earnings. Here’s why it is always so risky to buy call (or put) options right before an earnings announcement.

Although the stars were aligned for Deere to break triple-digits, the stock fell 10% and any out-of-the-money May calls you may have bought are pretty much worthless right now. Now, this is not to say you can’t buy options after an earnings announcement. Let’s look at the numbers first.

Deere earned $764 million, or $1.74 per share, a 20+% increase versus the same quarter last year. Sales came in a little over $8 billion led by a 34% increase in Agricultural sales. Bingo, there’s our growth driver. Deere confirmed its outlook for 20% growth for the quarter and for the year and that’s saying a lot. However, in the overall scheme of things their numbers were short of Wall Street’s expectations by a penny. The interesting thing was that there was basically twice as much call action in the May and June options than puts.

Any action in the May options is just too extreme to take as the battle line will be the May 80 call (DEEP, $1.85, down $8.95) or the May 85 call (DEEQ, $0.20, down $6.20) strike price on where the stock may end up. (I told you owning these calls were risky!). There was also plenty of action in the June 90 calls (DEFR, $1.15, down $4.55).

Deere could make a slight rebound on Thursday but if not key support levels will be at $79 and then $76. If Deere continues its slide, $70 would be the last line of defense before the stock really breaks down. Demand for farm equipment isn’t going away just like that and the increasing demand for food and other farm products isn’t going away overnight either.

Let’s see where Deere is in a month or so and whether or not Wall Street oversold the stock. Carl Icahn anyone? (joking).

Rick Rouse
Rick@OptionsMentoring.com

Real Goods Solar (RSOL, $7.50, unchanged) made its IPO (initial public offering) debut last week but has failed to “ride the tide” that other Solar energy plays are providing as they breakout to new highs. Real Goods Solar installs residential and small commercial solar energy systems in California and has plans to expand along the West Coast and in New England.

The IPO was priced at the low-end of its $10-$12 range and the stock closed at $8.80 on its first day of trading. Real Goods Solar raised $55 million after offering 5.5 million shares at $10 a share. It is important to note that Real Goods Solar is a subsidiary of Gaiam (GAIA, $15.66, down $0.17) but as a stand-alone company it is already profitable. Only time will tell how well this company will do in the future. Meanwhile, other solar energy plays remain hot:

Canadian Solar (CSIQ, $45.22, up $4.44). I mentioned the company would be announcing earnings on Tuesday and they simply blew Wall Street away. The stock gained 30% yesterday and is up another 11% today after doubling estimates by reporting earnings of $0.61/ share.

Energy Conversion Devices (ENER, $56.18, up $0.98). The company reported earnings last Thursday and is up 20 points since.

First Solar (FSLR, $314.90, up $10.92). The stock is steam-rolling past its previous all-time high of $308 and has traded as high as $317 this morning.

SunPower Corporation (SPWR, $95.54, up $5.54). The stock was trading at 52-week lows in mid-March, hitting the low $50’s. Its been in an uptrend but has a long way to go to get back to its 52-week high of $164.

There’s no doubt that investors are striking while the iron is hot but be careful when chasing these stocks higher. The sector carries some extreme volatility and expectations are getting a little out of hand right now.

Rick Rouse
Rick@OptionsMentoring.com

Apple’s (AAPL, $189.96, up $1.80) knocking on the $200 door and some key events will determine whether Apple kicks in the door or goes away quietly again. Last time Apple tested $200 it was Christmas and the company was still riding the success of its iPhone debut as well as the holiday shopping season. It was all downhill after that when Apple announced earnings in January and lowered expectations for its coming quarter. The stock reached a low of $120 in late February and early March.

However, this was an important level of “support” and the stock has done nothing but gain 70 points in two months since then. Yeah, for those who thought Apple was going to be swallowed by the bears, those same bears have been covering their short positions like crazy over the past few months.

I believe the key to whether Apple stays above or below $200 will depend on what the company says and does at its annual Worldwide Developers Conference that starts June 9. Will Apple make a “surprise” announcement about an existing product or the possibility of a new one?

People “in the know” say Apple plans to begin selling its next-generation iPhone handset sometime on or after the third week of June. The new version of the iPhone will be compatible with 3G (third-generation) networks.

The other big news rumored to be is that Apple could be ready to enter the gaming business (to a degree). Word is the company has filed patents and is testing a “3D remote control system” for its Apple TV set-top box. It would be a knock-off of Nintendo’s Wii controller and would also have multi-touch technology.

Some of you have emailed me asking about the May 200 (APVET, $0.25, unchanged) and the June 200 (APVFT, $5.25, unchanged) call options. My advice is that you are playing with fire on the May 200 calls and we all know what can happen when you play with fire. The May calls are cheap but Apple would have to be at $200.25 by Friday for you to break even. With the June 200 calls, you’re still playing with fire but you can always get out if the stock fades at $200. You still might get burned just not as bad.

I can’t see a “gaming product” being launched at the conference but I can see the announcement of the updated iPhone unfolding. That and some news on iMacs and Apple’s operating software could help the stock “break on through to the other side”…

Rick Rouse
Rick@OptionsMentoring.com