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Daily Newsletter, Saturday, 09/16/2006

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Creeping Slowly Higher

The indexes crept slowly higher for the week but progress appeared to be hampered by quicksand like moves. Volume increased as the week drew to a close but internals were almost dead even with advancers beating decliners by only a slim margin. Inflation reports continued to be tame ahead of next week's FOMC meeting and energy prices hit new lows prompting gains in retail stocks.

Economic Calendar for Next Week

Chart of Core CPI

Friday started off with the Consumer Price Index, which came in almost exactly where analysts had predicted at +0.2% for the headline number and +0.2% for the core rate. This was very positive and nearly guarantees the Fed will remain on hold at next week's meeting. The small increase in the core rate was still enough to push the trailing 12 months inflation rate to 2.8% and well over the Fed's target rate. However, this was the second month with a +0.2% increase after four months at +0.3%. The trend is moving in a Fed friendly direction just as the Fed had hoped. The main drivers for the reduction of inflation factors were falling energy prices and the weakening housing market. This trend should continue and based on the current inflation picture the Fed should be done. The Fed funds futures are showing only a 12% chance of another hike this year and longer dated futures in April 2007 and beyond are beginning to show a slight chance of rate cuts.

The NY Empire State Manufacturing Survey released on Friday showed a slight rebound to 13.8 in September up from 11.0 in August. The trend is still down but any slight uptick is a positive event. Employment jumped from 6.4 to 12.5 and back orders rebounded into positive territory at 2.3 compared to last months dip to a negative -6.6. Prices paid dropped -3.3 points and hours worked spiked sharply to 22.6 from 14.4. This report shows a decent rebound in the internals and possibly the start of a turnaround in the NY area.

Industrial Production fell -0.1% in August instead of an expected gain of +0.1%. This compares to a +0.4% gain in the prior month. This is further evidence of a slight weakening of the economy as the Fed currently expects. The majority of components showed declines with capacity utilization slipping slightly to 82.4%. This is just another report that should make the Fed comfortable to wait on the sidelines.

September Consumer Sentiment rose to 84.4% from 82.0 in August. The gain came from the expectations component, which jumped from 68.0 to 77.1. The present conditions component still showed a decline to 95.7 from 103.8. Falling gasoline prices and the perception that the Fed was done helped to provide support. Slower job growth was the drag on the current conditions component. If the Fed does remain on hold next week and give us a positive statement we could see long-term interest rates decline slightly and quite possibly the housing market could find a bottom.

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Next week's economic calendar has the PPI and Residential Construction on Tuesday followed by the FOMC meeting on Wednesday. If the PPI is lower as expected and residential construction is still declining the Fed could give us a stronger pause statement and that would setup a strong positive climate for the markets through year-end.

The Fed has also been presented with an inflation gift in the form of a -$15 drop in oil prices since the $78.80 high on the day of their last meeting, August 8th. This drop has cut gasoline prices by -50 cents with more to come. Natural gas has fallen from $8.68 on August 2nd to $4.96 at Friday's close. This -43% drop in gas prices is reducing heating and cooling costs and utility bills for everyone in the country where natural gas is the fuel for electricity generation. This drop in energy prices is a major benefit for the Fed and should give them even more peace of mind about halting rate hikes permanently for this cycle.

The decline in energy prices may be about over as it pertains to oil. Natural gas still has a rocky road ahead. Oil prices declined to $62.00 on Friday where it was met with a strong surge in buying. I personally believe the rebound was driven by end of contract short covering and option expiration pressures. I still expect further declines to something in the $58-$60 range but that is where I expect OPEC to provide price supports in the form of production slowdowns. They have become very accustomed to the flood of dollars into their coffers from high priced oil and a -21% drop is painful. Saudi has already slowed production and others may follow. This could be a good time for OPEC producers to take problem production areas offline for a mechanical refurb. They have to do this periodically and I would bet it was not happening at $75 oil prices. By taking a maintenance cycle now it would let global supplies equalize and take the surplus out of the system before the winter demand for heating oil begins. It would also provide a floor for prices and allow a new cycle to begin. OPEC producers could do this without any official directive and that would also be positive for prices.

Natural gas has more pain ahead without any hurricanes in the Gulf. Inventory levels this week saw an injection into storage of 108 Billion CF pushing gas in storage to 3.1 Trillion CF and the highest inventory level for this week in over 15 years. This is just one strong week away from hitting maximum storage levels of 3.2-3.5 TCF. When those storage locations hit their maximums they will close the pipelines and pressure will backup in the lines preventing suppliers from accepting gas from the fields. As pressure begins to build in all the pipelines the number of fields going into idle mode will increase. There will be strong gas on gas price competition for available storage space. Those with space can take the lowest bid on gas for sale thereby filling their tanks with the cheapest gas available. This gas on gas competition should send prices significantly lower for several more weeks. Once cold weather begins and inventory levels begin to drop prices will surge once again. That could be the middle to the end of October. Remember, we do not have sufficient production capacity to supply all the gas needed during the winter months. Only by filling the storage tanks prior to winter can suppliers keep the gas flowing when the weather turns cold. Once heating requirements begin to reduce storage levels it will be back to business as usual for the producers. Based on current supplies and historical winter demand it suggests a price ceiling this winter of around $8 mbtu but that is nearly double today's price. As a point of reference December gas futures are still in the $8 range. There are no hurricanes on the horizon headed for the Gulf. There has been a string of them form in the Atlantic recently led by Florence, Gordon and now tropical storm Helene. All have taken a hard right turn northward after formation and all will disappear when they hit colder water in the northern Atlantic.

Oil and natural gas do trade in tandem on a relative BTU basis but gas has broken that linkage over the last couple weeks. On a relative basis the drop in gas prices should have been equivalent to a -$25 drop in oil prices to something in the $52 range. The linkage was broken because of the remaining geopolitical concerns over oil. Gas has no geopolitical concerns holding it up. The majority of our gas is produced in the US or Canada while our oil imports come from around the globe. With Iran, Iraq, Lebanon, Syria, Nigeria, Venezuela, Ecuador and Bolivia still smoldering the future supply of oil is not guaranteed. OPEC surprised everyone on Friday by lowering their 2007 demand outlook for OPEC crude to 28.1 mbpd. This was -800,000 bpd less than the 2006 demand at 28.9 mbpd. OPEC said supply growth outside OPEC could rise by as much as +1.7 mbpd in 2007 but numerous analysts disputed that figure. New production dates and targets are very prone to being missed. Either way overall demand growth is still expected to grow by 1.2 mbpd in 2006 and another 1.2-1.5 mbpd in 2007. 92% of demand growth comes from developing countries. China's oil demand is expected to grow by +8.3% by year-end. In August OPEC produced 29.8 mbpd and non-OPEC production was 51.1 mbpd representing an increase of 1.1 mbpd over August 2005.

Fidel Castro and Cuba may end up a member of OPEC if Hugo Chavez has his way. Cuba currently imports 85,000 bpd of oil from Venezuela at a discounted rate but that may be about to change. Cuba has been very active in signing deals with the major exploration companies to drill in about 5000 square miles off the Cuban coast. Petrobras, Repsol, India's ONGC, Norsk Hydro and Canada's Sherrit Intl have signed exploration deals. Rumors are strong that China has also inked a deal but there is no confirmation. There are supposedly some major fields about to be explored and it would not take but a couple decent finds to turn Cuba into an exporter rather than an importer. Chavez would like nothing better than to see Fidel accepted into OPEC and become a major oil producer only 90 miles off our coast. It would be a nightmare for the US government, which has been hoping Castro would finally expire and Cuba opened up as a friendly country to the US. If Cuba suddenly finds its coffers bulging with oil wealth that plan could evaporate.

Individual stocks making the news on Friday included Adobe, which soared +3.35 after reporting earnings that beat the street by +3 cents. This was surprising since expectations were already lowered and earnings were below the same quarter last year. Guidance about the coming releases of Acrobat and Creative Suite 3 helped provide the boost to sentiment.

Hewlett Packard made the news again after several employees were asked to testify in the ongoing investigation. It is a sure bet now that charges will be filed in some form against the outside firm that handled the spying and possibly on some insiders as well.

Ford fell -1.07 after saying it was slashing its workforce by a third in an effort to cut costs by $5 billion. They plan to offer buyouts to as many as 14,000 workers of as much as $140,000. Wall Street thought the plan fell short of what was needed to rescue Ford from the current slump.

Dynegy (DYN) agreed to buy 11 generating plants from LS Power for $2.3 billion. DYN will increase its capacity from 12,800 megawats to over 20,000 and go from 20 plants in 9 states to 31 plants in 15 states. DYN is assuming $1.8 billion in debt with the rest a combination of cash and stock.

Daimler Chrysler (DCX) fell -3.54 after warning that profits would be about -$1.3 billion less than previously expected. The carmaker blamed operations in the US for a loss of about $1.2 billion due to excess inventories, high fuel prices and non-competitive costs for employees and retirees. DCX said health care would run about $2.3 billion for the full year. They said customer demand in Q3 shifted to smaller vehicles while inventory was overstocked with larger vehicles. Excess production capacity was also a problem since costs are incurred even when vehicles are not being produced. DCX is halting production on the Jeep Commander and Grand Cherokee for a month starting next week.

Freescale Semi (FSL) announced after the close that they were being bought for $17.6 billion by a private equity consortium led by the Blackstone Group. This is believed to be the largest leveraged buyout ever in the technology sector. FSL was spun off from Motorola in 2004. Freescale makes chips for handsets and for automotive and industrial equipment. The buyout is for $40 a share in cash. Freescale announced on Monday that it was in talks. Dow Jones said Blackstone was competing with Kohlberg Kravis Roberts, Bain Capital, Silver Lake Partners and Apax Partners. This was quite a distinguished list of suitors. Freescale must have found a way to turn silicon into gold to attract this much attention. KKR recently acquired 80% of Phillips Semiconductor and could have merged the companies had it been successful. It was theorized that Freescale will eventually be broken apart after the acquisition with the wireless division being floated as an IPO once again.

Gold fell to $576 on Friday morning to end eight days of declines from $648.60 in early September. Reasons have been flying fast and furious without any gaining credibility. I heard on Friday that one large holder was liquidating 100 tons but that cannot be confirmed. It is also a factor of falling crude prices and a relaxation of geopolitical concerns. Iran is trying to get off the front page and the Israel/Lebanon conflict is easing on schedule. Several large dealers noted that on the last drop back in July the gold funds and ETFs also saw liquidations. This time around those same funds and ETFs are seeing an influx of cash as investors add to positions. They feel it is not a retail flight from gold but something related to a major holder exiting their position. That selling triggers sell stops held by others and down we go. Gold is thought to have strong support at $560 but few expect it to test that level. But, gold bugs are historically bullish until broke so retail sentiment is not a valid indicator.

Friday was a quadruple witching expiration along with a rebalance of the S&P-400, 500 and 600. Considering the potential volatility and the extra 1.5 billion in volume over Thursday's level it was a very tame day. The spike at the open on the low CPI gave everyone interested a chance to get out at four month highs. Many did take that exit and the indexes declined to their lows around 1:PM. It was an orderly exit and once over the indexes regained some lost ground but mostly traded sideways into the close. The Dow and the S&P indexes did see a closing dip on the rebalance but all finished the day with gains.

The battlefield is set for next week. The indexes are holding near their highs and Tuesday's PPI will be the final act before the Fed takes the stage on Wednesday. Nobody expects the Fed to do anything but pass and release a statement claiming the economy is on track and inflation is easing. That is the major problem ahead. Everybody already expects this to happen and the 9/11 relief rally this week moved the indexes one notch higher to wait for the Fed's blessing. In theory the blessing should release the markets to rally into the Q3 earnings cycle. In reality the markets have already rallied to the point where gains are stretched pretty thin.

The recent moves higher have been labored and not without a struggle. That is fine as long as we continue higher since the bears are paving the path ahead with one failed short after another. The problem I am seeing is a lack of conviction on the part of the bulls. Now that summer is over, inflation is easing and the economy is slowing into a very soft landing they should be backing up the truck to load up on stocks. It is not happening and that bothers me. The broader indexes of the Russell and NYSE Composite have stalled while the Nasdaq is spiking steadily higher. Tech stocks are in favor and nearly everything else is being kicked to the curb. Chip stocks are the leading techs and the Freescale announcement after the bell on Friday should energize them even more on Monday. Unfortunately you can't build a credible market rally on one sector.

The Dow and S&P are nearing breakouts of prior five-year highs. Another way of saying that would be, the Dow and S&P are perilously close to testing double top resistance. In the monthly Dow chart below you can see why the all time resistance high of 11750 could easily be strong resistance especially in a Sep/Oct calendar period. The daily chart emphasizes that 11650-11750 range as resistance with a double top test of the May high at 11670. The bulls will see both of these tests as potential breakout attempts leading to a sprint much higher as Q4 arrives. The bears will see these levels as critical tests of bullish conviction and that conviction has been sorely lacking as of late.

Dow Chart - Monthly

Dow Chart - Daily

The corresponding monthly chart of the S&P shows strong resistance at 1325 and again at 1380. Currently it is the 1325 resistance we are concerned with. Again, the daily chart shows how critical 1325 may be for the bulls. The key here is the May/June sell off. That was a sharp drop and totally out of character for May. The three-month duration could have eliminated the possibility of a normal September dip but that has yet to be proven. Until the bulls find some conviction the bears will continue to chip away at the gains.

S&P-500 Chart - Monthly

S&P-500 Chart - Daily

The Nasdaq has been on a roll and powered by the chip stocks. The dead stop at 2235 on Friday is exactly resistance from the first quarter lows. The Nasdaq needs to hold this level, which was achieved on a gap open from the CPI on Friday. Should it slip back below 2225 it would face a tougher test the next time around.

Nasdaq Chart - 90 min

Nasdaq Chart - Daily

The Russell is not showing as much upward momentum as the Nasdaq and faces its own resistance challenge at 730. Both indexes have broken the 200-day average and that is definitely positive. The Russell took a sharper drop in the May sell off and has yet to return to its bullish ways. The congestion range from 670-730 has been a magnet that small caps have been unable to escape. Small caps are the heart of the market. Without a bullish Russell any tech rally is doomed to failure. The Russell is the incubator for the stock market and graduates hundreds of issues to the larger indexes each year. Unless the small caps are finding support from mutual funds the market will remain directionless. Recently we have seen the indexes like the Dow and S&P-100 move higher on the strength of the large caps as a defensive measure by funds afraid to invest capital in the smaller more volatile issues. Eventually that will fail as well since the smaller number of large caps eventually become overbought and managers begin to avoid them as well. Pay close attention to the Russell as the health of the market.

Russell-2000 Chart - Daily

NYSE Composite Chart - Daily

Dow Transports Chart - Daily

Two other indexes, which show the health of the market, are the NYSE Composite and the Dow Transports. The NYSE Composite is made up of all the stocks on the NYSE and indicate the underlying strength of the market simply by providing a diverse cross section of market capitalization and sectors. The NYSE Composite rallied to resistance at 8460 on September 5th but has shown relative weakness ever since. The Dow Transports should be soaring with $63 oil but instead they are limping. They saw a strong post 9/11 relief rally when there were no planes falling out of the sky due to an anniversary attack. Once that rally ended on Wednesday consolidation settled in just below the 200-day average. Were it not for Tue/Wed and the relief rally the index would be resting on 4200 and threatening a sharper breakdown. I am sure 9/11 caused the initial decline the prior two weeks but there is still no bullishness now that 9/11 has passed. The weakness is based on the potential for slowing shipments if the economy is really slowing. So far the shippers have not given any indication that business is slowing and several have actually mentioned strong bookings. Still, the transports are lagging the broader market and remain a cautionary indicator for the post Fed market.

The bottom line for me is simply the calendar, the Fed, rising complacency, lack of bullish conviction and impending resistance. I don't want to turn outright bearish at these levels but I am sure not bullish. The VXO (old VIX) closed at 11.01 on Friday. This is almost exactly the same level as the close on May 8th. It has been there several times in late August but the return on Friday could be ominous. It is strange to have this much complacency but so little conviction. I believe it is because we are approaching strong resistance highs at a time we should be worrying about normal September lows. This is unnerving for those with many years of experience in the markets.

I probably need to remind everyone that the markets tried to retest their highs in early September last year only to implode on September-20th for a -78 point S&P drop to the October lows. There is precedent for a late August, early September rally that eventually ends badly. In 2004 the September decline started on the 22nd for a -30 point SPX drop, which was bought in volume but was then followed by a -52 point drop in October. The 2004 drop came after an August rally from a correction that started in late June. This was very similar to our current August rebound. In 2003 the drop began on Sept-19th for a -40 point drop. In 2002 the September high was on the 11th and was followed by a -156 point drop into the October lows. Skipping 2001, the September high in 2000 came on the 1st and there was no relief until the -225 point low in October. In 1999 the indexes were pretty choppy but the September high was on the 8th with the October low -128 points lower on the 18th. 1998, -143 points from September high on 9/23 to Oct low. 1997 saw September close at its highs but the October decline, which began on the 7th knocked off -128 points in only 14 days. 1996 was the closest year on record devoid of a material Sept/Oct decline. One year out of ten with no decline? What does that tell you about our chances in 2006? Averaging the start dates over the last nine years gives us September-17th as the date most likely to see a decline start. Today is September 17th. Is it a coincidence that the markets almost reached their highs on Friday? I also pondered the impact of Fed meetings on the September decline and produced the following table. The last three years the decline began within three days of the meeting. Before that the results were inconclusive other than it did not make any difference if the Fed was hiking, cutting or taking a pass. The decline still appeared.

Fed Meeting Table Last Nine Years

For next week I would be very cautious of a post Fed sell the news event. I am writing on Wednesday night next week instead of Tuesday so I will get to recap the Fed meeting and the market reaction immediately after it happens. If the Fed gives us a market friendly statement anything is possible. However, given the consistency in the table above I would be far more inclined to have a bearish bias for the next week or so than bullish. They say statistics were invented to keep the bean counters busy and give historians something to write about. That is fine if you are talking about batting averages or yards gained rushing. When it pertains to money invested for retirement it might make sense to pay attention just in case lightning does strike 10 times in a row. I would continue to buy dips to 1290 and remain long over 1300.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
BZH CAT None
  JEC  
  JOYG  
  LVS  
  NUE  
  STLD  
  WYNN  

New Calls

Beazer Homes - BZH - close: 39.60 change: +0.85 stop: 37.90

Company Description:
Beazer Homes USA Beazer Homes USA, headquartered in Atlanta, Georgia, combines the capabilities of a national company with the knowledge and insight of the best local professionals. Beazer currently builds in over 40 markets in the Southeast, Mid-Atlantic, Midwest, West and Central United States. (source: company press release or website)

Why We Like It:
It looks like the homebuilders may have finally put in a significant bottom over the last couple of months. The group has been bouncing lately due to improving consumer confidence, a huge pull back in crude oil prices, and tame inflation data. If the FOMC passes on raising rates this week it will be another positive sign for the homebuilders. Some market pundits are actually talking about rate cuts early next year. That would keep mortgage rates relatively low and improve sales for the homebuilders. There has already been a parade of earnings warnings for the sector so it looks like all the bad news is already out. The group could easily see more buying since they look like bargains with many of the homebuilders down 50% or more from their highs. We like BZH as a potential call candidate with the stock's bullish double-bottom pattern. Another positive is the rising volume on the recent bounce. We're going to suggest that readers wait for a bullish breakout over technical resistance at the descending 50-dma. Our trigger will be at $40.75. More conservative traders may want to wait for a move over $41.00 first. If triggered our target is the $46.00-47.00 range. We do not want to hold over the November earnings report.

Suggested Options:
We are suggesting the October and/or November calls. You, the individual trader, should choose which month and strike price best suits your trading style and risk. Don't forget that October options expire in five weeks.

BUY CALL OCT 35.00 BZH-JG open interest= 320 current ask $5.40
BUY CALL OCT 40.00 BZH-JH open interest=1562 current ask $2.05
BUY CALL OCT 45.00 BZH-JI open interest= 883 current ask $0.50

BUY CALL NOV 35.00 BZH-KG open interest= 573 current ask $6.10
BUY CALL NOV 40.00 BZH-KH open interest= 928 current ask $2.85
BUY CALL NOV 45.00 BZH-KI open interest=1873 current ask $1.05

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.2 million
 

New Puts

Caterpillar - CAT - close: 65.43 chg: -0.08 stop: 67.36

Company Description:
For more than 80 years, Caterpillar Inc. has been making progress possible and driving positive and sustainable change on every continent. With 2005 sales and revenues of $36.339 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. (source: company press release or website)

Why We Like It:
The Dow Jones Industrial Average may be nearing a new high but shares of Dow-component CAT are certainly not participating in the rally. CAT has a bearish trend of lower highs and looks poised to breakdown under significant support near $65.00. The Point & Figure chart is already bearish and points to a $48 target. We are suggesting that traders wait for a new relative low before opening positions. Our entry point will be a trigger at $64.59, which is under last week's low. If triggered our short-term target is the $60.25-60.00 range.

Suggested Options:
We are suggesting the October options. Please note the October strikes expire in five weeks. We do not want to hold over CAT's earnings report in October.

BUY PUT OCT 67.50 CAT-VU open interest=5260 current ask $3.50
BUY PUT OCT 65.00 CAT-VM open interest=5600 current ask $2.10
BUY PUT OCT 62.50 CAT-VZ open interest=3808 current ask $1.15
BUY PUT OCT 60.00 CAT-VL open interest=3450 current ask $0.55

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/20/06 (unconfirmed)
Average Daily Volume = 5.2 million

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Jacobs Engineering - JEC - cls: 79.98 chg: -2.25 stop: 82.26

Company Description:
Jacobs, with over 42,000 employees and revenues approaching $7.0 billion, provides technical, professional, and construction services globally. (source: company press release or website)

Why We Like It:
The July-August rally in JEC is over. The stock has failed near resistance in the $87.50-88.00 range with what looks like a double-top pattern. This past week saw JEC plunge under support near $82.00 and its 50-dma. Now the stock is poised to breakdown under support near $80.00, its 100-dma and 200-dma. Volume on Friday's decline was pretty strong. Aggressive traders may want to enter put positions here or on a failed rally under $82. We want to see more confirmation lower so we're suggesting a trigger to buy puts at $79.45. If triggered our target is the $72.50-70.00 range. This coincides with the bearish P&F chart that points to a $72 target. We do not want to hold over the early November earnings report.

Suggested Options:
For the moment we don't see any November options available so that leaves us with October strikes, which expire in five weeks.

BUY PUT OCT 85.00 JEC-VQ open interest=563 current ask $6.00
BUY PUT OCT 80.00 JEC-VP open interest=526 current ask $2.95
BUY PUT OCT 75.00 JEC-VO open interest=596 current ask $1.15

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 416 thousand

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Joy Global - JOYG - close: 36.28 change: -0.06 stop: 37.51

Company Description:
Joy Global Inc. is a worldwide leader in manufacturing, servicing and distributing equipment for surface mining through P&H Mining Equipment and underground mining through Joy Mining Machinery. (source: company press release or website)

Why We Like It:
In spite of some positive analyst comments and news that the company was raising their stock buy back program, shares of JOYG are still sliding toward support near $35.00. The stock surged higher a couple of weeks ago but end the end gave it all back in spite of the major indices hitting new four-year highs. We suspect that the next move will be lower. However, JOYG has to breakdown under support at the $35.00 level first. Therefore we're suggesting a trigger to buy puts at $34.95. If triggered our target is the $30.50-30.00 range.

Suggested Options:
We would prefer to play November options but don't see any available at this time. January strikes are available but that might be overkill. That leaves us with Octobers.

BUY PUT OCT 40.00 JQY-VH open interest=4135 current ask $4.70
BUY PUT OCT 35.00 JQY-VG open interest=2616 current ask $1.70
BUY PUT OCT 30.00 JQY-VF open interest=1257 current ask $0.50

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/30/06 (unconfirmed)
Average Daily Volume = 2.6 million

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Las Vegas Sands - LVS - close: 67.71 change: -0.73 stop: 70.05

Company Description:
The Las Vegas, Nevada-based company owns The Venetian Resort Hotel Casino and the Sands Expo and Convention Center in Las Vegas and the Sands Macao in the People's Republic of China (PRC) Special Administrative Region of Macao. The company is currently constructing two additional integrated resorts both scheduled to open in 2007: The Palazzo Resort Hotel Casino in Las Vegas and The Venetian Macao Resort Hotel Casino in Macao. (source: company press release or website)

Why We Like It:
You know how the saying goes..."If at first you don't succeed try, try again." We're going to try again with LVS. The stock's rally on Tuesday never saw any follow through higher and the Tuesday-Wednesday move is a very clear bearish reversal. The late week slide lower has produced a new MACD sell signal on the daily chart. Plus, volume has been coming in at above average levels during the Wednesday-Friday declines. We are fighting against a bullish P&F chart but suspect LVS can still decline toward support near its 200-dma. We're going to set a trigger to buy puts at $65.99. If triggered our target is the $60.50-60.00 range. We do not want to hold over the early November earnings report.

Suggested Options:
We are suggesting the October puts. Please note that the October options expire in five weeks.

BUY PUT OCT 70.00 LVS-VN open interest= 708 current ask $4.50
BUY PUT OCT 65.00 LVS-VM open interest= 864 current ask $2.05
BUY PUT OCT 60.00 LVS-VL open interest=1108 current ask $0.75

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 2.2 million

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Nucor - NUE - close: 46.76 change: +0.10 stop: 50.01

Company Description:
Nucor and affiliates are manufacturers of steel products, with operating facilities in seventeen states. Products produced are: carbon and alloy steel -- in bars, beams, sheet and plate; steel joists and joist girders; steel deck; cold finished steel; steel fasteners; metal building systems; and light gauge steel framing. Nucor is the nation's largest recycler. (source: company press release or website)

Why We Like It:
A lot of the metal/iron/steel stocks were sold off on the commodity selling recently. The weakness in NUE has produced a bearish breakdown from a pennant type formation of higher lows and lower highs. The breakdown has not seen a lot of follow through yet as it hugs the 200-dma but we see the lack of follow through as an opportunity. Aggressive traders can open put positions with the stock under $50.00 or $48.00. We're going to suggest a trigger to buy puts at $45.95, which is under short-term support at $46.00. If triggered our target is the $40.50-40.00 range. The P&F chart has a relatively new triple-bottom breakdown sell signal with a $41 target. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October puts. Remember, you should choose which month and strike price best suits your trading style and risk.

BUY PUT OCT 50.00 NUE-VJ open interest=7377 current ask $5.00
BUY PUT OCT 47.50 NUE-VW open interest=5713 current ask $3.30
BUY PUT OCT 45.00 NUE-VI open interest=5154 current ask $1.95
BUY PUT OCT 42.50 NUE-VV open interest=2547 current ask $1.10
BUY PUT OCT 40.00 NUE-VH open interest=2460 current ask $0.55

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 4.2 million

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Steel Dynamics - STLD - close: 50.93 chg: +0.30 stop: 52.05

Company Description:
Steel Dynamics, Inc. (SDI) is the nations fifth largest producer of carbon steel products, based on production capacity. Annual revenues exceed $2 billion, with annual shipments at a rate surpassing 4 million tons per year. SDI employees number about 3,300. (source: company press release or website)

Why We Like It:
STLD is another steel stock that we think will see a breakdown relatively soon. Shares have a bearish pattern of lower highs and the P&F chart is bearish with a $42 target. Currently the stock is flirting with support in the $49.50-50.00 region and its 200-dma. We're suggesting a trigger to buy puts at $49.40. If triggered our target is the $45.15-45.00 range. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October puts but November puts would also work well, just remember we want to exit ahead of STLD's earnings report. Our trigger is $49.40.

BUY PUT OCT 50.00 RQL-VJ open interest=981 current ask $2.65
BUY PUT OCT 45.00 RQL-VI open interest=826 current ask $1.00

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.5 million

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Wynn Resorts - WYNN - close: 73.10 chg: -2.47 stop: 76.61

Company Description:
Wynn Resorts, Limited is traded on the Nasdaq National Market under the ticker symbol WYNN and is part of the NASDAQ-100 Index. On September 6, 2006, Wynn Macau, a destination casino resort in the Macau Special Administrative Region of the People's Republic of China, opened, featuring 600 deluxe hotel rooms and suites, approximately 220 table games and 380 slot machines in approximately 100,000 square feet of casino gaming space, seven restaurants, approximately 26,000 square feet of retail space, a spa, a salon, entertainment lounges and meeting facilities. Additionally, the Company owns and operates Wynn Las Vegas, a luxury hotel and destination casino resort located on the Las Vegas Strip. (source: company press release or website)

Why We Like It:
The August rally in WYNN stalled out before the stock could reach its 2006 highs near $80.00. Shares struggled with new resistance at $78 and spent over four weeks consolidating sideways under the $78 level. This past week we began to see signs of weakness with volume surging on the declines. WYNN has been somewhat volatile the last few days but Friday's failed rally and bearish engulfing candlestick looks like a new entry point to buy puts. The P&F chart is already bearish with a $67 target. The short-term technical indicators and most of the weekly indicators have all turned bearish. We are suggesting puts right here with the stock under $75.00. More conservative traders may want to wait for a decline under the 50-dma (near 72.05) before opening new positions. Our target is the $68.50-68.00 range, which takes into account potential support at the rising 200-dma. Aggressive traders may want to aim lower.

Suggested Options:
We are suggesting the October puts. We would prefer November options but none are available. If you're inclined December strikes are available. Remember that October options expire in five weeks.

BUY PUT OCT 75.00 UWY-VO open interest= 4031 current ask $4.50
BUY PUT OCT 70.00 UWY-VN open interest=11268 current ask $2.25

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.3 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Cymer Inc. - CYMI - close: 44.00 chg: +0.05 stop: 39.95

The markets, if you're watching the Dow Industrials, the NASDAQ Composite and the S&P 500, turned in a pretty strong week. Yet sadly the SOX and shares of CYMI posted a failed rally on Friday. The SOX looks worse with a definite pull back from its highs on Friday. Meanwhile CYMI tagged round-number resistance near $45.00 Friday morning and then pulled back to spend the rest of the day trading sideways. Some of the short-term technical indicators are also suggesting this might be a short-term top for CYMI. We are not suggesting new positions at this time. Something to keep in mind is that while the first two weeks of September bucked the historical trend of weakness the next four weeks have a very strong history of weakness for stocks. More conservative traders may want to exit early or tighten their stop loss on CYMI.

Suggested Options:
We are not suggesting new plays on CYMI at this time.

Picked on September 06 at $ 42.55
Change since picked: + 1.43
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million

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Hartford Finc. - HIG - close: 87.04 chg: +1.16 stop: 82.99

We are growing more wary of the current rally in stocks that's not stopping shares of HIG from showing relative strength. The bounce from the $86.00 level is a new entry point to buy calls. The rally this past week has produced a new MACD buy signal on the weekly chart and daily chart technicals are already bullish. The Point & Figure chart is already bullish with a triple-top breakout buy signal with a $102 target. Our target is the $91.50-92.00 range, near its May highs. However, we do expect some resistance in the $89-90 region. We do not want to hold over the early November earnings report.

Suggested Options:
We are suggesting the October calls. These have five weeks left until expiration.

BUY CALL OCT 85.00 HIG-JQ open interest=686 current ask $3.40
BUY CALL OCT 90.00 HIG-JR open interest=436 current ask $0.75

Picked on September 12 at $ 86.29
Change since picked: + 0.75
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume = 1.4 million

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Manpower - MAN - close: 60.90 chg: -0.62 stop: 57.99

MAN produced a powerful rally and bullish breakout midweek last week. The move was strong enough to push shares of MAN through resistance at its 50-dma and at the $60.00 level. The surge higher also reversed the P&F chart from a sell signal into a new buy signal with a $77 target. Unfortunately, the rally has struggled to make it past the $62.50 level and its 100-dma. We have been suggesting that readers look for a dip to or a bounce from the $60.00 level as a new entry point to buy calls. The $60.00 mark is broken resistance so it should offer some support. However, we're cautious on the market's strength so more conservative traders may want to tighten their stops (suggestions are 59.45 or $58.99). We're leaving our stop at $57.99 for now. Currently our target is the $65.00-66.00 range.

Suggested Options:
We are not suggesting new positions at this time. Wait for a bounce from support near $60.00. If an entry point occurs we would use the October calls, which have five weeks left until expiration.

Picked on September 12 at $ 60.28
Change since picked: + 0.62
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 900 thousand

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Mettler Toledo - MTD - close: 65.43 chg: +0.75 stop: 59.99

Another day, another gain for this technical instrument maker. The stock has really seen a very strong rally since the bounce from technical support at its 200-dma about two weeks ago and the bullish breakout over resistance three to four days ago. Volume has been rising on the rally, which is a good sign for the bulls. The P&F chart has produced a triple-top breakout buy signal with a $78 target. The rally this past week has produced a new MACD buy signal on the weekly chart. Overall everything looks great for the bulls except now we need to prepare for some profit taking since MTD is starting to look short-term overbought. The consolidation may not happen on Monday but it could be soon. Friday's close at its high for the day is actually another bullish signal for Monday. We're not suggesting new positions at this time. Our target is the $68-69 range. Please note that we normally try to avoid playing stocks with average volume this low so traders may want to consider this a higher-risk play. We do not want to hold over the late October earnings report.

Suggested Options:
We are not suggesting new positions in MTD at this time.

Picked on September 13 at $ 63.66
Change since picked: + 1.77
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand

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Omnicom - OMC - close: 92.32 chg: -0.05 stop: 88.84

Overall the pattern for OMC remains bullish but short-term the upward momentum has stalled. Short-term technical indicators are pointing lower and we've been suggesting that readers wait for a dip back toward the 10-dma (90.80) or even the $90 region. Broken resistance in the $90.00-90.50 range should now offer some support. The weekly chart's MACD has a new buy signal and the P&F chart is very optimistic with a $131 target. Our target is the $96.00-96.50 range. We would definitely wait for the pull back and signs of a bounce before considering new call positions. We do not want to hold over the late October earnings report.

Suggested Options:
We are not suggesting new positions in OMC at this time.

Picked on September 10 at $ 90.97
Change since picked: + 1.35
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million

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United Ind. - UIC - close: 54.90 change: +1.14 stop: 51.45*new*

Defense related stocks are still showing some strength. The DFI index has just spent the last two weeks consolidating sideways after a bullish breakout over resistance near the 1100 level. This is one of the few sector indices that actually looks like it could begin a new leg higher. Meanwhile the bounce in UIC continues. The stock's consolidation ended after four days of profit taking and now UIC is once again hitting our initial target in the $54.75-55.00 range. Short-term technical indicators are bullish again. The P&F chart remains bullish and points to a $64 target although we see resistance on the P&F chart near $59. Our suggested strategy was to sell all or part of the position at the first target and then sell the rest at our secondary target of $57.50. We're going to adjust our stop loss to $51.45, which is under the September 6th low. UIC's next hurdle is the high two weeks ago near $55.50.

Suggested Options:
We are not suggesting new plays in UIC at this time.

Picked on August 27 at $ 51.77
Change since picked: + 3.13
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 198 thousand
 

Put Updates

EOG Resources - EOG - close: 59.84 chg: +1.12 stop: 64.15

Crude oil futures marked another loss on Friday but they rebounded from their lows. The commodity is looking pretty oversold and due for a bounce. In a similar manner EOG managed a bounce from its lows and produced a 1.9% gain. The lack of follow through on yesterday's drop suggests that EOG may be due for more of a rebound. We are not suggesting new put positions at this time. Instead it's probably a good idea to lock in some profits here. We would look for a bounce back toward the 10-dma (near $62) and potentially back toward the $63.00-63.50 region. A failed rally at either level could be used as a new entry point but keep an eye on crude futures. We're still worried that the Iran issue might flare up again. Our target is the $57.50-55.00 range. The P&F chart points to a $48 target.

Suggested Options:
We are not suggesting new plays on EOG at this time.

Picked on September 06 at $ 63.85
Change since picked: - 4.01
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 3.3 million

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Express Scripts - ESRX - close: 82.68 chg: -0.19 stop: 82.51

We are still sitting on the sidelines waiting for a breakout in ESRX. The stock has been trading sideways in the $80-85 range for six weeks. Friday's failed rally near $85 saw an increase in volume and the short-term technicals are suggesting that the next move is down. Taking into account that the next four weeks are usually a very bearish time period for stocks odds are definitely growing in favor of a breakdown. We're suggesting a trigger to buy puts at $79.85. If triggered our target is the $75.50-75.00 range.

Suggested Options:
We are suggesting the October or November puts. Remember that our trigger is at $79.85 and that the October options expire in five weeks. We do not want to hold over the late October earnings report.

BUY PUT OCT 85.00 XTQ-VQ open interest=258 current ask $4.00
BUY PUT OCT 80.00 XTQ-VP open interest=553 current ask $1.70
BUY PUT OCT 75.00 XTQ-VO open interest=377 current ask $0.65

BUY PUT NOV 80.00 XTQ-WP open interest=590 current ask $3.10
BUY PUT NOV 75.00 XTQ-WO open interest=699 current ask $1.60

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

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Johnson Controls - JCI - close: 71.86 chg: -1.09 stop: 74.16

It looks like the Ford (F) news on Friday undermined the rally in anything auto-related. Shares of JCI produced a bearish engulfing candlestick (bearish reversal) with Friday's 1.49% loss. We had been growing more worried that JCI would stop us out so the reversal is a welcome event. Friday's reversal can be used as a new entry point to buy puts. Conservative traders could tighten their stop loss toward Friday's high. Our target remains the $68.50-67.50 range. The P&F chart is more bearish with a $56 target.

Suggested Options:
We are suggesting the October puts. Don't forget that we do not want to hold over the October earnings report and that October options expire in five weeks.

BUY PUT OCT 75.00 JCI-VO open interest=442 current ask $4.30
BUY PUT OCT 70.00 JCI-VN open interest=565 current ask $1.65

Picked on August 22 at $ 72.96
Change since picked: - 1.10
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.3 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

Fluor - FLR - close: 77.91 change: -1.08 stop: 84.05

Target achieved. FLR continued to show relative weakness on Friday morning with a spike down to $75.01 before bouncing back from round-number support. Volume on the move was pretty high. Our target was the $75.50-75.00 range. We could not find any specific news to account for the spike lower. Given the sharp intraday bounce we would expect the rebound to continue until FLR hits $80 or broken support/resistance near $82.00. Readers can keep an eye on FLR for a failed rally under either level as a potential entry point for new put plays.

Picked on September 10 at $ 81.74
Change since picked: - 3.83
Earnings Date 11/06/06 (unconfirmed)
Average Daily Volume = 863 thousand
 

Dropped Strangles

None
 


Trader's Corner

Putting It All Together: Finding Support and Resistance

As I rough out this article on Labor Day weekend, I'm thinking ahead to the October option expiration cycle. Many other options traders might be doing the same, especially if they trade credit spreads. The last several weekend Trader's Corner articles discussed determining support and resistance. My search for possible resistance into October provides an opportunity to pull together all the information in those previous articles.

For those options traders who do not trade combination trades, a little explanation may be in order. A credit spread of the type I trade is composed of either two calls or two puts. One is sold to collect premium, and another, further out of the money, is bought to hedge the play. For example, I could (but wouldn't) sell an SPX Oct 1340 call and buy an SPX Oct 1350 call. As of the close Friday, September 1, my quote source notes that the bid/ask for the 1340 was 8.90/9.90, and for the 1350, 5.60/6.30. As of the close that Friday, I could presumably have sold the 1340 for at least $8.90 and bought the 1350 for no more than $6.30.

I wouldn't have done that although the premium collected was attractive, and there's at least a slight possibility that it would end up being profitable. With seven weeks to go until October's option expiration as I type, and with the SPX closing Friday, September 1 at 1311.02, that 1340 strike is far too close to the action for me to consider selling it, even if hedged. A bear call credit spread, the type I would be initiating, would experience a loss if the SPX closed the October expiration cycle above the 1340 strike plus the credit I collected, minus commissions, and it would experience its maximum loss if it closed above 1350 at October's option expiration. With September and October often known for their volatility and with an important FOMC meeting due in September, I wouldn't have dared to get so close to the action.

So, on Labor Day weekend, my search begins. I am looking for resistance that might be strong enough to hold back the SPX into the October expiration. Because I'm a fan of nested Keltner channels, a topic touched upon in last weekend's Trader's Corner article on support and resistance, that's where I'll start. I'll begin with the 240-minute chart.

Annotated 240-Minute Chart of the SPX:

This chart tells me that 1336-1337 could be fairly strong resistance, but there's plenty of time before October opex to nudge that line higher, too. Although it's possible the SPX would turn lower at or below that level and never move above it before October's option expiration, obtaining a modicum of safety requires other resistance levels above that first strong resistance level. I don't want to sell an option with a strike barely above the first identified long-term resistance, not with so many weeks to go before October's expiration. The weekly nested Keltner chart will help me pinpoint those other resistance levels.

Annotated Weekly Keltner Chart for the SPX:

As explained in a prior article in this series, I like to combine two kinds of channels: one pinpointing where support or resistance is likely to lie, such as these Keltner channels, and one pinpointing where historical resistance has been found. Since 2004, the SPX has been climbing in a rising regression channel. During that long trending move, the SPX has found resistance at the midline or top of that channel.

Annotated Weekly Chart of the SPX, with Regression Channel:

Although it's longer than a month until option expiration, I also like to look at the monthly average true range to get an idea of how much the SPX has been moving over a month's time. This indicator, sometimes shown as ATR, is available on many charting services.

Although it's possible that the SPX could just climb for six straight weeks, it's likely that prices will retrace sometime during that period, so ATR at least gives me some idea of the amount the SPX has lately been moving in a month to six weeks.

As this article was prepared on Labor Day, ATR was 47.16, and had been about that level the whole time the SPX has been climbing within that rising regression channel. Adding that amount to the SPX's close the Friday before Labor Day gives me a figure of 1358.16, so that's another figure I'll keep in mind. Remember, however, that the end of a rally sometimes produces a straight-up move, so that the SPX could exceed its monthly ATR if it should see a buying crescendo.

I typically also look at moving-average support or resistance. As this article was typed, the SPX had moved above most important moving averages, so there's nothing above to restrict its movement, at least from a moving-average standpoint, on daily or weekly charts.

Annotated Weekly Chart of the SPX:

My next search is for historical and/or trendline resistance, with that augmented by Fibonacci studies. The regression channels have already helped me determine one type of trendline/historical resistance, but there may be important others to note.

Annotated Monthly Chart of the SPX:

As I study this chart, I note that the SPX has retraced more than 61.8 percent of its decline off its 2000 high, but a quick calculation reveals that it hasn't yet retraced 2/3 of the decline. That would be at about 1355, if my calculation is correct. Many market pundits believe that it's normal to retrace 1/2 to 2/3 of a prior movement, without that movement necessarily being reversed, so the possibility exists that 1355 or so could also present some resistance. I tend to watch the Fib lines shown here more than a 2/3 resistance level, but its close proximity to a 1350 round-number resistance, as well as to that ATR + Friday-before-Labor-Day-close is intriguing, too.

Just to add one more fillip to my search, I check a point-and-figure chart, and find that the SPX, as of Labor Day, had an upside target of 1480. Whoa! Fortunately, the SPX is unlikely to get there before October option expiration, because there's not a chance I'm going to get a spread above that level! As of Labor Day, no options existed that high for the October expiration cycle. However, this is important information, because it tells me that I need to be particularly careful with identifying resistance levels. While I don't trade off P&F charts, I do take a look at them as background information on overall trend.

What about historical patterns for September and October, with weakness often appearing into October? Do I factor that seasonal pattern into my reasoning and my choices for resistance? I do note that the SPX was outstripping its 200-sma as of Labor Day, and that sometimes means that a pullback is due. However, while acknowledging that distance from the 200-sma, the bearish price/RSI divergence on some charts and the often-seen dip in the fall season, those bits of evidence are more than balanced by that strong P&F target. While I'm not building an expectation that 1480 will be hit, that target does warn me to be careful about the placement of my credit spreads.

As I study the charts and calculations above, I see a number of resistance levels coming together in the 1347-1355 range. That's still too close, though, not even quite equaling the sum of the close on Friday, September 1 added to the monthly ATR. I see some resistance coming together in the 1365-1367 level, but I'm also still aware that if the SPX does nothing more than stay within that rising regression channel in which it's traded since 2004, it could be hitting 1376-1377 on weekly closes (and perhaps higher intra-week) by October's option expiration.

I'd prefer my bear call credit spreads to be established above 1376-1377, with the sold call at least an October 1375 call and preferably a 1380 one. As of that weekend, I am uncertain as to whether I could get enough premium to establish a trade with a sold call with a strike at or above 1380. It seems unlikely. I must consider whether I'm willing to risk establishing credit spreads with sold calls as low as 1350, 1355, 1360, 1365, 1370, and 1375.

That was my thinking on Labor Day weekend. Ultimately, on September 6, I was able to establish SPX bear call spreads with the sold call at 1375 and the hedging long one at 1390. A day or two later, at the suggestion of Mike Parnos of Couch Potato fame in an email that went out to his subscribers, I established a few credit spreads by selling the 1365 and buying the 1380. That one was only a partial position, because of the greater risk I perceived and my own comfort level. The 1365-1367 resistance level had the advantage of being above that 1347-1355 level, but was below the 1376-1377 level that represented where the SPX could be on October's option expiration if it just climbed straight through that rising regression channel, defying both gravity and the seasonal pattern.

When I began this series on support and resistance, I noted that even seasoned traders sometimes liked to look over the shoulder of another trader and note the indicators that trader used and learn something about that trader's thought processes. I hope this look over my shoulder has provided some insight for newbies and at least fodder for thought for more experienced traders. Perhaps, depending on how the SPX moves into October's option expiration, it will become an example that even careful consideration sometimes results in losses on positions, but I'm hoping that's not the kind of lesson it provides.
 

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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