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Daily Newsletter, Thursday, 07/10/2008

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Table of Contents

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

Market Wrap

It's Time to Buy

I say that facetiously (so don't go out and buy the market yet) because Jim Cramer is now saying "Sell everything. Nothing's working." His throwing in the towel has me thinking maybe we're reaching a tradable bottom soon. Soon is the key phrase here. Soon could be here or it could be in a few days down near DOW 10900 or it could be the end of next week (opex week) down near 10500. The only thing I have to ask Jimbo is where was he 20% ago last October? Did he really think, like so many wanted to believe, that the credit crisis and bank fiasco was going to be contained? Did he really think a consumer slowdown caused by declining home values and empty home equity piggy banks was not going to result in a recession this time? The warning signs were pasted all over the wall and yet he and many others simply ignored them.

So now Cramer's crying the blues and telling us we should sell everything. Since he was telling us to buy at the top and to keep buying during the decline, including Bear Stearns the day before its demise, do you suppose we might be able to use him as a contrarian sign for a bottom here? What's got him upset is that so many of his (well-paid) friends are losing their jobs on Wall Street. I could be forgiven for not having a lot of sympathy for the mega-rich money changers losing their jobs and joining the real world.

Certainly investor mood has turned sour enough to suggest we're oversold to the point where we can expect a decent bounce back up. Robert did a great job covering sentiment indicators in both last night's newsletter and his Contrarian piece. He showed the volatility index (VIX) chart and pointed out some things to watch for in order to confirm a bullish reversal in the market. I have a slightly different (OK, bearish) take on VIX and think that it's not showing us enough fear. I don't necessarily expect a capitulation event in the market because quite frankly it's way too early to expect one. Not until much lower levels and a lot more fear has registered will we likely see a "puking party", to use the market's vernacular.

If we compare the VIX and SPX charts since last October we see that the market is making lower lows and yet the VIX is nowhere near the January and March highs:

SPX vs. VIX chart, Daily

SPX has been making steady new lows since breaking the March low this month but VIX is still well below its November, January and March highs. It's as if investors are less concerned about today's lows than they were about the January/March lows. Have people become numb to the fact that the market just keeps dropping lower? If so it would help explain the fact that total trading volume has been dropping since the May high. A lack of volume in a strong price decline (as opposed to seeing lower volume in a normal pullback in a strong bull market) indicates that there's more selling to come. Selling pressure has picked up but buying pressure has clearly waned. The combination shows up in lower volume numbers and that's what we're seeing.

There are other sentiment indicators such as bullish vs. bearish advisors, put/call ratios, American Association of Individual Investors (AAII) sentiment data, etc. InvestorsIntelligence.com reports bearish advisors now outnumber the bullish advisors by the largest margin since 1994. A first reaction to this would be to load up the truck on call options--this market is ready for a reversal now! I'd suggest keeping that truck unloaded for the moment. Some interesting data from Elliottwave.com reports that bearish advisors outnumbered bullish advisors for 46 weeks straight, or nearly a year, back in 1994. So this is not exactly a market timing tool. Once the bull market of the last half of the 1990s got into gear the bullish advisors outnumbered bearish advisors for 5-1/2 years. Currently we've seen 4 straight weeks where bearish advisors outnumber bullish and therefore one could say we're only in the infancy stage of this bear market.

Another sentiment indicator I've shown before is the call/put data from ISE.com. This shows the number of calls and puts being purchased primarily for speculation (they have a proprietary way of filtering out hedge plays and spreads). This is the chart of the data since last October:

ISEE call/put data, Daily, courtesy ise.com

Note the low readings in January and March. This reflects a high number of puts being purchased relative to calls. You can see the opposite back in October when more traders were buying calls (at the market high). Now look at the current readings in the past month--if anything the number is trending up. As the market has been sinking lower more people are buying calls in anticipation of finding a bottom! If I went with nothing else this chart alone would keep me playing in the bears' sandbox.

The bottom line here is that you will hear many calling for a bottom because the market is oversold, that there are too many bears, too many put buyers, we're more bearish than any time since 2002 (or 1994). To which you must say "so what". Price is the final arbiter and the price pattern is bearish. Downtrend lines and down-channels have not been threatened and moving averages continue to hold down the bounces. The trend is your friend.

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As most of you know, I was looking for a top to the rally most of last year so I've been known to fight the trend and look for a reversal. But I look for signs in the price pattern (wave analysis), a loss of market breadth during rallies, Fib targets being hit, etc. and was able to pretty well nail the high in October. I like to play reversals but it's too early for me to be looking for a low.

We're getting closer to a tradable bottom and I'll show some downside targets and some upside key levels to watch in case we find a low sooner than I expect. When we start hitting some important downside targets and I see some market breadth numbers showing bullish divergences I'll then be looking for a reversal and recommending some long plays that could be good for a nice rally into August/September. After that I'll want to be short for a big ride back down (but that's a few months away). For now the downside is getting a little riskier (but not as risky as the upside) and I'm watching for evidence of bottoming (by price action, not by sentiment or Jim Cramer or any other talking head on CNBC). On to the charts:

SPX chart, Weekly

The price pattern on the weekly chart suggests lower prices, perhaps to about 1190 by the end of the month. Before we find a meaningful bottom (something good for a rally of more than a couple of weeks) I suspect we'll see MACD buried further than it was back in January and March. But I show the possibility for a stronger bounce (pink) from here. We are oversold and it would not be difficult to get some serious short covering going. If you're playing the short side don't get complacent.

SPX chart, Daily

SPX is following the mid line of its down-channel lower. I show a drop to the bottom of the channel in the next few days to be followed by a bounce back up to the top of the channel and then down again into the end of the month. It's possible the new low around 1220-1225 (which should be strong support) will mark a longer term and tradable bottom (pink) and it will be worth nibbling on some long plays if and when it gets there.

Note my comments on the chart by MACD and RSI. There are hints of bullish divergence but nothing strong yet. When a trend is about finished, meaning the leg down from May, you will very often see RSI break its trend line first so that's what I'm watching here. If RSI breaks its downtrend line, it doesn't mean price can't make a new low but if it does make a new low and RSI is testing its broken downtrend line, that's usually a very good trade setup (on the long side in this case). Something to watch for over the next week or so.

Key Levels for SPX:
- cautiously bullish above 1292
- bearish below 1278

SPX chart, 60-min

This afternoon's bounce has the potential to continue tomorrow morning up to about 1270 where a Fib projection and trend line could cause trouble for the bulls. The primary message I'm getting from the price pattern is that we're seeing a correction of the decline and nothing more bullish than that. Therefore continue to look for setups on the short side for a move to lower lows.

DOW chart, Weekly

A recap of price action since the May high shows the DOW gave a kiss goodbye to its broken uptrend line from August 1982-October 2002. Ms. Market gave the DOW a mighty slap in the face for that unwanted kiss. The break of the green uptrend line is a Major break--that uptrend line was used as support and resistance since the 1974 low, including the January and March lows (the last touch before that was October 2002). As shown in pink we could see a bounce all the way back up for a retest of that broken uptrend line and if it managed that kind of a bounce it would be a MOAP (Mother of All Puts) setup. I have my doubts we'll see that. I think the DOW has a better chance of moving lower, possibly as low as 10500-10700 into the end of the month, and then a bigger corrective rally into August/September before selling off again.

DOW chart, Daily

Like SPX the DOW is in a narrow down-channel since the May high and is not threatening to break out of it. The least resistance is down and I see the likelihood for a drop to around 10700 in the next few days and then a bounce into the end of opex (next week). I'll then have to see evidence of the kind of bounce we get to see if we'll get a bigger bounce into August (pink) or just back up to the top of its down-channel and a final low by the end of the month/first of August before breaking its down-channel.

Key Levels for DOW:
- cautiously bullish above 11500
- bearish below 11400

DOW chart, 60-min

Again, just like SPX, I see the possibility for a little more choppy consolidation into early next week before dropping lower again or we could start down in earnest right away on Friday and make a low by early next week.

Nasdaq-100 (NDX) chart, Daily

NDX has been stronger than the blue chips but it too sports a nice parallel down-channel for its decline and is not threatening to break out either. A move above 1875 is needed to confirm a more bullish move has started (pink) but I think we'll see another move lower after the current price consolidation finishes. A downside target near the March low by the end of this month is depicted.

Notice though that RSI has broken its downtrend line. This is a warning flag for bears. We could still get a new low but it may not be nearly as deep as I'm showing. If NDX makes a minor new low with bullish divergences on MACD and RSI I would cover my short positions and nibble on some longs. Whether from here, a little lower, or from the March low, following a new low should be a healthy multi-week rally to correct the decline from May.

Key Levels for NDX:
- cautiously bullish above 1875
- bearish below 1780

Nasdaq-100 (NDX) chart, 60-min

Downtrend lines continue to hold NDX down so use them to guide your trading. If we get a little higher bounce tomorrow morning keep an eye on the downtrend line from June 25th, currently near 1850, which stopped Wednesday's rally. If it can make it higher the top of its down-channel is near 1883. The price pattern suggests we'll see lower before we see the top of its channel challenged.

Russell-2000 (RUT) chart, Daily

The RUT looks like NDX. You can see it consolidating on top of the downtrend line from October. It may chop sideways for a little longer before continuing lower. If it can get above 685 then it could be at the start of a larger rally to correct the decline from May (pink).

Key Levels for RUT:
- cautiously bullish above 695
- bearish below 685

The banks have been in the news a lot lately. Probably because earnings season is here and there's a lot of worry about how they'll do. Everyone knows there's a lot of dirt under their carpets but everyone's afraid to peek. Even our fearless Treasury Secretary Paulson was out defending the latest to take some verbal hits--Fannie Mae and Freddy Mac. He has been quick to defend them against those who say the companies are insolvent (including by William Poole, the former president of the St. Louis Federal Reserve bank). This is the same Paulson who told us the subprime problem would have no impact on the economy and would be contained. This is the same Paulson who told us repeatedly over the years that the U.S. government supports a strong dollar (as it collapsed lower each time he opened his mouth). Paulson has no, zero, nada credibility and yet the market was relieved to hear his calming words.

Actually I may be being a bit harsh. He's probably right--they probably aren't insolvent. Each has the American taxpayer to bail them out if they should default.

But speaking of earnings, the banks have a little help from a rule change. Under a rule introduced in February 2007, after much lobbying by the banks, the financial companies are essentially now allowed to show higher profits (or lower losses as the case may be) if their credit rating worsens. Huh, you say? Yep, as their credit ratings decline, making their stock price less valuable, they are allowed to write down the value of their debt. More mark-to-model shenanigans by the banks. When they report their earnings we will know even less than usual about what their real earnings are. This will make the stock market reaction to their reported earnings that much tougher to gauge. Stay aware.

BIX banking index, Daily chart

Based on some Fib projections I thought the BIX might find support around the 157 area and the leg down from early May looks like it could be complete, or near complete. I've tentatively drawn in a parallel down-channel based off the two lows in March and July. The wave pattern calls for a sideways/up choppy correction, probably into September and I'm showing a relief rally up to about 190 by then. This could be a result of relief over the banks' earnings (although as stated above, those earnings will be dubious at best). Regardless, the move down from May needs to be corrected before they continue lower.

For additional downside projections I needed to go to the monthly chart:

BIX banking index, Monthly chart

With the BIX well below the 2000 low and no lower prices to find support it becomes difficult to figure out where support might come into play. Using daily, weekly and monthly pivots can help and so to can Fibonacci projections. Based off the move up from 2000 to 2007, it is very common to find support (in this case) at the 127% projection of the prior move. That's shown at 157.08. Whether it finds support here or not is anyone's guess but it's something to watch for. The next common Fib support levels are 138% and 162%. I think before all is said and done the banks will probably see the 162% level down at 86.97 but probably not until later this year or next year.

U.S. Home Construction Index chart, DJUSHB, Daily

Other than the downtrend line from February 2007, which price has been oscillating about since March, I've drawn in trend lines that show a potential descending wedge developing since the April high. This could be significant for this index since I've got a wave count that is looking for a final low and the 5th wave often forms a descending wedge (in a decline and a rising wedge in a rally). I show hints of bullish divergence at the current low and this helps confirm the bullish descending wedge pattern.

If the broader market gets into bigger trouble later this year it's hard to imagine the housing stocks having a grand old time to the upside but I think this index is about done to the downside and should be left alone. I don't like it for a long play in a down market but nor do I like it for a short play. However, for a trader, trading the housing stocks on the long side soon could work--it doesn't take much of a rally from these lower levels to get a nice 50% return. I continue to like the 216 downside target and it could be achieved by the end of this month.

Transportation Index chart, TRAN, Daily

I show the Trannies stair-stepping lower into August but it's possible the wave pattern is even more bearish than what I've depicted. It's possible we're about to get a flush to the downside that takes the index well below 4000 in the next few weeks. I'm not predicting that will happen but just warning that the price pattern suggests it could happen. But until it breaks below 4600 there remains the possibility for a larger bounce in the index, especially if the broader market manages the same.

U.S. Dollar chart, Daily

After a little head-fake move below its uptrend line from March the US dollar did quick recovery back up inside its parallel up-channel. It has pulled back the past three days and could retest the uptrend line which is currently near 72.30. A break below 71.82 would confirm a breakdown in the dollar with a likely move to new lows for the year (despite Secretary Paulson's words to the contrary). But if the dollar can hold up here, it should be able to rally to a new high for the bounce from March and make it up to near 75. Depending on what the dollar does here should have a significant impact on commodities.

Oil chart, Oil Fund (USO), Daily

Oil remains in its up-channel from March (and longer term uptrend). The uptrend line from March is clearly important to traders so a break of it will be a big deal. But until that happens, the trend remains up.

Oil Index chart, Daily

While the commodity has continued to rally, oil stocks have not done so well. They could be ready for at least a bounce though. The move down from May achieved two equal legs down at 863.23 which was tagged today. I show a bounce back up to the apex of its previous sideways triangle pattern (typical support/resistance) just shy of 950 before rolling over again. A rally above 972 is needed to turn the price pattern bullish again.

Gold chart, Gold Fund (GLD), Daily

After tagging the top of a parallel up-channel for price action since the May 1st low, price pulled back last week but on Tuesday it successfully tested the broken downtrend line from April. It could fail here but I'm showing just a little higher to 94.71 to complete a 5-wave move up from June. That should complete the larger 3-wave rally from May 1st and I believe it will be a good short play setup there. As depicted in dark red, the next big move should be a decline to the 78-80 area.

Not shown on the chart (gets too crowded) are the Fib retracements of the March-April decline. The 62% retracement is at 94.00 so in between today's closing price and the 94.71 Fib projection for the move up from June.

For those who follow the actual price of gold, here's the chart of the gold contract (August):

Gold contract, August (GC08Q), Daily

It's the same pattern obviously and the same setup. The Fib projection for the 5th wave in the move up from June is at 964.30 and the 62% retracement of the March-April decline is at 967.80. I think this is the area where the gold rally will end, if not a little lower.

Economic reports, summary and Key Trading Levels

The Michigan Sentiment could move the market if it's more disappointing than the market expects. Many in the market are trying to discount the consumer sentiment and think it's different this time and that the consumer sentiment is not as important as it once was. Too much money on the sidelines (which is bogus by the way--funds are holding record low levels of cash as a percent of assets), Sovereign Wealth Funds, pension funds, you name it--they're all given credit for why the market will rally this year. And let's not forget that the market Always rallies in an election year.

But the consumer does matter and matters a lot. When 75% of our GDP is based on consumer spending and we have a tapped-out consumer (although they're trying mighty hard to continue credit card spending) then it makes sense to assume we will have a consumer-led recession and they're usually worse than business-led recessions.

From an Elliott Wave perspective, the market is in the early stages of the 3rd wave down (the 1st wave down was the October-January (or October-March) decline, followed by the 2nd wave correction into the May high and now wave-3 down has started. The 3rd wave is called the recognition wave because it's when the majority recognize that their previous bullish assumptions (that we'll have a modest growth year and a positive year in the market) were wrong. It's when the selling starts to accelerate as the majority start to exit their long positions. When the reality hits that we're not going to have a positive year (we're not there yet), that's when we'll start seeing very strong selling days. We haven't seen that yet and it's reflected in things like the relatively low VIX readings.

But before those kinds of days, which I think will be after the summer, we should be finding a bottom soon (this coming week or the end of the month) and get a multi-week rally. It won't be a pretty rally unless you put "pretty" in front of choppy. The summer could be a very challenging time to trade the market. Can't afford gas to go to the lake, can't trade, business is slowing down--oh joy, what do I do now? Read. Read and study and be ready to trade the market more quickly (long term trades are difficult at best and buy-and-holders will probably not be happy with their results).

If you're not comfortable trading the short side, practice on paper this summer. Paper trade buying and selling puts, sell credit spreads, read how to do these, take seminars/webinars. If there's one thing we have too much of it's information available at the click of a button. Use that power to expand your knowledge since different market conditions require different trading techniques. Traders get better over the years only if they know how to swing at all the different pitches and hit at least 40% of them while controlling their losses.

Lastly, remember we're heading into opex week. The Thursday prior to opex tends to be a head fake day for the Big Boyz to load up on cheap front-month options. The trouble with today is I'm not sure which direction was the head fake. Just stay aware that opex activities tend to skew the market in directions that are not necessarily reflective of longer term trends, even intraday. Whipsaws are common so trade light and trade quick.

Good luck and I'll be back with you on Thursday.

Key Levels for SPX:
- cautiously bullish above 1292
- bearish below 1278

Key Levels for DOW:
- cautiously bullish above 11500
- bearish below 11400

Key Levels for NDX:
- cautiously bullish above 1875
- bearish below 1780

Key Levels for RUT:
- cautiously bullish above 695
- bearish below 685


Keene H. Little, CMT
Chartered Market Technician
 


Trader's Corner

Q and A: Technical Snapshot

I got a couple of e-mails from Option Investor subscribers yesterday, one of which had general relevance to a market snapshot using (just) technical analysis. Many shorter-term traders will tend to make trading decisions based on charts and indicators; i.e., 'technically'.

The simple reason for this it that it can be quite hard to predict shorter-term market direction and SHIFTS in shorter-term market direction based mostly on 'fundamental' factors; e.g., what oil prices are doing, latest earnings, what the Fed is doing. So much depends on 'mood' and market sentiment. Why didn't a relatively sharp pullback in oil prices this week lead to more of a rally? Answer: the mood is bearish, as the longer-term oil price trend looks to be higher. If the mood is bearish regarding stocks, a sharp drop in energy prices won't shift the dominant trend at all.

OI Subscriber QUESTION:
"The market must be quite oversold by now, but stocks don't able to recover more than a day or two and them get slammed again. How do you rate the market technically right now?"

RESPONSE:
Well, 'the' market is quite capable of a short-term rally (e.g., 2-3 days), but I rate the chances of a more sustained rally as less likely, based on a couple of considerations. One is whether the market is really as 'oversold' as it can get before there's potential for a substantial rebound. The second is whether a major prior low or major trendline has been re-tested. There is actually a third consideration as to whether bearish sentiment has gotten to the kind of 'extreme' associated with a tradable rally being near at hand.

Another consideration is 'WHICH' market are we talking about. The long-term weekly chart of the Nasdaq Composite (COMP) still has a long-term up trendline (dating from 2002) that hasn't yet been pierced. It's possible that this chart aspect suggests that COMP could remain within a long-term uptrend. The S&P 500 (SPX) has already broken below its long-term up trendline. However, if COMP doesn't go lower than it's been this week, it's still possible that tech is in a heck of long-term bull run still.

Overbought and oversold have to be looked at relative to short, intermediate or long-term time frames. It's a 'relative' concept. My favorite of what are classed as 'momentum oscillators', or indicators that have oversold (or overbought) default definitions, is the RELATIVE Strength Indicator or RSI.

Given that we've been in a multimonth decline, where the decline to date is greater than a 10% decline from the peak, I calculate 'oversold' by whether the long-term RSI measuring 13-weeks (a quarter of a year) is near or under a reading of 30. Seen first is the SPX weekly close-only (line) chart.

You'll note that the major prior weekly closing low at 1236, from 2006, has not been re-tested or reached. I rate it as somewhat unlikely that there will be a sustained rally (e.g., more than 2, perhaps 3, weeks) without a test of this major prior CLOSING low.

If there is rebound once again from the area of this prior 1236 closing low, investors will tend to have more confidence that the S&P stocks as a group may have discounted all the possible bearish news and all possible lowered earnings expectations. Nothing says that this week's INTRADAY low (today!) at 1236.7 can't be a final low for this move, but what would set up a more 'convincing' bottom would be a WEEKLY close near 1236, followed by a rally.

The other INDICATOR aspect to the above weekly SPX line chart is that the index hasn't yet gotten as oversold as at an earlier low of this year (January). Moreover, I'm not comparing what RSI level is fully 'oversold' to what has come in the period shown above. At recent lows the retracement of the 2002-2007 advance is now equal to 40 percent. That is a major, bear-market type, correction. If the correction deepened to 50%, which is not uncommon, SPX would fall to 1173. If the RSI got as oversold as it did toward the end of the 2001-2002 bear market, the 13-week RSI could fall to 20.

NASDAQ PRESENTS A DIFFERENT PICTURE

The Nasdaq Composite (COMP), as viewed on a very long-term weekly chart basis, still has the POTENTIAL of 'holding' its 2002-2007 up trendline. The COMP bar chart below shows that this week's low at 2214 (made Monday) has touched the aforementioned long-term up trendline. If we continue to see COMP weekly lows not much under this week's, the index actually remains within its uptrend channel. However, in terms of how 'oversold' COMP has gotten at significant lows, it has TYPICALLY gotten to a lower RSI reading at MAJOR lows. I am struck by this inconsistency.

Time will tell if this indicator pattern conforms to the prior pattern or whether COMP has a bottom this time that doesn't also see the 13-week RSI down where it's been at most prior major bottoms where sustained rallies followed. Maybe the game is afoot and the stocks that are going to be somewhat recession proof are TECH. Stay tuned on that.

SENTIMENT ISN'T BEARISH ENOUGH FOR A MAJOR BOTTOM?

I've been saying for a while, mostly in my weekend Index Trader column, that the build up of bearish sentiment hasn't yet been 'extreme' enough to suggest a major bottom could be near, at least according to my sentiment indicator. The way I use this indicator is very straight-forward; buy 'signals' are suggested 1-5 days after any SINGLE day when daily CBOE equities put volume is equal, or nearly equal, to that day's equities call volume. NO qualifications to this and NOT measured on a moving average basis.

There is one possible qualification to the above, which is that call to put volume ratio extremes seen on an expiration Friday could be suspect, the result of unwinding not strictly related to trading activities of the aggregate of individual traders.

Given the duration and EXTENT of this decline, I have been anticipating that the next tradable bottom, at least one with rally potential of 5-10 percent, would be preceded by my sentiment indicator getting closer to l or under, per my last chart seen below. I have my sentiment indicator 'set up' with my S&P 100 (OEX) chart, but the CPRATIO indicator represents trader sentiment for the entire market.

Not only would OEX have to sink further to set up a 'test' of its major prior low, but my sentiment indicator also has not yet achieved a solidly 'oversold' bearish extreme. Which of course in an Alice In Wonderland 'contrary opinion' sense would suggest that the market is quite near (e.g., within 1-5 trading days) a bottom with substantial rally potential; 'substantial' bottom = one worth buying calls for more than a 2-3 day trading turn.

QUESTIONS/COMMENTS:
Please e-mail Click here to email Leigh Stevens support@optioninvestor.com with any questions or comments, with 'Leigh Stevens' in the Subject line and it will get forwarded to me for a reply.

GOOD TRADING SUCCESS!
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
HES None GLW

New Calls

Hess Corp. - HES - close: 112.98 chg: +3.24 stop: 107.24

Company Description:
Hess Corporation, with headquarters in New York, is a global integrated energy company engaged in the exploration, production, purchase, transportation and sale of crude oil and natural gas, as well as the production and sale of refined petroleum products. (source: company press release or website)

Why We Like It:
The oil sector rebounded higher thanks to a sharp rally in crude oil this afternoon. Shares of HES, which had been testing technical support at its 100-dma, ended the session with a 2.9% gain. We see the bounce as an opportunity to buy calls with a stop loss under today's low. We have two targets. Our first target is $119.75. Our second target, if HES can breakthrough resistance near $120.00, is the $124.50 mark. We do not want to hold over the late July earnings report.

Suggested Options:
We are suggesting the August calls but plan to exit before the July earnings announcement.

BUY CALL AUG 110.00 IGG-HB open interest=2114 current ask $9.70
BUY CALL AUG 115.00 IGG-HC open interest=2326 current ask $7.10
BUY CALL AUG 120.00 IGG-HD open interest=2952 current ask $5.10

Picked on July 10 at $112.98
Change since picked: + 0.00
Earnings Date 07/30/08 (confirmed)
Average Daily Volume = 4.3 million
 

New Puts

None
 

New Strangles

Corning Inc. - GLW - close: 20.16 chg: +0.14 stop: n/a

Company Description:
Corning Incorporated is the world leader in specialty glass and ceramics. Drawing on more than 150 years of materials science and process engineering knowledge, Corning creates and makes keystone components that enable high-technology systems for consumer electronics, mobile emissions control, telecommunications and life sciences. (source: company press release or website)

Why We Like It:
There seems to be some disagreement over just how well GLW is doing. Many believe that GLW's LCD screen business is going to double over the next couple of years. Others see the company's inventory levels rising, which is bearish. The stock has gone straight down for almost four weeks in a row, which is VERY unusual. Shares paused at round-number, psychological support and near its January 2008 lows around $20.00 today. Aggressive traders will be tempted to buy calls here with a stop loss under $20.00. Even though GLW is overdue for a big bounce we don't want to bet on it so we're suggesting a strangle. Earnings are late July and we do plan on holding over the report unless the stock hits our target first. Try and open positions as close to $20.00 as possible but we would use the $20.25-19.75 zone.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We don't care what direction the stock goes as long as it moves one direction. If it moves far enough one side of our trade will rise enough to pay for the entire trade and make a profit.

We are suggesting the August options below. Our estimated cost is $0.75. We want to sell if either option hits $1.50. Try and keep your investment balanced on both sides of the trade. Thus for every two calls you buy, we need three puts (at current prices).

BUY CALL AUG 22.50 GLW-HX open interest=16237 current ask $0.45
-and-
BUY PUT AUG 17.50 GLW-TW open interest= 3498 current ask $0.30

Picked on July 10 at $ 20.16
Change since picked: + 0.00
Earnings Date 07/30/08 (confirmed)
Average Daily Volume = 15.9 million
 


Play Updates

In Play Updates and Reviews

Call Updates

CF Inds. - CF - close: 156.85 chg: +4.62 stop: 142.45 *new*

CF continues to rally and shares added another 3% today. The stock looks poised to hit our target at $159.00 tomorrow. We are adding a secondary target at $164.50. We suggest readers take a good portion of their position off the table at $159 but consider leaving a small position with the higher target. Our new stop loss is $142.45.

Picked on July 08 at $145.06 *gap open entry
Change since picked: +11.79
Earnings Date 07/28/08 (unconfirmed)
Average Daily Volume = 2.7 million

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Fording Candn.Trust - FDG - cls: 79.66 chg: +4.04 stop: 69.90

It was another volatile day for FDG. The stock dipped to $71.90 only to rebound sharply and challenge the $80 level again. We suggested yesterday that readers look for a bounce in the $70-72.50 zone as a new entry point and we got it. Our target is $84.00.

Picked on July 08 at $ 75.35
Change since picked: + 4.31
Earnings Date 07/23/08 (confirmed)
Average Daily Volume = 2.4 million

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Gold ETF - GLD - cls: 93.53 chg: +2.03 stop: 89.45

The U.S. dollar slipped lower today and that gave gold a boost. The GLD added more than 2% and closed near its highs for the session. Our target is the $97.00 mark but the $95.00 level could be overhead resistance and more conservative traders may want to jump out near $95.

Picked on July 09 at $ 91.50
Change since picked: + 2.03
Earnings Date 00/00/00
Average Daily Volume = 9.8 million

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Mosaic - MOS - cls: 140.09 chg: +3.05 stop: 118.99

MOS traded in a $6.00 range today and bulls were buying the dip late this afternoon. Shares look set to breakout over $140 soon. We're setting two targets. Our first target is $144.00. Our second target is $158.00. Just remember that we do not want to hold over the late July earnings report.

Picked on July 08 at $133.57 *gap open entry
Change since picked: + 8.97
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 6.0 million

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CBOE Volatility Index - VIX - close: 25.59 chg: +0.36 stop:

The markets may have closed higher but that didn't stop the volatility index from posting a gain too. The tug-of-war between the bulls and the bears isn't over yet. We were suggesting the August options. We were listing two targets. One target is $29.50 and a second one at $34.00.

Picked on June 30 at $ 23.95
Change since picked: + 1.64
Earnings Date 00/00/00
Average Daily Volume = n/a million
 

Put Updates

Apple Inc. - AAPL - close: 176.63 chg: +2.38 stop: 181.01

It looks like some of the 3G iPhone hype might be coming alive again. The media is already talking about the lines forming at Apple stores across the country for tomorrow's launch of the new phone. Shares of AAPL plunged late this afternoon to $171.37 but suddenly found a bid and closed up 1.3% by closing bell. We added this stock on Wednesday following the bearish failed rally pattern but we warned readers that if AAPL didn't see some follow through lower soon we'd exit early. We're going to see what happens tomorrow before deciding if we should pull the plug. Look for another failed rally under $180 as a potential entry point to buy puts. Our target is $165.00. More aggressive traders could aim for the $160 region. We will be expecting a bounce either at the 200-dma or at $160.

Picked on July 09 at $174.25
Change since picked: + 2.38
Earnings Date 07/21/08 (confirmed)
Average Daily Volume = 31.4 million

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Amazon.com - AMZN - close: 70.63 chg: +0.02 stop: 73.85

Be careful here. AMZN broke down under support at $70.00 on an intraday basis and hit our trigger to buy puts at $69.75. Yet the stock bounced back to close almost unchanged. Today's move could be a bear trap (that we are now caught in). A failed rally in the $72.00-72.50 zone might prove to be a new bearish entry point but traders need to be cautious. If the market suddenly surges then AMZN will surely follow. Our target is $62.50.

Picked on July 10 at $ 69.75 *triggered
Change since picked: + 0.88
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume = 7.2 million
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

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Alpha Nat. Res. - ANR - close: 91.84 chg: + 2.66 stop: n/a

If ANR can rally past the $94-95 region we'd expect it to continue toward $100 and possible the recent highs. Unfortunately, we only have a few days left before July options expire and we need to see some big moves yet from ANR. We're not suggesting new strangle positions at this time. This is a higher-risk strangle play with the options so expensive. The options we suggested were the July $105 calls (ANR-GA) and the July $85 puts (ANR-SQ). Our estimated cost was $9.40. We want to sell if either option hits $14.50.

Picked on June 15 at $ 94.25
Change since picked: - 2.41
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 3.7 million

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Chevron - CVX - close: 96.25 chg: +2.34 stop: n/a

A massive rally in crude oil lifted the energy stocks and CVX rose almost 2.5%. We are not suggesting new strangle positions at this time. The options we suggested were the August $110 calls (CVX-HB) and the August $90 puts (CVX-TR). Our estimated cost is $2.20 (based on June 30th prices we needed 2 calls per 1 put). We want to sell if the puts $3.85 or if the calls hit $1.90. More aggressive traders may want to aim higher.

Picked on June 30 at $ 99.13
Change since picked: - 2.88
Earnings Date 08/01/08 (confirmed)
Average Daily Volume = 13.3 million

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DIAMONDS - DIA - close: 112.22 chg: +0.56 stop: n/a

It's been three days and we're right back to where we started. If you're considering new positions this is the spot to open them in the $112.00-113.00 zone. The options we suggested were the August $115 calls (DIA-HK) and the August $109 puts (DIA-TE). Our estimated cost is $4.35. We want to sell if either option hits $6.90 or more.

Picked on July 07 at $112.21
Change since picked: + 0.01
Earnings Date 00/00/00
Average Daily Volume = 15.5 million

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iShares Brazil - EWZ - cls: 82.15 chg: +2.84 stop: n/a

The EWZ, like most of the market, can't decide which direction to go. Shares have been churning sideways in a volatile fashion for three days. We are not suggesting new strangle positions. The options we suggested were the August $90 calls (EWZ-HR) and the August $75 puts (EWQ-TO). Our estimated cost is $3.95. We want to sell if either option hits $5.90.

Picked on July 03 at $ 83.06
Change since picked: - 0.91
Earnings Date 00/00/00
Average Daily Volume = 13.6 million

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Garmin Ltd. - GRMN - close: 43.67 chg: +1.00 stop: n/a

GRMN still acts like it wants to rally higher and shares bounced from the $42.00 region again. We're not suggesting new positions at this time. The options we listed were the July $50 calls (GQR-GJ) and the July $40 puts (GQR-SH). Our estimated cost was $2.55. We want to sell if either option hits $ 4.75 or higher.

Picked on June 15 at $ 44.91
Change since picked: - 1.24
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 4.1 million

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Internet Holders - HHH - cls: 50.88 change: -0.88 stop: n/a

There was no real movement in the HHH today but the stock did finally hit our entry zone in the $50.50-49.50 range. The play is now open. The options we suggested were the August $55 calls (HHH-HK) and the August $45 puts (HHH-TI). Our estimated cost is $1.65. We want to sell if either option hits $2.45.

Picked on July 03 at $ 50.50
Change since picked: + 0.38
Earnings Date 00/00/00
Average Daily Volume = 132 thousand

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KLA-Tencor - KLAC - close: 38.74 chg: +1.14 stop: n/a

The semiconductor sector and the NASDAQ bounced on Thursday but KLAC out performed them both with a 3% gain. We are not suggesting new positions at this time. We listed two different strangles on KLAC.

Suggested Options:
KLAC Strangle #1) The options we listed were the July $42.50 calls (KCQ-GV) and the July $37.50 puts (KCQ-SU). Our estimated cost is $1.65 We want to sell if either option hits $3.00.

KLAC Strangle #2) The options we listed were the July $45.00 calls (KCQ-GI) and the July $35.00 puts (KCQ-SG). Our estimated cost is $0.70. We want to sell if either option hits $1.50.

Picked on June 22 at $ 40.07
Change since picked: - 1.33
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 3.7 million

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Lehman Brothers - LEH - cls: 17.30 chg: -2.44 stop: n/a

Rumors that PIMCO was reducing their business with LEH sent shares of LEH to an intraday low of $15.63. Volume was huge at 153 million shares and the stock pared its losses to close with a 12% decline. We are not suggesting new strangle positions in LEH. The options we suggested were the August $25 calls (LYH-HE) and the August $15 puts (LYH-TC). Our estimated cost is $2.54. We want to sell if either option hits $4.25 or more.

Picked on July 07 at $ 20.84
Change since picked: - 3.54
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 44 million

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MarketVectors Agribusiness- MOO - close: 57.40 chg: -0.29 stop: n/a

The agribusiness ETF is still trying to bounce. We were suggesting readers open strangle positions in the $57.00-58.00 zone. The options we suggested were the August $62 calls (MYV-HJ) and the August $50 puts (MOO-TX). Our estimated cost is $2.10. We want to sell if either option hits $3.15.

Picked on July 03 at $ 57.25
Change since picked: + 0.15
Earnings Date 00/00/00
Average Daily Volume = 745 thousand

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PowerShares QQQ - QQQQ - cls: 45.28 chg: +0.53 stop: n/a

If you were looking for another entry point near $45.00 you got it today. The Qs are still stuck in their trading range but now instead of a breakdown it looks like they want to breakout higher. Our suggested entry zone was the $45.25-44.75 region. The options we suggested were the August $47 calls (QQQ-HU) and the August $43 puts (QQQ-TQ). Our estimated cost is $1.80. We want to sell if either option hits $2.75 or more.

Picked on July 07 at $ 44.90
Change since picked: + 0.38
Earnings Date 00/00/00
Average Daily Volume = 148 million

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United States Oil - USO - cls: 114.34 chg: +4.69 stop: n/a

Crude oil just exploded higher late this afternoon. The USO rallied more than 4.2%. Oil and the USO are bouncing from near the bottom of its bullish channel. We have just over one week left before July options expire and we need to see a bigger move in oil and the USO if these strangles are going to pay off! We are not suggesting new positions at this time. We suggested two different strangles. The strangle with the wider strikes costs less but has higher risk.

USO Strangle #1) The options we listed were the July $115 calls (IYS-GK) and the July $105 puts (IYS-SA). Our estimated cost is $7.10 We want to sell if either option hits $9.75.

USO Strangle #2) The options we listed were the July $120 calls (QSO-GP) and the July $100 puts (IYS-SV). Our estimated cost is $4.10. We want to sell if either option hits $6.50.

Picked on June 22 at $109.14
Change since picked: + 5.20
Earnings Date 00/00/00
Average Daily Volume = 12.5 million
 

Dropped Calls

Research In Motion - RIMM - cls: 117.54 chg: -4.50 stop: 114.75

Late this afternoon shares of RIMM suddenly spiked under the $115.00 level and hit our stop loss at $114.75. Yesterday we discussed the possibility that RIMM would dip to its 200-dma before bouncing and that is what occurred today. If you had a more aggressive stop loss under the 200-dma you're still in this play. We're going to watch for a new move over $122.50 before considering new bullish positions.

Picked on July 08 at $122.04 /stopped out 114.75
Change since picked: - 4.50
Earnings Date 09/25/08 (unconfirmed)
Average Daily Volume = 17.7 million
 

Dropped Puts

None
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Keene H. Little, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

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