It was the weakest week for the Dow since June 2005 with a -356 point drop and the worst for the S&P since April 2005. The Nasdaq closed at a seven month low after six straight days of losses. Thursday's rebound failed to create any follow through and the markets closed at their lows on Friday. It was a fitting end to a very bearish week.
Dow Chart - Daily
Chart - Weekly
Dow Transport Chart - Daily
Friday's economic reports had little to do with the continued weakness but they did get their share of airtime. Import prices rose +1.6% in May and twice the consensus estimates. 1.0% of that increase was due to a +5% rise in oil prices. The May increase of +1.6% and the April jump of +2.1% was the largest two month jump since October 1990. Export prices rose +0.7%. The trade deficit for April was -$63.426 billion, an increase of +$1.5 billion over March. The deficit with China increased to $17.0 billion. The major problem is the weakness in the Chinese yuan. It is thought to be about 40% undervalued when compared to the dollar. That makes their exports cheaper and imports into China more expensive.
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After a decline from 28% in June-2005 to 15.7% in April-2006 the Risk of Recession as calculated by Moodys rose to 20% in May. This is the projected chance of recession over the next six months. Since most analysts are targeting early 2007 for a recession possibility it is still a little early for this index. Factors contributing to the jump are factors that could push it significantly higher over the next several months. Consumer confidence, weak equities, rising interest rates, the treasury yield curve, unemployment claims and the falling housing market. Iowa, New Hampshire and Mississippi are all showing risks over 30% with California and Illinois having the lowest risk.
The Blue Chip Economic Indicators survey of 50 leading economists was released on Friday and the outlook has declined across the board. The GDP for Q1 is currently showing to be 5.3% but recent economic reports this week suggest it could be revised upward to 5.9% or even as high as 6.2%. If it is revised higher it will make the plunge to the levels expected for the rest of 2006 seem even sharper. 2007 is already starting off low and with a growing number of analysts expecting the Fed to go too far the fear of a recession in early 2007 is growing.
TTable of GDP Estimates
The BCEI estimates for inflation predict a rise to 3.3% from their earlier estimate of 3.1%. With current inflation at 2.1% after the May reports it suggests we are in for several more Fed rate hikes. 3.3% inflation is well off the Fed comfort scale. However, the survey did expect the slowing economy and continued Fed action to push inflation back down to 2.5% in 2007.
Corporate profits were expected to finish the year at an upwardly revised 15.5% rate. We have seen previously lowered estimates for the last two quarters revised upward as earnings refuse to die as expected. However, stronger comparisons and a slowing economy are expected to produce a bear market in earnings growth for 2007 with a drop to ONLY +3.9% for the entire year. With the current S&P price to earnings ratio at 17.75 it suggests limited upside for the markets and probably a period of PE compression. That means stock prices will be pushed lower to compensate for lower earnings growth. This is a temporary cycle since an expected economic rebound in the second half of 2007 will allow prices to move higher. Markets typically anticipate this increase in earnings by 6-9 months. Bear in mind that these BCEI estimates are just that, estimates. We have seen how the economy and specifically earnings growth has surprised analysts for the last two quarters.
Table of CPI/EPS Estimates
Next weeks heavy economic calendar has several potential stumbling blocks. The PPI and CPI will give us the current reading on inflation while the Fed Beige book for May will show us all the data the Fed will be using when they meet later in the month to raise rates. In addition there are two Fed surveys, which are expected to show slowing growth. In the table below I highlighted the most market reactive events.
There are so many things to cover about the last two days I hardly know where to start. The Dow traded in a 500-point range for the week and that would normally produce a turning point but the bullish outlook is still dim. Internals on Friday were decidedly negative at 2:1 in favor of decliners and declining volume indicating the selling is far from over. The carnage has been widespread and while commodities and metals were hardest hit early in the process the selling has broadened to cover nearly every sector and stock. Of the Dow 30 only 1 stock, JNJ, has posted a gain since the FOMC meeting in May.
Table of Dow Stocks Since FOMC
Losses in Metals Since FOMC
As I have stated before the carnage within the United States markets has been relatively limited compared to the damage in other global markets and the ETFs associated with those markets. The problem is the unwinding of the carry trade. As a refresher, the carry trade is where large hedge funds and institutions borrow cheap money abroad such as the nearly zero percent loans available in Japan. They use this money to speculate in equities and commodities around the globe. The global markets, especially the emerging markets have been rising so quickly that made them a perfect place to put this money to work. Since January 1st many of these markets have risen +50% or more! That would be the equivalent of the Dow rising to 21,000 or the Nasdaq 4200 just since January 1st. Massive profits have been accumulated by these investors. Since we all understand leverage it should be no shock that these funds were so excited about the money mill they borrowed heavily to add to their successful investments. Eventually this house of cards, like our Nasdaq in 2000, would fall. According to TrimTabs individual investors moved over $500 billion into ETFs and mutual funds invested overseas between October 2004 and April 2006. Many of these markets were seeing cash inflows equal to or greater than their existing capitalization. If you have a market worth $20 billion and suddenly Americans want to buy $10 billion worth of that market it creates a spike that makes our two-year tech bubble in 2000 look tame by comparison. We all know profits are not profits until they are safely back into cash. Once the fire drill began it was a race to the exits. Like the spike higher after January 1st the extraction of 25% to 35% of your entire market capitalization is going to cause some volatility. Since many hedge funds and most individual investors use the ETF/iShares for their investment the panic exits caused these exchange traded funds to fall farther than the index they represented. In the table below I listed a few showing the drop in the corresponding market for that country and the drop for the ETF. Note that the ETF drops are substantially higher except in the case for Argentina's ILF, which covers four countries not just Argentina.
Table of Country/ETF Declines
Indonesia Fund Chart - Daily
Helping to erase this carry trade impact is the sudden burst of rising interest rates around the globe. Free or nearly free money has been rampant for so long that literally hundreds of billions could be at risk. Last week seven countries raised interest rates and more are expected. Countries raising rates included India, Turkey, South Africa, Thailand, Denmark, South Korea and the ECB. Japan has been extracting massive amounts of liquidity in preparation for a series of rate hikes after years of nearly zero interest. When interest rates rise it is the equivalent to the keg at a frat party going dry. The party ends quickly.
There is some good news to this story. Once the carnage is over analysts do not expect this money to return to the international funds. Everyone knew the gains were too good to pass up as the markets rose but now everyone is going to be skeptical until the markets have a chance to find their own level again. Nobody wants to put their money back into the fund only to have another round of selling on the next bounce. That cash is likely to find its way back into the US markets once they feel the current dive is over.
On Friday TrimTabs also said corporate cash was at record levels and buybacks were also at record highs. Just since May 1st 162 companies have announced over $70 billion in new or expanded buybacks of their own stock. Coupled with earlier buybacks by others already in progress TrimTabs estimated over $1.5 billion was being repurchased every day based on the announced date ranges and amounts. The last time buybacks were this strong was between June-2002 and Feb-2003. During that period individuals withdrew $102 billion from mutual funds while corporations completed over $30 billion in buybacks. Some recent additions to the announced buyback list include AXP $10.5B, PEP $8.5B, UNH $7.0B, CSCO $5.0B and NWS $3.0B and it is a long list. TrimTabs also said individuals had withdrawn over $6 billion from funds since May 9th. I personally thought it would have been higher. Charles Biderman said market gains after these buyback cycles typically ran between +9% to +15%. At least we have something to hope for!
Global markets are not the only markets still feeling the pain. Commodities, metals and stocks with strong gains are still reeling under the selling. Oil was up +$1.28 on Friday to close at $71.64 and oil stocks were still getting crushed. Like the global ETF gains some story stocks had seen extreme gains within the US. Until these gains are turned into profits the selling will not be over. Some of the major winners for the year are listed in the table below. When you realize the gains over the last five months the profit taking is not that bad. For instance PEIX went from $10 to $45 and even with a -45% drop it is still trading at $25 and a +150% gain for the year. That is unless you were the last to buy at $45.
Table of Large Winners/Losers
Adding to our problems last week was an extremely large option rotation. Traders told Rick Santelli in Chicago that there were an unusually large number of option positions being closed on Thursday. I mentioned this as a risk last Sunday but I thought it would be minimal for a non-quarterly cycle. The high volume could have been related to the major market move since May-10th requiring an unusually large number of position adjustments. Rick also reported heavy put buying on Friday.
From my viewpoint there just doesn't seem to be any buying interest even on good news. For instance the SOX dropped on Friday despite good news from National Semi and Texas Instruments on Thursday night. There was also an upgrade to the chip outlook from the Semiconductor Organization and it also failed to help. The SOX closed the week with more than a -6% loss.
I added a column showing percentage change for the week to the market recap graphic at the beginning of this commentary. You will note that the NYSE Composite, Russell-2000 and Dow transports lost over -4% for the week. These were the indexes, which were the most bullish in the weeks leading up to the FOMC meeting in May. Like the global market implosion they are feeling the pain as profits are extracted. I updated the index graphic below to show the lows for the week and highlighted those already past the -10% level. Those few indexes remaining, which have not reached the ten percent mark are quickly approaching those levels. When I created the table three weeks ago I thought Dow 10500 was a long way off. At after testing 10750 it does not seem that far away.
Table of Index Correction Levels
In a special update for the LEAPS Trader newsletter on Thursday night I told readers I did not feel the rebound would hold. Despite the massive volume on Thursday of 7.527 billion shares and a +200 point rebound for the Dow, +44 for the Nasdaq, there was selling all the way up. There was never any scramble to buy stocks and despite the large point rebound the internals barely made it back into a 1:2 ratio on the advancing/declining volume. This was depressing since the ratio was 15:1 declining over advancing volume early in the day. It was a textbook capitulation day from the early day internals but it turned out to be just a chapter in the book not the conclusion.
Market Internals for Thursday Rebound
Unfortunately I still feel that way this weekend. I simply don't see any real buying interest. Dip buyers were hammered on every minor rebound on Friday and the pattern of late day selling is returning. I know we can't pin a lot of market outlook on Friday's close since there was any number of reasons why traders hit that sell button before the bell. What we can count on for next week is another round of inflation news and nearly every Fed head is going to be on a podium somewhere. This will be the last week of Fedspeak before their pre meeting quite period. We also have the retail expiration exodus as June options expire.
The indexes are starting to reach some strong support levels and it will take a lot more effort for the bears to push them lower. It will not be impossible but the easy money for shorts has been made. The Dow hit 10750 on Thursday and 10700-10750 is very strong support. This is where I would circle the wagons and make a stand as a dip buyer.
Dow chart - daily
Likewise the 2100 level on the Nasdaq was reached on Thursday and it should be a sizeable speed bump to slow down the bears. The rebound from 2100 was relatively quick compared to the other indexes. I actually thought for a while we had a real rally in progress based on the Nasdaq bounce. A second test of 2100 would be an effort but could be seen as a confirmation test.
Nasdaq chart - daily
I was particularly impressed with the S&P and the speed it reached falling from Monday's high of 1287 to Thursday's low of 1235, -52 points. With 1240 decent support I believe the 1235 penetration was simply a momentum overshot and I was relieved to see the quick rebound over 1240. If that level breaks on a retest we could see 1200 or even 1185 very quickly.
SPX chart - daily
All the indexes except for the Dow, NYSE Composite and the Transports have broken their 200-day average. This is a technical sell signal for many funds. If we see additional weakness on Monday I believe it could gain speed rather quickly to those critical support levels I mentioned above of 10750, 2100, 1240. If those break it would be a confirmation sell signal in addition to the 200-day failure. In layman's words grab your parachute and bail out quick.
Offsetting the technical mumbo jumbo is the extreme oversold conditions and sentiment factors. With the Nasdaq down six days straight and the Dow 5 for 6 and minus nearly 800 points this rubber band is stretched nearly to the limit. With two weeks to go before the Fed meeting and a 90% certainty of another hike the bad news is already priced into the market. While worsening inflation data in the PPI/CPI (Tue/Wed) could cause another wave of selling pressure most analysts and traders already expect it. If we should receive a lower inflation surprise in those reports it could prompt a rally on hope the Fed may not have to pull the trigger again. While I think that is highly unlikely it is a possibility. Fed Director of Monetary Affairs, Vincent Reinhart, said on Friday the Fed must draw a firm line in the fight against inflation. As the top Fed staffer on monetary issues, Reinhart presents the FOMC with policy options during the regular FOMC meetings.
There will probably be no shortage of geopolitical events to keep the markets off balance next week. After the bell on Friday the State Dept warned Americans in China of a potential terror threat. The US Embassy in Beijing said it had received information of a possible terrorist threat against American interests in China, especially in Beijing, Shanghai and Guangzhou. They warned citizens to avoid places where Americans congregate, including clubs, restaurants and schools. Nigeria said that oil production offline due to sabotage was worse than previously reported. Nigeria said over 800,000 bpd of light crude was offline rather than the previously reported 500,000. The weather service reported heavy thunderstorm activity in the Caribbean in what could be the early stages of a tropical storm. Should one actually form and head for the gulf we can expect oil prices to rocket higher. Gasoline demand for last week fell slightly as higher prices took their toll on the actual holiday driving. This slight decline helped depress oil prices only for a day before the Thr/Fri rebound. Average gasoline demand is only 81,000 bpd behind last years average but three of the highest usage weeks are still ahead. Gasoline is 70.2 cents higher this summer than last.
Table of Gasoline Demand
Crude Oil Chart - 120 min
So far our May/June game plans have been working well. The Tuesday night recommendation was to expect the Tuesday bounce to fail and to short that failure at 1275. I also suggested not buying any dip to 1255 because I expected that level to fail the next test. Wednesday opened with a sprint to 1272 and the expected failure. 1255 provided support at Wednesday's close at exactly 1255.77 but that support was toast as Thursday's open was a free fall event to 1235. That 40-point drop was a very nice ride and I hope everyone took it.
Next week is not so clear. We are so oversold that any spark could produce one
of those monster short covering rallies we have seen so many times before.
However, since Thursday was the perfect opportunity for a real rally and it
failed the odds of a sudden short squeeze are a lot slimmer. I would look for
critical support levels, 10750, 2100, 1240, to be tested again but after
that it is anybody's guess. It just depends on how much stock funds have left to
unload. If Friday's decline was just cleanup by those late to the party then we
could move into range bound mode as we await the PPI/CPI and Beige Book. Once
those reports are opened for the world to see it should determine our market
direction. It is important to either follow the trend or watch from the
sidelines. The VIX hit
a 2-year high on Thursday at 20.75 but you don't need
that news to tell you the markets are highly volatile. This is an adult swim
only and there are sharks in the water. We had our first fast market day in ages
on Thursday as well as trading curbs on the NYSE. A fast market means quoted
prices on your screen are not correct because order flow is too fast for the
systems and computers to keep up. I had several fills well away from where the
price was indicated. If you can't stand the
heat stay out of the market. No
Play Editor's note: You already know that the U.S. market's failure to rebound on Friday is pretty bearish. Part of the challenge here is that so many stocks and indices are already oversold. We need to anticipate a bounce and that makes setting stop loss a difficult task. Too tight and we'd be stopped out an almost any rebound. Too wide and we're taking too much risk. Our stops are only a suggestion. You may want to adjust yours to account for your own risk profile.
Group 1 Auto - GPI - close: 58.46 chg: -0.67 stop: 60.65
Why We Like It:
BUY PUT JUL 60.00 GPI-SL open interest=454 current ask $3.80
Picked on June 11 at $ 58.46
Garmin Ltd. - GRMN - close: 90.47 chg: -0.99 stop: 95.01
Why We Like It:
BUY PUT JUL 90.00 GQR-SR
open interest=1388 current ask $5.00
Picked on June xx at $ xx.xx <-- see TRIGGER
IDEXX Labs - IDXX - close: 78.58 chg: -0.67 stop: 80.05
Why We Like It:
BUY PUT JUL 80.00 UID-SP open interest=208 current ask $3.10
Picked on June xx at $ xx.xx <-- see TRIGGER
Oshkosh Truck - OSK - close: 50.60 chg: -0.05 stop: 52.05
Why We Like It:
BUY PUT JUL 50.00 OSK-SJ open interest=266 current ask $1.75
Picked on June xx at $ xx.xx <-- see TRIGGER
Google - GOOG - close: 386.57 chg: -6.73 stop: 384.50
There was no follow through on the market's big Thursday afternoon bounce and there was no follow through for GOOG. The stock failed near $395, just under its simple 50-dma. By the closing bell GOOG had pretty much erased Thursday's gain altogether. We are currently sitting on the sidelines with a suggested trigger to buy calls at $401.00. We thought about yanking GOOG as a bullish candidate given the lack of a market bounce on Friday but we'll leave it on the play list for now. A breakout over $400 and the 50-dma might still be buy-worthy. The biggest risk is probably an intraday spike over $400 that hits our trigger and then reverses on us. This is an aggressive play and more conservative traders might want to use a tighter stop loss but beware GOOG's volatility. Currently the stock looks poised to fall back toward the $380-379 region. Aggressive traders might want to speculate on a bounce from its simple 200-dma (near $376) but we'd use a pretty tight stop. If we are triggered at $401 our target is the $440-445 range. Currently the P&F chart sports a buy signal with a $444 target.
Picked on June xx at $ xx.xx <-- see
United Tech. - UTX - close: 60.05 chg: -0.26 stop: 58.75
Danger! UTX followed the DJIA and failed to keep any sort of follow through high on Thursday's rebound. We would hesitate to open new bullish positions right here. If shares trade under the 100-dma near $59.85 then more conservative traders may want to exit early. We have our stop loss under Thursday's low, which was a bounce off its long-term trendline of support. Should UTX turn higher on Monday we'd probably look for a rise past 60.75 before considering calls. Our target is currently the $64.00-65.00 range. We do expect some resistance near $62.00 and its 50-dma. We do not want to hold over the July earnings report.
Picked on June 08 at $ 60.13
VF Corp. - VFC - close: 64.98 change: +0.49 stop: 61.84
VFC is showing some relative strength with a 0.75% gain on Friday. We are encouraged by the follow through on Thursday's rebound but we would not open new bullish positions given the bearish market environment. Should VFC see any profit taking we'd look for the $63.50-63.00 region to offer support. More conservative traders may want to tighten their stop loss. Our target is the $68.00-70.00 range. The Point & Figure chart is very bullish with a $90.00 target.
Picked on June 01 at $ 63.51
Amgen Inc. - AMGN - close: 67.64 chg: -0.77 stop: 69.55
This may be a good spot to consider new bearish plays in biotech stocks. The BTK biotech index just produced a new lower high and a failed rally under its descending 50-dma, which happens to have recently crossed the 200-dma, a very bearish development. Shares of AMGN continue to trade under their trend of lower highs and the stock produced another failed rally near its descending 50-dma. This is a new entry point to buy puts although more conservative traders may want to wait for a move under $66.75 as confirmation. Our target is the $62.65-62.50 range. The P&F chart for AMGN points to a $60 target.
BUY PUT JUL 70.00 YAA-SN open interest=8332 current ask $3.40
Picked on June 05 at $ 67.48
Franklin Res. - BEN - close: 86.96 chg: -0.63 close: 91.55
The broker-dealer investment-related stocks also failed to rebound on Friday. While the group (sector index) has produced a double-bottom looking pattern the failure to rebound makes things look pretty ugly. The technical picture on BEN is getting worse with the MACD about to produce a new sell signal. We have been suggesting a target in the $85.25-85.00 range. Given the market weakness and BEN's failure to rebound we're going to get more aggressive too. We're suggesting that traders sell half (or more) of your position at $85.25 and then sell the rest in the $82.50-81.50 region, which is closer to the bottom of BEN's bearish channel. The $85 level does look like support so be ready for an oversold bounce. The Point & Figure chart for BEN points to a $77 target.
on May 14 at $ 89.30
Burlington Nrth.SntFe - BNI - cls: 72.28 chg: -1.84 stop: 77.55
We have good news to report with BNI. The early morning follow through higher on Friday morning reversed after it filled the gap from Thursday morning. Shares turned lower on Friday to produce what looks like a bearish engulfing candlestick. The MACD indicator has produced a new sell signal. There is still a chance for another bounce from support near $70 and its 200-dma but the weakness on Friday looks good for the bears. BNI has been trading lower in a bearish channel after breaking its long-term bullish pattern weeks ago. The P&F chart points to a $62.00 target. Our strategy with BNI involves two targets. We suggested readers sell part of their position at $70.50 (already hit) and then sell the rest of your position at $66.00 near the bottom edge of its bearish channel. However, we are going to adjust the bottom target to $67.00-66.85 to account for the 50% retracement level of BNI's previous bull run. Be advised that BNI is due to present at the upcoming transportation conference next week (June 15th).
Picked on June 05 at $ 75.64
Barr Pharma - BRL - close: 51.76 chg: -0.32 stop: 54.25
We do not have anything new to report on for BRL. The stock's oversold bounce from the May low is still slowly rolling over. The MACD is nearing a new sell signal. The P&F chart remains bearish but it is noteworthy that shares are near the P&F target. Volume has been pretty light the last couple of days. That may be a warning sign for the bears that a lot of the selling pressure may have already been exhausted. Keep an eye on the DRG index, which appears to have built a big bearish head-and-shoulders pattern and is nearing the neckline (support) around the 320 level. A breakdown in the DRG could help push BRL to new lows. Our target is the $48.00-47.50 range.
BUY PUT JUL 55.00 BRL-SK open interest= 339 current ask $4.20
Picked on June 05 at $ 52.20
Dril Quip - DRQ - close: 74.75 chg: -0.72 stop: 80.05
The oil stocks joined the rest of the market and failed to see any follow through on Thursday's big afternoon bounce. Friday's session saw DRQ erase Thursday's gain. Volume was a bit light on Friday, which doesn't suggest a lot of conviction. DRQ remains long-term overbought and there is still plenty of room for profit taking. What concerns us is the ongoing drama with Iran. Some of the stories we noticed suggested that Iran is going to refuse the latest deal. That would put pressure on crude oil, which "should" help the oil stocks. Buying puts on DRQ is a little bit aggressive. The stock's P&F chart has resisted producing any sell signals thus far and shares have not yet broken technical support at their 100-dma. We listed DRQ as a put play with two targets. Our conservative target was $70.25, which has already been hit. Our aggressive target is the 100-dma but since that moving average is rising we have to adjust our lower target as it moves. Right now our aggressive target will be the $67.50-67.00 range. More conservative traders may want to use a tighter stop. We have a wide, aggressive stop above $80.00.
BUY PUT JUL 75.00 DRQ-SO open interest= 81 current ask $5.50
Picked on June 07 at $ 74.77
Express Scripts - ESRX - close: 69.34 chg: -1.54 stop: 72.65
Good news! ESRX displayed some relative weakness on Friday and closed below the $70.00 level for the first time in months. This move helped the MACD indicator produce a new sell signal. We see this as a new entry point to buy puts. More conservative traders may want to wait for a decline under $69.15. We were suggesting two targets at $65.25 and at $60.50. The P&F chart points to a $62 target.
BUY PUT JUL 70.00 XTQ-SN open interest= 904 current ask $3.50
Picked on June 08 at $ 69.59
It's been a rough week for IBM. Shares produced a failed rally at their 21-dma near $81 on Wednesday and shares then fell to new eight-month lows on Thursday with big volume on the move. Friday saw a small attempt at a bounce but it wasn't very convincing. We would still consider new put positions here or if IBM bounces again look for a failed rally anywhere under $80.00. If you look at the weekly chart is looks like IBM has produced a bearish head-and-shoulders pattern. The P&F chart points to $73.00 target. Our target is the $73.50-73.00 range.
BUY PUT JUL 80.00 IBM-SP open interest=26069 current ask $3.50
Picked on June 06 at $ 78.75
Schlumberger - SLB - close: 59.22 chg: -1.00 stop: 65.01
It was a very bearish week for oil stocks and oil service stocks lead the group lower. SLB broke support at its 100-dma and the $60.00 level. The recent action looks like a bear flag pattern. While SLB might be considered short-term oversold the lack of follow through on Thursday's bounce doesn't bode well. Our biggest concern right now with puts on oil stocks is that the situation with Iran might heat up and push crude oil prices higher lending support to the oil sector. Other than headline news risk (Iran) the outlook with SLB is technically pretty bearish. Readers can choose to buy puts here under $60.00 or wait for an oversold bounce back toward the $62 region or its 100-dma and enter there. Our target is the $55.75-55.50 range, above its rising 200-dma. The P&F chart shows a triple-bottom breakdown sell signal with a $49 target.
BUY PUT JUL 62.50 SLB-SZ open interest= 238 current ask $5.10
Picked on June 07 at $ 60.51
Wynn Resorts - WYNN - close: 69.26 chg: -0.12 stop: 73.51
If you study the charts on WYNN the stock has spent the couple of days consolidating sideways. However, you'll notice a consistent trend of lower highs (trendline of resistance). If the major market averages continue lower next week then we would expect WYNN to make a run for the $65 region. Friday's failed rally near its 10-dma and back under the $70.00 level and its 100-dma looks like another entry point to buy puts. More conservative traders may want to think about reducing their risk with a stop closer to $72.00. We are suggesting two targets. Consider selling half your position in the $65.25-65.00 range and then sell the rest of your position in the $61.00-60.00 range. The simple 200-dma near $60 could be support. The P&F chart is bearish and points to a $60 target.
BUY PUT JUL 70.00 UWY-SN open interest= 180 current ask $4.20
Picked on June 05 at $ 69.11
Apple Computer - AAPL - close: 59.24 chg: -1.52 stop: 58.69
We are suggesting that readers, if you opened positions on Friday, consider cutting your losses right here. Many of the world indices bounced on Friday but the lack of a bounce and follow through on Thursday's rebound in the U.S. markets looks very bearish! The attempt at a bounce in AAPL failed at its exponential 200-dma near $61.50. This was a potential obstacle we pointed out in the play description. The close back under $60.00 is another sign of weakness. We're closing the play early. More aggressive traders, if you still believe that AAPL can bounce from here may want to put their stop loss under Thursday's low (57.15). We will keep an eye on AAPL for a move past the $62.00 region as a potential bullish development.
Picked on June 08 at $ 60.76
What are the differences in a bull call spread and a bull put spread? Which has a maximum loss that is the debit originally paid for establishing the position? Which has a maximum gain that is the credit taken in when the position is established?
Don't know? The PHLX.com's Strategy Screener will tell you this and much more.
Many traders gravitate to the CBOE site for educational information on options, but traders might be surprised at the easy reference tool provided by the PHLX's Strategy Screener. It's a handy resource for those first learning about different options strategies. It's also a great tool for those who have long been trading one type of strategy and would like to brush up on the particulars of another.
Click on any of the strategies from the Strategy List, and you see a chart of the profit/loss potential at expiration, such as the one below for a bull put spread that is short one 60 put and long one 55 put.
Net Position at Expiration:
Click over to the bull call spread and you'll see that the shape of the chart is identical. One hypothetical example of a bull call spread was established by being long a 60 call and short a 65 call, but the similarities in shape remain obvious.
Net Position at Expiration:
Buttons on the top of each strategy's page allow traders to check out various parameters of each strategy.
for Bull Call Spread:
As explained on the site, the bull call spread's maximum loss is the debit paid when the position was established, plus the commissions paid.
That information as well as the maximum gain is also included in a quick reference at the bottom of the page. Many who know the basics of establishing a position still might find helpful the discussions of how volatility and time decay impact the spread. I've known many traders who establish positions without knowing their assignment and expiration risks, and this site explains those succinctly.
Had enough of the basics? Then punch the "Launch Interactive Analysis" button. Imagine that just before May's option expiration you'd established a SOX bull put spread by selling a June 440 put and buying a June 430 put, and that you have a rule that you'll close out a spread if the underlying moves within five points of your sold spread ten days before option expiration. The position simulator allows you to estimate how much profit or loss you would have if the SOX were to drop to $445 ten days before option expiration, something that the SOX nearly did Wednesday of this week. The left side of the screen allows traders to edit positions and settings, including price on the test date, days to expiration and estimated volatility.
With those parameters set, the left side of the page produces a set of profit-loss information, including a chart and a table.
The simulator estimates that if a trader wanted to exit the bull put spread if the RUT hit 445 ten days before opex, with volatility at 29 percent, the trader would take a loss of $194 plus commissions for each options contract.
I actually did establish this bull put spread just before May's expiration. At Wednesday's close, with the SOX at 448.26, the bid and ask for closing out the position by buying back the 440 put and selling the 430 were 2.40 x 2.90. I had taken in $0.50 credit when establishing the spread, so an estimate of a $194.00 loss per contract was probably a conservative estimate, and that's probably because volatility increased with Wednesday's steep decline. Because it's sometimes hard to get out of one of these positions on the SOX without paying something at or near the ask, the loss probably would have been more in the $250.00 range by the time the SOX had dropped another few points, depending on volatility and other factors. While it might not be wise to trust these figures implicitly, the estimate gave some idea of the loss that might be incurred. The helpfulness in exploring how time, volatility and the underlying's price impact options positions can't be denied. Neither can this tool's ease in use.
Traders should spend some time familiarizing themselves with the risks and
parameters of any options strategy they're considering. The PHLX.com site
provides one way of
Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other plays and content by the Option Investor staff.
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