Schaeffer's Midday Options Update Features Cisco Systems.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Cisco Systems (NASDAQ:CSCO). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day. The Midday Options Update is published every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

Take advantage of the timely Schaeffer commentaries by signing up for their free e-newsletters -- Opening View, Market Recap and Monday Morning Outlook. Click here to have the Schaeffer's commentaries delivered to you free via email every day and get entered to win an iPod Nano. http://www.schaeffersresearch.com/redirect.aspx?CODE=PRMOU13M&PAGE=1 .

Options Update: Can the Cisco Kid Ride Again?

News was plentiful in the early going, kicked off by reports that U.S. consumer confidence pulled back during November. According to the Conference Board, the index dropped to 102.9 in November from October's revised reading of 105.1. Economists were expecting the reading to increase to 106.5 from the initial reading. The present situation index slipped to 123.6 from 125.1, and the expectations index dropped to 89.2 from 91.9.

In other news, sales of existing U.S. homes rose 0.5 percent to a seasonally adjusted annual rate of 6.24 million in October, which is the first increase since February. Economists expected sales to drop to 6.15 million annualized. The homebuilding sector received further strength as September's sales were revised higher to 6.21 million from 6.18 million, which was initially reported.

Finally, U.S. durable goods orders dropped 8.3 percent in October, erasing September's gain of 8.7 percent. The drop reported by the Commerce Department was the largest decline since July 2000. Most of the pullback was comprised by a 44.5-percent drop in new orders for civilian aircraft. Excluding transportation goods, orders fell 1.7 percent, while economists were anticipating a drop of 4.8 percent.

Most-Active Options Update

At 1:14 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA - 12,131.4) is 0.09 percent higher, while the S&P 500 Index (SPX - 1,385.44) has increased by 0.26 percent. The Nasdaq Composite (COMP - 2,403.7) has shed 0.09 percent. At 1:15 p.m. Eastern Time, 2,827,399 calls have changed hands compared to 2,148,068 puts, equaling a single-day put/call volume ratio of 0.75. The CBOE's equity put/call volume ratio stands at 0.82, while the ISE's ratio weighs in at 0.85.

Cisco Systems

On November 8, Cisco Systems (NASDAQ:CSCO) posted first-quarter earnings of 26 cents per share. Excluding employee stock-option costs and other expenses, the firm topped the expectations of the Street. Sales increased to $8.18 billion, which was also better than expected. This news sparked a number of upgrades and target-price elevations, along with a sizeable gap higher to a multi-year high. Today, the company shows up on our notably active options list thanks to heavy activity on its December 27.50 call (CYQ LY) after its Chief Executive noted that its current growth is sustainable. This news has the stock more than three percent higher on the day.

Technically, this activity has had one major impact, placing heavy call open interest at the 27.50 level. Notice that 27.50 capped the shares back in 2004, and it appears that it reclaimed its role as resistance a few weeks back. The result is a double-top formation, signifying that the stock has found a staunch layer of resistance. That said, it isn't impossible to break through this overhead resistance, especially since CSCO enjoys various layers of support. One level of support could be CSCO's 10-week moving average; the problem is that this trendline is currently positioned at the 25 level. In order to use this trendline as a springboard, the stock would have to lose more than $1.50.

Further support could come in the form of the 25 level itself. This level acted as resistance in the past, and now that it has been breached, it could provide a measure of support. Moreover, CSCO's 10-month moving average could help put a floor on any losses. This trendline completed a bullish crossover of its 20-month moving average, which is a technical indicator of continued strength. It certainly seems that sufficient support exists to help limit losses. My question is what is keeping CSCO from entering a tight trading range between 27.50 and 25? We'll just have to wait and see if this scenario takes place.

Let's now shift our focus to CSCO's sentiment backdrop. Pessimism runs high from the speculative options crowd. The firm's Schaeffer's put/call open interest ratio (SOIR) of 0.59 is higher than 86 percent of those taken during the past 52 weeks. I like this setup, especially as the sentiment could shift and suddenly become buying pressure, which could push the stock higher.

I am not a big fan of the way analysts and short interest set up for CSCO. During November, short interest decreased minimally. As a result, one percent of CSCO's float is sold short, and it would take one day to buy back these shorted shares at the stock's average daily trading volume. This accumulation leaves little chance for short-covering support, or a short-covering rally.

Turning to Zacks, 21 of the 25 analysts following CSCO rate it a "buy" or better. This configuration leaves ample room for downgrades, which could serve to push the stock lower.

Bottom line: CSCO's performance and sentiment backdrop combine to earn it a Schaeffer's Equity Scorecard rating of 6.0 out of a possible 10. This rating suggests that the path of less resistance leads higher. I find this encouraging, but I would wait to see if the shares can make a definitive break through the 27.50 level. A move of this sort could signal a run higher, as there is little in the way of overhead options-related resistance in place.

Click here to see a Weekly Chart of CSCO Since January 2004 With 10-Week and 20-Week Moving Averages, and a Monthly Chart of CSCO Since January 2002 With 10-Month and 20-Month Moving Averages:

http://www.schaeffersresearch.com/wire?ID=17790 .

The best way to take advantage of the timely Schaeffer commentaries is to sign up to receive their free e-newsletters -- Opening View, Market Recap and Monday Morning Outlook. Click here to have the Schaeffer's commentaries delivered to you free via email every day and get entered to win an iPod Nano. http://www.schaeffersresearch.com/redirect.aspx?CODE=PRMOU13M&PAGE=1 .

About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .