Option Investor
Newsletter

Daily Newsletter, Saturday, 07/26/2008

HAVING TROUBLE PRINTING?
Printer friendly version

Table of Contents

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

Market Wrap

Earnings Surprise

For a quarter that was supposed to be very negative in terms of earnings the outcome has been significantly different. With 66% of the Dow already reported, 70% of those beat the street. Over 45% of the S&P has reported and 75% beat the street. The historical average is for a 61% beat. That seems rather bullish if you stop there in your analysis. Unfortunately the best earners are the blue chips that report first and earnings quality declines as the cycle progresses. Secondly the earnings fell -17.8% for the quarter. If you exclude energy companies those earnings then decline by -25.8% for the quarter. Lastly the financial sector was expected to produce an earnings decline of -60% but instead have reported a -90% decline. Guidance has also been worse than normal with an almost unanimous view across all sectors that Q3 and Q4 will see lower profits. It is not surprising that the rebounded faded as the week progressed.

Wilshire 5000 Broad Market Index Chart - Daily

Dow Chart showing Doji Star Reversal

Friday was a good day for economics with three big surprises. The Durable Goods report for June rose by +0.8% when analysts were expecting a decline of -0.7%. Were it not for a sharp drop in aircraft orders the headline number would have been around +2.0%. That would have been the largest monthly increase this year. This was the second month of positive growth. Unfilled orders also rose and the orders to shipments ratio is near its all time high. The inventory to shipments ratio is at its highest level since 2001. This was a very positive surprise.

The Consumer Sentiment for July spiked to 61.2 from June's 56.4 reading. This was the first move higher since January. Analysts credited the tax rebate checks and a firming of home prices in many states. A reading of 61 is hardly something to be bullish about but it was a far cry from the expectations for something in the low 50s. Current conditions rose +6 points to 73.1 and expectations rose +4 points to 53.5. Inflation expectations remained high at 5.1% but appear to have eased somewhat from the first July reading at 5.3%.

Consumer Sentiment

The third report for the day was the New Home Sales for June. New sales totaled 530,000 units and much better than the 501,000 analysts expected and better than the previously reported 512,000 in May. However, the Census Bureau revised the May numbers up to 530,000 as well as the April numbers to 540,000 from 520,000. This surprising improvement in sales was good news to everyone. New home prices rose slightly to $237,871 from $231,087 in May for a +2.94% gain. Months of inventory decreased slightly to 10.0 from 10.4. Sales in the second quarter declined only 17% over Q1 compared to drops of nearly 40% in the prior three quarters. Homebuilders claim the limited access to mortgage loans is the biggest drag on sales today. As long as Fannie and Freddie continue to take mortgage paper that will eventually ease but the biggest problem then will be the down payment. Gone are the days of little or no down and saving has never been an American blue-collar tradition.

Advertisement

QQQQ
The Most Profitable 4 Letters in Trading

Master them with Hotstix QQQ Trader. We'll show you exactly when to buy and sell the QQQQ and turn you into a master trader who knows how to cut your losses, nail short term gains and rack up some incredible profits.

30-Day FREE Trial:

http://www.hotstix.com/public/defaultqqq.asp?aid=755

The report calendar for next week is very light until Thursday. The last two days of the week make up for a slim list the first three days. The GDP will be the big report on Thursday with expectations for 2.15% growth in the second quarter. If the real number is anywhere close to that it would appear the country has dodged the recession bullet. Q1 growth remained positive even if only barely at +0.96%. The Chicago PMI will be seen as a preview of the ISM on Friday. These are both indicators of current economic activity. The non-farm payrolls on Friday will be a critical test of the current economic strength. Current estimates are still for minimal job losses of 70,000 jobs compared to normal recession losses of 250,000 to 400,000 per month. If job losses remain muted it would be a good sign the economic indigestion is easing. However, we saw a sharp spike in unemployment claims last week at 406,000 suggesting job weakness was increasing. There can be a lot of noise in the weekly numbers and one week does not make a trend. The payroll report will be the most important report of the week.

Economic Calendar

The keys to market direction next week will still be earnings with nearly 750 companies reporting. This will be the heaviest week of the Q2 cycle although most of the largest companies have already reported. Earnings quality will continue to decline as we move farther into the cycle. This will be a heavy week for energy earnings and those should be very strong.

Earnings Calendar

Late Friday afternoon Chrysler shocked the markets saying they would no longer write leases on its vehicles. This is shocking for more than one reason. Chrysler depends on leases for nearly 20% of its sales. Analysts were shocked that they would risk pushing that many buyers to Ford or GM. Many people, especially small business owners, lease their vehicles so they can deduct them from their taxes. That is not likely to change just because Chrysler is no longer writing leases. Those customers will go elsewhere to shop. Chrysler said the business was changing, they could no longer be competitive in leasing and the cost of capital would be better utilized elsewhere. Chrysler said its $30 billion credit facility is up for renewal in August and borrowing costs were going to rise given the continuing credit market turmoil. In reality analysts believe it is the falling residual values of their vehicles that caused the problem. Chrysler sales are off -22% year-to-date and Chrysler said they expected the decision would cost them additional sales. It probably won't be the entire 20% of their lease sales but it could be close.

Chrysler had the heaviest mix of trucks/SUVs at 75% and the residual values of those products have fallen through the floor. In a lease the company typically assumes a 40% residual on a three-year lease. With used SUV values off 50% in most areas from just a year ago those residual values are underwater and not expected to recover. The consumer is also dumping debt at every turn. Auto loans/leases have been said to be the next housing crisis. If people are going to let their homes be foreclosed then keeping a lease car is not going to be a priority. Ford just took a $2.1 billion charge for its finance company when it reported Q2 results. That was in large part because of the hit it took on the declining value of SUV and truck leases. Nissan CEO Carlos Ghosn said this week that rising reserves needed to cover losses on vehicle leases had been one major surprise in the downturn for Nissan.

America is finally shifting to an economy focus and it would take a drastic change in the price of oil to make them reverse again. OPEC has always worried about changes in driving habits because they view it as a decade long move. In the past major changes in driving habits took years to reverse simply because of the replacement cycle. It takes years for automakers to switch vehicle types and then years for them to switch back when the crisis is over. They can't design and retool overnight.

Chart of GM - Daily

Trucking company YRC Worldwide (YRCW) reported profits that fell -35% and blamed the decline on the struggling economy. No surprise here and CEO Bill Zollars has been up front about the worsening conditions for months. On Friday Bill said on CNBC that they were seeing signs of life in the economy. He said sizes of shipments were increasing, as were numbers of shipments. He said it was too early to start calling a bottom but the signs were encouraging. Given his early warning on the economic decline this is a positive sign even if it is in the early stages of the change.

GE announced this week it was restructuring into four business units, down from six. This is in addition to their announced plans to spin off its lighting and appliance businesses. They could not find any buyers so they are going to donate it to the shareholders. The new units will be GE Technology Infrastructure, GE Energy Infrastructure, GE Capital and NBC Universal. GE Money is still for sale but no takers there either. Earlier in the week GE announced a joint venture with Abu Dhabi where Mubadala Development will pump $4 billion in outside capital into GE's commercial finance business. All these announcements follow a surprise earnings miss by GE last week.

S&P place Fannie and Freddie on negative credit watch as the stress level increases on those companies. S&P said it expects the stress to continue and placing them on credit watch is a pretty good indicator they will change the rating soon. With mortgages failing in record numbers Fannie has already raised $7 billion in capital and Freddie $5.5 billion. The government has pledged to help them and the Fed said it would open a special lending option to provide further support. Congress is expected to pass the housing bill this weekend and that includes guarantees of up to $100 billion for the pair. Lawmakers said there was only a 5% chance the companies would need the support and the maximum risk to the taxpayer was $25 billion. Over the last year the government along with Fannie and Freddie have already put $1.43 billion of support into the mortgage market. That breaks down as Fed $446B, FHLB $274B, FHA $90B and F/F $621B. As a result of the subprime crisis banks have already written off $880 billion and expectations are for that to climb to $1.5 trillion by the end of 2009.

In a side note the Fed reported that bank borrowings at the discount window rose to an average of $16.38 billion per day in the latest week and that was the highest level ever. This does not bode well for the health of the sector. If you are a bank today you are basically a ward of the state. You can't raise money in the equity market and banks are not lending to each other for fear of skeletons in the closets. This suggests the economy is not going to have a growth spurt any time soon.

The Fed seized two more banks after the close on Friday and immediately sold them to Mutual of Omaha Bank. The two failing banks were the First National Bank of Nevada with assets of $3.4 billion and $3 billion in deposits. The bank just completed a merger of its own with the First National Bank of Arizona on June 30th. Bet those stockholders are happy today. The second was First Heritage with assets of $254 million and $233 million in deposits. The FDIC said the estimated cost of the transactions to its insurance reserve account would be $862 million. The 28 branch banks will reopen on Monday as Mutual of Omaha Bank. Mutual itself only has $750 million in assets and operates 14 branch locations. Thanks to good management and a strong balance sheet it was able to quadruple its size overnight. However, it is also a subsidiary of Mutual of Omaha, a 99-year-old insurance company with $19 billion in assets. It never hurts to have a rich parent.

Juniper (JNPR) was a double winner this week reporting earnings that jumped +40% on stronger sales of networking gear and a new CEO they stole from Microsoft. Kevin Johnson will take the reins on Sept 1st. Juniper jumped +$4 on Friday after reporting profits that jumped from $86.2 million to $120.4 million. Revenue was also up more than $200 million to $879 million. It was a great quarter for Juniper and Friday's spike came off a two-month base at $22.

On the flip side Crocs (CROX) was crushed for a 45% drop on Friday after slashing their outlook after Thursday's close. One analyst called Crocs an endangered species after months of warnings on sales and the final blow on Thursday. CROX said in May that earnings would be in the 42-47 cents range for Q2. Thursday night they slashed that guidance saying they only expected to make 3-7 cents now. They blamed the challenging conditions in the domestic market place for the drop in sales and by the way overseas markets were weak as well. Let's see, that sounds like "the economy killed us" excuse but they blew their credibility when they added the sentence about the weak overseas sales. What killed them is the generic competition from a dozen companies. You can get Crocs look-alikes at Wal-Mart for $5-$8 and nobody will ever know the difference. CROX closed at $4.93 on Friday. I hope everyone who owned it at $75 last Halloween saw the warning signs and bailed.

CROX Chart - Daily

Qualcomm (QCOM) also won twice last week. One when they settled the patent dispute with Nokia and the second time when they won the S&P-100 lottery. QCOM was named to replace Clear Channel (CCU) in the S&P-100 after Friday's close. Qualcomm announced a settlement on Thursday in the CDMA squabble with Nokia. Nokia agreed to a 15-year royalty deal in order to get back into the U.S. market with 3G CDMA phones. They had been blocked from selling those phones in the U.S. after they lost a court battle last year.

NetFlix (NFLX) beat the street by 2-cents on Friday and said it added 168,000 subscribers over the quarter. In the same quarter in 2007 they lost 55,000 subscribers. NetFlix said they appeared to be unaffected by the slowing economy probably because families were spending more time at home in front of the TV rather than burn gasoline going places. NetFlix said it was finding a large acceptance of its streaming movie service with over 100,000 of the $100 devices sold in the first two months of service. Microsoft's Xbox is scheduled to begin streaming for NetFlix this fall and that could increase subscribers by leaps and bounds. Blockbuster is preparing to hit the market hard with the service it acquired from Movielink last year but it appears NetFlix is still sprinting ahead. Too bad their stock is not sprinting higher. When they start adding streaming subscribers by the millions through the Xbox that should change. I tried to find a total for the number of Xboxes in circulation but after topping 30 million in 2007 I could not get any more current numbers. Microsoft expects to sell 6-8 million in 2008. That should be a very good market for NetFlix.

Oil prices shook off a rebound to $126.50 overnight to close at $123.26 on Friday. The decline that began on July 15th is continuing but $122 should be fairly strong support. The next week will be a make or break week for the energy sector. A move under $120 would produce heavy technical selling while a rebound could trigger some serious short covering. Factors that could impact oil include a new tropical disturbance forming well east of the Caribbean but moving westward at 15-20 mph.

September Crude Oil Chart - Daily

Violence flared again in Nigeria and rebels kidnapped eight oil workers in three separate incidents according to reports out late Friday. Eleven Russians and a Ukranian were seized from a vessel off the island of Bonny but six were released. Five are still being held. The vessel was working for an Italian oilfield company. No demands have yet been made by the kidnappers. Security services said an oil services vessel was attacked on its way to a field operated by Total but there was no word on causalities. The MEND rebels warned two weeks ago they were ending their truce after Britain told the Nigerian government they would help to rid the country of its violence. It appears the MEND rebels are making sure the Nigerian government is aware they are back in action. Repeated attacks on this scale will force production to slow again. MEND rebels have promised to blow up the major pipelines in Nigeria within 30 days to prove they are not being paid off by the government in a $12 million bribe as various news stories have claimed.

Russian markets have been in a tailspin over the last week after Putin made negative comments about OAO shareholder Igor Zyuzin. His implied threat of physical violence after Zyuzin failed to attend a meeting sent the markets into free fall. Putin is attacking nearly every major company much like Hugo Chavez recently did in Venezuela. Renaissance Capital strategist said the idea of Russia as a safe haven is finished. Investors fear worse purges and takeovers ahead as the government tries to combat 15% inflation and the perceived flight of money out of Russia. The Russian markets fell -20% last week. The CEO of TNK-BP, the joint venture of BP and AAR, was refused a visa last week to continue working in Russia. The government is trying to run BP out of the partnership and give control to Rosneft. All of the problems in Russia are slowing production with the first serious declines in a decade. There is plenty of news impacting oil all over the globe and that suggests support at $122 should hold.

The Senate failed to get enough votes to pass the oil speculation bill. They were only able to garner 50 of the needed 60 votes to pass the resolution. Among other things the bill would have closed a loophole that allows speculators trading on the London oil market to escape scrutiny by U.S. regulators. The Intercontinental Exchange (ICE), which owns the London based derivatives exchange rallied +13% on the news.

Final approval came on Friday for the XM Satellite and Sirius Satellite merger. The FCC vote was 3-2 with Republican commissioner Deborah Tate making the tiebreaker vote. Tate had insisted the pair settle charges they violated FCC rules before she would approve the deal. The companies finally agreed to pay $19.7 million to the U.S. Treasury for violations related to radio receivers and ground based signal repeaters. Subscribers will be able to listen to content from both providers but they will have to buy new dual channel radios to receive content from both companies. The combined companies had to agree to a 3-year price cap and to provide 8% of their programming as full time audio channels for public interest and minority programming. They will also have to adopt an open radio standard that could lead to greater competition among manufacturers. They also have to offer a limited a la carte offering that would be available within three months of the close and allow listeners to pay only for the channels they want to receive. I am just glad the 16-month deal is finally completed so I don't have to listen the constant debates about it.

This was a confusing week for me. We had the buy program on Tuesday at the close that pushed the indexes over their strong resistance points but the follow through on Wednesday was lackluster at best. The -283 point sell off on Thursday brought back fears of another leg down but Friday's lack of selling rekindled hope for the bulls. You may remember I changed to cautiously bullish after Tuesday's tentative breakout and suggested we switch to buy the dip mode. I also posted a chart of the Dow showing the potential failure points including the Fibonacci retracement level at 11700. On Wednesday the Dow rallied to 11698 and failed almost instantly. It was a perfectly scripted touch and failure at strong resistance. Unfortunately I did not script the sell off in the financial sector on Thursday that knocked the indexes back to support. I would have preferred a slightly less severe dip to buy.

Dow Chart showing Fib Resistance Levels

The Dow closed positive on Friday but it was a fight that it almost lost. IBM, BAC and GM were the biggest losers. For reference the five financial stocks in the Dow accounted for nearly 100 of the -283 points the Dow lost on Thursday. Support is currently 11200 but I definitely hope we don't have to test that level. I previously discussed the potential for 5-8% rebound rallies in a bear market and even as much as 10% in some. I had thought that we were going to avoid another leg down on Tuesday but now I am not so sure. I am not changing my buy the dip view as long as the Nasdaq and Russell remain the strongest indexes. The Dow is handicapped by its financial components, as is the S&P. I am going to caution that the internals appeared to be breaking down late in the week. I don't think we can call Thursday anything but ugly and 5:1 declining over advancing volume is not just profit taking. It was fears the credit crunch was coming back to haunt us again. News of record discount window borrowing and two more failed banks is only going to increase those fears.

The Nasdaq rallied +30 points on Friday and moved right up to solid resistance at 2310. This is a bullish chart even after the drops in AAPL, RIMM, GOOG and company. Even those stocks have started to recover. The Nasdaq is not impacted by the financial crisis except from the drag on the markets by the Dow and S&P. Investors appear to have shaken off the gloom and doom in the chip sector and we could be seeing some of the money that rotated into financials the prior week rotating into techs now. Initial support is 2270, resistance 2310-2325. A break over 2325 should attract additional buyers.

Nasdaq Chart - Daily

S&P-500 Chart - Daily

S&P-500 Chart - 60 min

The S&P-500 failed miserably at 1290 on Wednesday and dropped back under 1260 at the close on Friday. It was not a pretty sight. Obviously this is because of the drag by financials and because the drop in oil tanked energy stocks and the second largest S&P sector. I am worried about the S&P dragging the Nasdaq into the tank with it. It looks weak and could be very close to a breakdown. I know this conflicts with statements I made above but there is some tremendous divergence among the indexes today.

The Russell 2000 declined only slightly from the Wednesday highs and remained well above prior resistance at 700. As long as the Russell is showing strength we need to buy the dips in the broader market. The Russell continues to exhibit better relative strength than the rest of the market. Fund managers are buying small caps and that is long term bullish.

Russell 2000 Chart - 180 Min

For next week we have month end on Thursday and that could see some window dressing but the reports on Thursday and Friday are going to be critical. They should supply an upward bias because all the bad news for the next couple months is already priced into the market. The Fed meeting the following Tuesday already has a quarter point rate hike priced into the announcement so any talk about not hiking would be bullish. Personally I don't expect any with FOMC members Fisher, Plosser and Stern already calling for a hike. The Fed needs to hike to support the dollar and begin fighting inflation and I believe that will be seen as a positive move. It also suggests the Fed believes the economy is no longer on life support. However, we did get testimony from Bernanke just over a week ago that the Fed thought economic weakness was a bigger problem than inflation so it may come down to a coin flip when they take the vote. We still have another week for that discussion to heat up before the markets have to start taking a position.

A big event for Monday could be the housing bill. The support for Fannie and Freddie could imply that existing shareholders are eventually going to be diluted away and the drops on Friday ahead of the weekend vote suggests traders are also worried current equity holders are going to get hammered. This could continue to pressure the financial community in general because we are hearing the same song about the rest of the banks in trouble. More equity being sold just to survive dilutes existing holders. Banks are not done going down if you believe most analysts despite last week's short covering rally. To summarize all my market views I would continue to buy dips above 690 on the Russell. Under 690 I would be short or flat. Despite being cautiously bullish we have to expect the unexpected. We are approaching the two worst months of the year for the markets (Aug/Sep) and anything is possible.

Jim Brown
 

Index Wrap

RALLY CAN CONTINUE, BUT...

THE BOTTOM LINE:

The recent rally looks like it can continue, speaking in terms of the chart patterns seen on the major indexes, including the Russell 2000 (RUT). The 'but' modifier in my title relates to a couple of technical aspects that call into question whether we won't see a another bottom LATER ON, either testing prior lows or possibly exceeding them.

As to whether recent lows could have been a major bottom, it's not a question we have to speculate a whole lot on as option traders. The sustaining power of this rally IS something that holders of index calls, and I have some, DO need to assess and I think the market can work still higher.

The two questionable aspects I had about the recent lows refers to the fact that:

1.) The Nasdaq indexes and tech stocks, the key to the continuation of the current rebound, didn't see the contraction in Advancing volume, which I find to nearly always occur at intermediate-term bottoms; e.g., bottoms where there's potential for a gain of 350 to 500 points or more in the Nasdaq Composite, as opposed to say 150-200 points. For more on my Nasdaq Advancing Volume 'indicator' reading at the recent low, versus two other key indicators I rely on, see my Thursday Trader's Corner piece by clicking here.

2.) The extreme bearishness usually seen at a major low, when the S&P 500 (SPX) got down to 1200, was seen, but just barely and briefly. It's not a precise rule of thumb, but given the extreme trouble the economy is facing, I anticipated a heavier move into puts at the time, relative to call volume. On this recent rally, trader sentiment got a little 'too' bullish too soon I thought and sure enough the market got slammed again on this past Thursday.

Moving on, I don't want to overemphasize my background feelings about the recent low, as not every bottom is the same in terms of fundamental OR technical factors. The market looks headed higher still, but I'm not betting the ranch on it. I'm in for trade and still long some calls.

"DEAD LETTER BOX" or E-MAILS NOT ANSWERED!

You'll recall seeing in both this, my Index Trader and in my (Thursday) "Trader's Corner", the following:
"QUESTIONS/COMMENTS:
You can e-mail me with any questions or comments at Click here to email Leigh Stevens support@optioninvestor.com Please put "Leigh Stevens" in the Subject line."

NOT! I'm sorry to say, as our support desk didn't 'get the memo' so to speak as to my updated e-mail address (to use in forwarding any Subscriber mail to me) since my move back from California over a year ago!! Except for the few who had my direct e-mail, there were zero mails coming in from Option Investor.com sources and I did wonder about that....but never checked up on it with our support desk. My bad!

So sorry for any and all who may have written something to me for answer or response and never heard back. Getting e-mails is important to me also as to future topics so I suffered the consequences also. FROM THIS POINT ON HOWEVER, THE COMMUNICATIONS SNAFU WITH ME HAS BEEN CORRECTED.

MARKET NEWS and INFLUENCES:
Other index and sector closes, recaps of market influences like earnings, company news, related market events, government reports and activities, etc. are found in the Option Investor 'Market Wrap' section.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

The recent rally in the S&P 500 (SPX) Index is not setting the world on fire, but who would think that bullishly in this downtrodden economy. Near resistance and selling interest was seen in the 1290 area. Key technical resistance next comes in around 1312 as highlighted on the SPX chart below. Pivotal next resistance begins around 1350 and extends to 1370,which is about the best upside potential I see currently.

Pivotal near support is in the 1260 area. There is not a lot of chart support below 1260 until the 1200 level is reached. I noted last week about 1200 being a 'natural' support area, which could be 'the' bottom for a while if not a 'final' low, but my crystal ball is hazy on this window into the market future. Support below 1200 is at 1170.

S&P 100 (OEX) INDEX; DAILY CHART:

As anticipated, the S&P 100 (OEX) Index broke out above pivotal resistance implied by the 21-day average and staged a substantial, but short-lived, further advance. The pullback was then back to key near support implied by the 21-day moving average. If OEX closes, at least for more than an isolated day, under its 21-day average (currently at 577), I'd anticipate a fall back to the 560 area again.

Conversely, on the bullish side of things, I see potential for OEX to climb back and retest the area of recent highs around 595, with some potential then for a further advance to the 608-609 area. Next resistance looks like 620, with fairly major resistance beginning at 640.

Below 560, I've envisioned support at a downtrend channel line that intersects at 553, and falls lower from there over the days and weeks ahead.

Bullish 'sentiment' did take a hit on the recent pullback, but not all that much yet. Traders see some potential for a turn of the economic corner; this I get from talking to a few. I'm not so sure just yet!

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) also looks like it has some further upside potential in what I see in its chart, especially if INDU can hold above its 21-day average which I've noted as near support at the green up arrow. Fairly major support begins in the 11000 area, and extends to 10850-10825.

I see potential for the Dow to rally again to retest resistance implied by the key supply overhang beginning at 11732, with next potential to 12000, perhaps to 12250-12300 ultimately.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

If the Nasdaq Composite (COMP) Index continues to hold above 2300 on a closing basis, its suggests that the index is headed still higher, possibly into a new up 'leg' with potential to 2425 or higher. Near resistance is at 2250.

Key near support is in the 2250-2253 area, with lower technical support anticipated 2223, with fairly major support coming in at 2200.

NASDAQ 100 (NDX) DAILY CHART:

Unless the Nasdaq 100 (NDX) Index starts falling below 1800, especially on a closing basis, the chart pattern looks like it's in a recovery mode and will retrace still more of its prior early June to mid-July decline. The true test for NDX's rally potential lies in the index's ability to climb above pivotal resistance in the 1870 area, also on a closing basis and for more than an isolated day.

So far NDX has been mostly holding above near support implied by its 21-day moving average, currently at 1832. You'll notice that the "moving average envelope" indicator has made it back onto this chart. Relative to the 21-day moving average, the upper line is set at an NDX value that is 5% above that day's (21-day) average and the lower line floats 5% under the average. Normally, the Nasdaq has a tendency to trade about 5% above and 5% below this key average; the S&P envelope values tend to range from 3 to 4%.

The wrinkle as to predicting a top or bottom just because the index trades in at the upper band or lower line is that advances and declines can climb or fall in the area of this line for some period of time. A value of the envelope lines comes into play at a transitional phases or shift in trend (or in a 'trading range' market) when their use gives another take on possible support and resistance.

Resistance above 1870 coves in around 1900 and extends up to the 1945 area. Support is anticipated in the 1780 area, next around 1760 and then down in the 1720 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) is holding above its 21-day average at 45 currently, which is bullish for a possible test of an important 'line' of resistance at 46; next resistance then comes in around 47 and above 47, there's resistance at 47.85-48.

A close above 46.0 that lasts beyond that day is a key test here for the bulls. On Balance Volume (OBV) continues to climb, which suggests that some accumulation is going on. Daily volume is still light however.

The Q's should find support in the 44 area, with next support assumed to lie at the prior 43.3 low and if that level is exceeded, the stock could fall to the 42.30 area.

I continue to see potential for QQQQ to advance to the 47 area.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) was struggling some last week hold above its 55-day moving average, a 'length' setting and also a fibonacci number following after 21 and 34 in the fibonacci sequence, that tends to show whether RUT (depending on whether it's closing above or below this average) is in an up or down trend.

I'd say the same thing this week, as last, that a close above 717-720, not reversed the next day, suggesting further upside potential back to the 740 area or a bit higher. RUT might get back to the 760 area but if it did, the index would look more like a sale than that RUT was going to see a new up leg.

Near support is down in the 680 area, with next support at 660, then at 647, a key support implied by the mid-month intraday low.

GOOD TRADING SUCCESS!

NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
CHART MARKINGS:
1. Technical support/areas of likely buying interest are highlighted with green up arrows.
2. Resistance/areas of likely selling interest: red down arrows.
[Gray up/down arrows: support/resistance levels that got pierced]
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls (or selling puts or other bullish strategies).
4. Price levels where I suggest buying index puts (or, adopting other bearish option strategies).

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I most often favor At (ATM), In (ITM) or only slightly Out of the Money (OTM) strike prices in order not to 'overtrade' my account. Exit or 'stop' points, as well as projected profitable index price targets, are based on my technical analysis of the indexes.


Trader's Corner

What's the Probability?

Leading into the June 25 FOMC decision, market pundits speculated on what the FOMC might decide. Based on the Fed funds, many said, no rate hike was expected. Leading into the August 5 meeting, you'll hear speculation rise again.

They were right, but how exactly did they make that calculation? How does one calculate the probability of a rate hike or cut? Can you do it for yourself?

Certainly you can, but you don't have to. Someone else does it for you.

If you wanted to calculate that number for yourself, your calculations begin with a look at the CME Group's 30-Day Fed Funds futures contracts. A Fed fund rate is the rate that banks assess each other for overnight loans of reserves that the Fed holds. The futures track that effective overnight rate for a specific month. Originally traders would have found this information at the Chicago Board of Trade (CBOT), but the information is now migrating to the new CME Group website after the merger of the two.

CME Group says that the 30-Day Fed Funds Futures provide a "view on the direction of the Federal Open Market Committee (FOMC) policy," among other benefits. Options are available on those futures. If a trader looks at those options on the 30-Day Fed Funds futures for a specific month in the future, that trader should get a rough idea of what the FOMC will be deciding in that month.

Exactly how is that done? Well, there's a simple way and a complex way. Edward Talisse discussed a simple method in "Predicting the FED Funds Rate" in an article picked up by Yahoo. Those 30-Day Fed Fund futures have different maturity dates, of course. To calculate the market's prediction of where the Fed's target rate will be on a specified date in the future, you subtract the price of the 30-Day Fed Fund future for that date from one hundred.

For example, as this article was first prepared on June 27, 2008, the futures expiring March 9, 2009 were last at 97.360. If that's subtracted from 100, that results in an expected target Fed rate on March 9, 2009 of 100.000 - 97.360 = 2.64 or 2.64 percent. That's 64 basis points above the current Fed rate of 2.00 percent. As this article was edited prior to publication midmorning on July 25, 2008, futures expiring March 9, 2009 were then at 97.475. That results in a new expected target Fed rate on March 9, 2009 of 100.000 - 97.475 = 2.525 or 2.53 percent. That's still more than 50 basis points above the current Fed rate of 2.00 percent, but expectations for higher rates are ebbing.

Midmorning that Friday, July 25, 2008, futures expiring September, 2008 were 97.940. That equates to a Fed rate of 100.000 - 97.940 = 2.06, only six basis points above the current Fed rate of 2.00 percent. The FED tends to move in multiples of 25 basis points (or quarter-point moves), so the expectation did not seem high that the FOMC would raise rates between now and September.

Quotes for the 30-Day Fed Funds futures can be found at www.CMEgroup.com by clicking on "Quotes" in the blue bar on this page: http://www.cmegroup.com/cmegroup/trading/interest-rates/stir/30-day-federal-fund.html

A more difficult calculation may be arrived at by employing the Taylor Rule, developed by the Stanford economist and former U.S. Undersecretary of the Treasury John B. Taylor. That calculation requires inputs for the inflation rate and real GDP gap, and it's meant to tell us what the Fed Funds rate should be, not what the FOMC will necessarily do. Whether or not the Fed decides to hone in on that rate depends on whether they agree with the inputs, their expectations on how the economy might shift away from some of the current inputs, and a multitude of other factors. Does one use the PCE (Personal Consumption Expenditures) to estimate inflation or some other measure?

I don't know. I have enough difficulty determining what I think might happen next with the stock market without having to figure out the whole economy and whether the Fed will agree with my assessment. However, if you want to dig in, Talisse provides this simplified form of the Taylor Rule calculation, with r = the Fed Funds rate, p= the inflation rate and y = the real GDP gap: r = 1.5p + 0.5y + 1.0.

John Hussman of Hussman Funds (www.hussmanfunds.com) explains that what this formula is doing is adjusting for inflation. In the Fed's ideal economy, inflation would be two percent, so the FOMC would tighten if inflation rose above that and ease if the economy weakened too much. In a June 9, 2008 article, Hussman surmised that the Fed has to operate in a "regret-minimax" mode. When conflicting needs arise--such as a need to tame inflation and a need to not to put further dampers on a weakening economy--the Fed must act in the way that "minimizes the maximum possible loss." In other words, if it's going to ultimately cause more harm in a weakening economic climate to raise rates than to risk holding off on tackling inflation with the hope that it would ease anyway, the Fed is unlikely to move.

The Taylor Rule is not the only method for calculating where the Fed's target rate should be. But in most cases, when someone on CNBC discusses predictions for the Fed's target rate, that person is not referencing either the Taylor or any other such rule. That person is likely referencing the simpler calculations made from looking at where the 30-Day Fed Funds futures prices are at a particular maturity.

The Fed may be looking at it, too, gauging what the market's expectations is. Hussman says that "even the policy makers themselves don't know the 'true model' determining the course of economic growth, inflation, employment, exchange rates and other variables." We know, too, that our Fed doesn't like to shock markets, either, with an unexpected move, unless that shock is to shorts who are occasionally surprised by a pre-market move by the Fed when equity futures were getting slammed. Some believe that the Fed doesn't dictate to the markets where target rates should go: that it's the other way around, and that it's those prices on Fed Fund futures that do the talking.

We know that the Cleveland Fed is watching those futures, at least. For those of you who don't want to check the futures on the CME Group's site, the Cleveland Fed is glad to do all the calculations for you. The URL http://www.clevelandfed.org/Research/data/Fedfunds/index.cfm sends market watchers to the Federal Reserve Bank of Cleveland's research section titled "Fed Funds Rate Predictions."

You'll find charts that list the probabilities of all kinds of outcomes for the next couple of Federal Reserve meetings, updated daily. For example, as of midmorning on July 25, 2008, the August Meeting Outcomes chart showed the probability of a 2.00 percent rate--unchanged from the current rate--at the August FOMC meeting higher than the probabilities for any other rate graphed, with those rates ranging from 1.75 to 2.75 percent. The chart showed the probability of no change at the August meeting at almost 0.90 or 90 percent.

August Meeting Outcomes from the Federal Reserve Bank of Cleveland:

The Cleveland Fed's page currently has charts for the next two FOMC meetings, so also produces one for September. For a while in early June, the September Meeting Outcomes chart had shown that the possibility of a rate hike to 2.75 percent by the September meeting had gained favor. Currently, however, that chart shows a more than a 50 percent probability that the target Fed rate will remain the same, with all other probabilities being less than 20 percent.

As long as you don't try to read through the pages of information on all the assumptions that go into that chart, including assumptions required for the "single meeting estimation technique" and "nonnegative probability constraint," the easiest way to obtain a current take on probabilities might be to bookmark that Cleveland Fed page. One advantage is that market watchers are provided with a visual of how expectations are changing over time. The Cleveland Fed also nicely benchmarks such events as the Beige Book release. Some market watchers, however, will want to check those predictions more frequently than once a day. Looking directly at the Fed Funds futures and making that quick calculation will provide a rough-and-ready estimate of what might happen.

At least now, however, you'll know what they're talking about on CNBC when someone says that Fed funds futures are predicting a certain move by the Fed by a certain time.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
BNI ATK LEH
FDG   VLO

Play Editor's Note: If you have read this weekend's market wrap then you know that Jim is very cautious but still bullish. We are both concerned about next week. Not only is the bounce already struggling but we're about to move into the two worst months of the year for stocks. Keep in mind that you could easily argue we are in no-man's land without any clear short-term market direction and the best trade may be to just sit on the sidelines. Bigger picture we're still in a bear-market bounce, which will roll over sooner or later.


New Calls

Burlington Northern - BNI - cls: 98.05 chg: -0.72 stop: 93.90

Company Description:
Burlington Northern Santa Fe Corporation's subsidiary BNSF Railway Company operates one of the largest railroad networks in North America, with about 32,000 route miles in 28 states and two Canadian provinces. The railway is among the world's top transporters of intermodal traffic, moves more grain than any other North American railroad, transports the components of many of the products we depend on daily, and hauls enough low-sulfur coal to generate about ten percent of the electricity produced in the United States. (source: company press release or website)

Why We Like It:
The railroad sector has recovered nicely from its July lows and looks like it could retest the 2008 highs. BNI has been lagging its peers and now that earnings are out of the way the stock has space to catch up to the group. Shares have broken the bearish trend of lower highs and investors bought the dip on Friday near the 10-dma, which has turned upward again. It is possible that BNI could fill the gap from July 22nd, which would mean a dip back toward $94.00. We're going to use a stop loss at $93.90. More conservative traders may want to place their stop loss closer to $96.00 instead to reduce their exposure. There is potential technical resistance at the 50-dma. Our target is the $104.75 mark. FYI: The Point & Figure chart is bullish with a $119 target but there is resistance near $102.

Suggested Options:
We are suggesting the September calls. August options are available but they expire in three weeks.

BUY CALL SEP 100.00 BNI-IT open interest=3127 current ask $4.30
BUY CALL SEP 105.00 BNI-IA open interest= 441 current ask $2.40

Picked on July 27 at $ 98.05
Change since picked: + 0.00
Earnings Date 07/24/08 (confirmed)
Average Daily Volume = 3.9 million

---

Fording Cand. - FDG - close: 80.35 change: +2.85 stop: 78.49

Company Description:
Fording Canadian Coal Trust is an open-ended mutual fund trust and one of the largest royalty trusts in Canada. The Trust makes quarterly distributions to unitholders using royalties received from its 60% interest in the metallurgical coal operations of the Elk Valley Coal Partnership. Elk Valley Coal Partnership is the world's second largest exporter of seaborne metallurgical coal, supplying high-quality coal products to the international steel industry. (source: company press release or website)

Why We Like It:
If you look at the consolidation pattern in FDG over the last four weeks the stock sort of has a pennant-shaped pattern. Normally a pattern of higher lows and lower highs is a neutral one and the breakout could go either way although usually the prevailing trend tends to resume. I seriously considered a strangle on FDG given its pennant-shaped consolidation but I felt the options were a little too pricey. You may want to take a look yourself and consider if a strangle would be a good trade or not for you. If you look at the overall trend in FDG the direction is still up. The stock hasn't suffered quite the same sell-off that many of the coal names have. It is this relative strength that could give the bulls an edge. I suspect the next move will be higher. However, FDG does have short-term resistance in the $81.00-81.50 zone. We're suggesting a trigger to buy calls at $81.75. If triggered our target is the $89.50 mark. I would expect some additional resistance near $85.00 on the way up.

Suggested Options:
We are suggesting the September calls. August options are available but they expire in three weeks. Our trigger to open positions is at $81.75.

BUY CALL SEP 80.00 FDG-IP open interest=2993 current ask $8.10
BUY CALL SEP 85.00 FDG-IQ open interest=1910 current ask $6.10
BUY CALL SEP 90.00 FDG-IR open interest=2995 current ask $4.40

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/23/08 (confirmed)
Average Daily Volume = 2.7 million
 

New Puts

Alliant Tech.- ATK - close: 99.33 chg: -0.31 stop: 101.75

Company Description:
ATK is a premier aerospace and defense company with more than 17,000 employees in 21 states and $4.5 billion in revenue. (source: company press release or website)

Why We Like It:
ATK is stuck in a down trend and just produced a failed rally at the top of its bearish channel. This is an entry point to capture another move toward the bottom of the channel. We are aiming for $95.25. More aggressive traders could aim lower (see chart). The Point & Figure chart is bearish with a $78 target. We do not want to hold over the August 8th earnings report. This could be considered a higher-risk more aggressive play because the spreads on the options are a little too wide!

Suggested Options:
We are suggesting the August puts or the September puts. Keep in mind that August options expire in three weeks.

BUY PUT SEP 100.0 ATK-UT open interest= 10 current ask $4.30
BUY PUT SEP 95.00 ATK-US open interest= 27 current ask $2.25

BUY PUT AUG 100.0 ATK-TT open interest= 213 current ask $3.10
BUY PUT AUG 95.00 ATK-TS open interest= 210 current ask $1.15

Picked on July 27 at $ 99.33
Change since picked: + 0.00
Earnings Date 08/07/08 (confirmed)
Average Daily Volume = 307 thousand
 

New Strangles

Lehman Brothers - LEH - close: 17.05 chg: -1.47 stop: n/a

Company Description:
Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private investment management, asset management and private equity. (source: company press release or website)

Why We Like It:
I wanted to just buy puts on LEH's failed rally at $22.00 this past week. However, I couldn't bring myself to make a directional play on such a volatile stock. More aggressive traders may want to consider it. If your right and LEH moves your direction it could be a big winner but if you're wrong and LEH moves against you it's going to move fast and the option could drop toward zero pretty quick. The stock is so volatile that trying to place a stop loss somewhere is going to be tough - at least today. We opted for a strangle play again. If LEH is going to move it's going to move big so we're using some petty wide options.

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 the stock moves far enough one side of our trade will rise in value and pay for the entire trade and make a profit.

We are suggesting the September options below. Our estimated cost is $2.15. We want to sell if either option hits $3.50 or higher.

BUY CALL SEP 24.00 LYH-IR open interest= 930 current ask $1.15
-and-
BUY PUT SEP 10.00 LYH-UB open interest=1591 current ask $1.00

Picked on July 27 at $ 17.05
Change since picked: + 0.00
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 63 million

---

Valero Energy - VLO - close: 31.88 chg: +0.44 stop: n/a

Company Description:
Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 22,000 employees and 2007 revenues of more than $95 billion. The company owns and operates 16 refineries throughout the United States, Canada and the Caribbean with a combined throughput capacity of approximately 3.1 million barrels per day, making it the largest refiner in North America. (source: company press release or website)

Why We Like It:
VLO, the nation's largest refiner, is due to report earnings on Tuesday morning. The group has been crushed this year. The refiners can't seem to win no matter what direction crude oil goes. There is a lot of pessimism in the stock and if VLO can say anything significantly positive it could spark some serious short covering. On the other hand if they unveil that the situation is a lot worse than expected the stock could plummet. We're suggesting a strangle position. You may want to consider using September options. We're listing this play with August options. If we don't get a big move on Tuesday following the report we'll close it! Wall Street is expecting a profit of $1.33 a share. Just a reminder, Monday is our only day to open positions ahead of earnings.

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 the stock moves far enough one side of our trade will rise in value and pay for the entire trade and make a profit.

We are suggesting the August options below. Our estimated cost is $1.38. We want to sell if either option hits $2.25 or higher.

BUY CALL AUG 37.50 VLO-HU open interest=11553 current ask $0.68
-and-
BUY PUT AUG 27.50 VLO-TS open interest=4476 current ask $0.70

Picked on July 27 at $ 31.88
Change since picked: + 0.00
Earnings Date 07/29/08 (confirmed)
Average Daily Volume = 12.7 million
 


Play Updates

In Play Updates and Reviews

Call Updates

SPDR Gold Shares - GLD - cls: 91.69 chg: +0.36 stop: 89.95

Traders bought the dip in gold and the GLD at $90.53 on Friday. The $90.00 level is round-number psychological support, which happens to be underpinned by technical support at its 50-dma and 100-dma. GLD is arguably short-term oversold with the sharp midweek sell-off. There appears to be potential resistance near $94.00 but we're aiming for a bounce back to $94.90. More aggressive traders may want to aim higher. FYI: There was a huge surge in open interest for the August $95 calls. There is also really big open interest in the August $97 calls.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 90.00 GLD-HL open interest=1790 current ask $3.30
BUY CALL AUG 93.00 GLD-HO open interest=1664 current ask $1.75
BUY CALL AUG 95.00 GLD-HQ open interest=10525 current ask $1.10

Picked on July 24 at $ 91.33
Change since picked: + 0.36
Earnings Date 00/00/00
Average Daily Volume = 12 million

---

Intl. Bus. Mach. - IBM - cls: 128.53 chg: -1.47 stop: 124.95

IBM gave into some profit taking as investors headed into the weekend. Overall the stock has done a good job maintaining its gains from the past couple of weeks. A dip back to the 10-dma near $127.40 or a dip back toward more solid support near $125 and its 50-dma would not be out of the question. If we do see a dip wait for signs of a bounce before jumping in. Or readers can wait for a new rally over $130.25 again to initiate call positions. We have two targets. Our first target is $134.75. Our second target is $139.00. We are now suggesting the August or September calls.

Suggested Options:
August options will probably work fine but they expire in three weeks. We would prefer to use September calls at this time. Wait for an entry point.

Picked on July 23 at $130.25 *triggered
Change since picked: - 1.72
Earnings Date 07/17/08 (confirmed)
Average Daily Volume = 7.7 million

---

United States Oil - USO - cls: 99.27 chg: -2.19 stop: 97.45 *new*

Our original play description called for traders to buy a dip to the 100-dma on the USO. We got impatient and suggested readers buy the bounce on Thursday. On Friday the USO delivered that dip to the rising 100-dma and what should be technical support. Thus we're looking at a new and more attractive entry point to buy calls. However, our stop loss is a little tight. We're going to widen our stop loss to $97.45. If you do not want to widen your stop, then consider jumping back in on a bounce over $100.50 if you do get stopped out at $98.45. The six-month bullish trend in oil has been broken but we're expecting an oversold bounce. Our target is the $106.75 mark. The 50-dma near $108 looks like overhead resistance. More aggressive traders may want to aim higher. Ultimately our ultra-long term bias for oil is much, much higher but that doesn't mean the commodity won't see corrections, seasonal swings, and some sector rotation.

Suggested Options:
We are suggesting the August and September calls. Remember, that the August options expire in three weeks.

It is up to the individual trader to decide which month and which strike price best suits your trading style and risk.

BUY CALL AUG 100.00 IYS-HV open interest=6758 current ask $4.20
BUY CALL AUG 102.00 IYS-HX open interest=3810 current ask $3.40
BUY CALL AUG 105.00 IYS-HA open interest=2205 current ask $2.35

BUY CALL SEP 100.00 IYS-IV open interest=1577 current ask $7.10
BUY CALL SEP 103.00 IYS-IY open interest= 119 current ask $5.90
BUY CALL SEP 105.00 IYS-IA open interest=1255 current ask $5.20

Picked on July 24 at $101.46
Change since picked: - 2.19
Earnings Date 00/00/00
Average Daily Volume = 14.6 million
 

Put Updates

Freddie Mac - FRE - close: 8.27 change: -0.54 stop: n/a

Friday closed the books on a volatile week for FRE. This weekend will have historical consequences for the GSE as the Senate will vote to approve the housing bill, which includes bail-out plans for FNM and FRE should they need it. Part of that plan involves the U.S. government buying stock if needed, which would seriously dilute current shareholders. Or the government could buy preferred stock, which would further push common shareholders further down the ladder. Many on Wall Street expect FRE's stock to eventually hit zero. We might see an emotional bump higher on Monday after the bill is signed by the President but we would not expect the bounce to last. We would still consider new positions here or wait for another bounce to roll over. This could take several weeks to play out so you'll want to consider the September or October puts. We consider this a lottery-ticket style of play. Our put is our ticket. If we win, we should win big. If we lose, we lose it all. Thus we're not playing with a stop loss. More conservative traders may want to play with a stop anyway. Our short-term target would be a move back to $5.00. More aggressive traders may want to aim lower. FYI: FRE will be presenting at a conference on July 28th.

Suggested Options:
We are suggesting the September or October puts.

BUY PUT SEP 5.00 FRE-UA open interest=1014 current ask $0.85
BUY PUT SEP 4.00 FRE-UN open interest= 112 current ask $0.60

BUY PUT OCT 5.00 FRE-VA open interest=11128 current ask $1.15
BUY PUT OCT 4.00 FRE-VN open interest= 2743 current ask $0.80

Picked on July 20 at $ 9.18
Change since picked: - 0.91
Earnings Date 08/06/08 (confirmed)
Average Daily Volume = 45.5 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.)

---

Apple Inc. - AAPL - close: 162.12 chg: +3.09 stop: n/a

AAPL managed a bounce from its 200-ema on Friday but the general trend is still down. Investors are still worried about Steve Jobs' health. More conservative traders need to consider cutting their losses here. There was no follow through on the post-earnings gap down and August options expire in three weeks and we still need a big move in AAPL to become profitable. We are no longer suggesting new strangle positions. The options we suggested were the August $180 calls (APV-HP) and the August $150 puts (APV-TJ). Our estimated cost is $8.90. We want to sell if either option hits $14.50 or more.

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

Picked on July 20 at $165.15
Change since picked: - 3.03
Earnings Date 07/21/08 (confirmed)
Average Daily Volume = 31.7 million

---

Popular Inc. - BPOP - close: 6.67 change: -0.23 stop: n/a

The rebound in the financials is losing steam. This week should be interesting for BPOP. Will it bounce from its 10-dma, which has been resistance for weeks? Or will it continue lower again? August options expire in three weeks. More conservative traders need to consider an early exit here to cut their losses since we didn't see a big enough post-earnings move to make the play profitable. We are not suggesting new strangle plays on BPOP. The options we listed were the August $7.50 calls (BQW-HU) and the August $5.00 puts (BQW-TA). Our estimated cost was $0.65. We want to sell if either option hits $1.45 or more.

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

Picked on July 16 at $ 5.82
Change since picked: + 0.85
Earnings Date 07/18/08 (confirmed)
Average Daily Volume = 3.4 million

---

DIAMONDS - DIA - close: 113.17 chg: -0.43 stop: n/a

We only have three weeks left before August options expire. Unfortunately, the DIA has traded on either side of our strangle but has reversed directions both times. We still need to see some big moves before the play is profitable. More conservative traders may want to exit early now. We are not suggesting new strangles on the DIA. 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.

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

Picked on July 07 at $112.21
Change since picked: + 0.96
Earnings Date 00/00/00
Average Daily Volume = 15.5 million

---

iShares Brazil - EWZ - cls: 77.40 chg: -0.10 stop: n/a

The EWZ has naturally been following the Brazilian Bovespa index lower. However, the EWZ broke down through short-term support in the $79-80 zone last week. The Bovespa broke down through much more significant support and could easily drag the EWZ into another leg lower. August options expire in three weeks and while it looks like the EWZ will be under the $75 level by expiration more conservative traders will still want to evaluate an early exit to cut their losses. We're not suggesting new positions at this time. The options we suggested back in early July 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.

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

Picked on July 03 at $ 83.06
Change since picked: - 5.66
Earnings Date 00/00/00
Average Daily Volume = 13.6 million

---

FosterWheeler - FWLT - close: 55.72 chg: +2.20 stop: n/a

Friday produced an oversold bounce in FWLT and the stock was indeed very oversold. The stock looks like it could encounter overhead resistance near $57.50 and again near $60.00. With three weeks left before August options expire more conservative traders need to consider an early exit to cut their losses. Earnings for FWLT are due out on August 6th and the announcement could produce some volatility and depending on where the stock is at and the direction of the post-earnings move it could empower or kill this strangle play. We are not suggesting new strangle positions in FWLT at this time. The options we suggested were the August $70 calls (UFB-HN) and the August $50 puts (UFB-TJ). Our estimated cost was $2.60. We want to sell if either option hits $4.00.

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

Picked on July 15 at $ 61.24
Change since picked: - 5.52
Earnings Date 08/06/08 (confirmed)
Average Daily Volume = 2.5 million

---

Corning Inc. - GLW - close: 20.50 chg: +0.62 stop: n/a

In spite of the volatility shares of GLW have gone sideways for three weeks. This lack of direction has been a killer for our strangle play. Odds are good that GLW will continue to trade sideways until its July 30th earnings report. GLW reports on Wednesday morning so we should see some movement on Wednesday. If GLW does not see a big post-earnings move we'll need to consider an early exit to cut our losses and try and salvage any capital. August options expire in three weeks. If you wanted to gamble on the post-earnings move then make sure you open positions before Tuesday's closing bell. The options we suggested were the August $22.50 calls (GLW-HX) and the August $17.50 puts (GLW-TW). 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.

Suggested Options:
We have not been suggesting new positions recently but if GLW is trading near $20 on Tuesday then readers may want to consider new positions again.

Picked on July 10 at $ 20.16
Change since picked: + 0.34
Earnings Date 07/30/08 (confirmed)
Average Daily Volume = 15.9 million

---

Google Inc. - GOOG - close: 491.98 chg: +16.36 stop: n/a

Before the opening bell on Friday GOOG was upgraded to a "buy" with a $580 price target. This fueled a rally in shares of GOOG but it ran out of steam before 11:00 a.m. The stock has short-term overhead, psychological resistance at the $500.00 level so further gains could be challenging. We're going to repeat our previous comments about the lack of follow through on the post-earnings sell-off. More conservative traders may want to consider an early exit now to salvage capital since August options expire in three weeks. We're not suggesting new strangle positions in GOOG at this time. The options we listed were the August $590 calls (GOO-HR) and the August $480 puts (GOP-TI). Our estimated cost was $19.10. We want to sell if either option hits $30.00 or more.

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

Picked on July 16 at $535.60
Change since picked: -43.62
Earnings Date 07/17/08 (confirmed)
Average Daily Volume = 4.5 million

---

Internet Holders - HHH - cls: 50.22 change: +0.71 stop: n/a

The HHH looks like it's trying very hard to breakout from its bearish channel. Many of the short-term technicals have turned positive. Yet this Internet ETF hasn't broken its pattern of lower highs yet. Volume on Friday was incredibly low. The lack of movement in this ETF over the last three weeks has been terrible. More conservative traders may want to consider an early exit now even though we'd only be able to recoup about $0.30 of our capital. We're going to stick with the play for now. The next three weeks could see some fireworks! Since the HHH is back to the $50 level again aggressive traders looking for a position may want to consider new strangles. A strangle at the same strikes would only cost about $0.65. I want to repeat that only aggressive traders should consider it. The HHH has not been performing for us. 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.

Suggested Options:
*See play details.

Picked on July 03 at $ 50.50
Change since picked: - 0.28
Earnings Date 00/00/00
Average Daily Volume = 132 thousand

---

Legg Mason - LM - close: 39.51 chg: +1.30 stop: n/a

LM reported earnings on Friday morning and missed estimates by 35 cents. The stock dipped to $36.80 on the news and quickly recovered. Obviously this reaction is a positive for shareholders. The lack of a big post-earnings move is negative for our strangle play. More conservative traders may want to consider an early exit right here to cut your losses. If you were able to exit right now the options would be worth about $1.65. I expect the financials will see some volatility in the next couple of weeks so we're going to keep the play open. We're not suggesting new strangle positions at this time. The options we listed were the August $45 calls (LM-HW) and the August $35 puts (LM-TG). Our estimated cost was $3.15. We want to sell if either option hits $4.85 or more.

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

Picked on July 23 at $ 40.20
Change since picked: - 0.69
Earnings Date 07/25/08 (confirmed)
Average Daily Volume = 3.1 million

---

MarketVectors Agribusiness- MOO - close: 55.26 chg: +1.44 stop: n/a

The MOO spent more than three weeks consolidating sideways. Last Thursday it looked like the Agribusiness ETF had finally picked a direction with the breakdown to new lows. That move reversed on Friday thanks to a rebound in many of the potash and fertilizer stocks. However, we wouldn't be suggesting calls just yet. The bounce failed to close over resistance near $55.00 and its 200-dma plus volume was pretty low. We only have three weeks left before August options expire and we still need to see a significant move in the MOO. More conservative traders will want to consider an early exit. We're not suggesting new positions at this time. 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.

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

Picked on July 03 at $ 57.25
Change since picked: - 1.99
Earnings Date 00/00/00
Average Daily Volume = 745 thousand

---

Netflix - NFLX - close: 27.85 change: +1.12 stop: n/a

NFLX reported earnings on Friday morning and the results were better than expected. The company beat estimates by 2 cents and said that subscribers had jumped by 168,000 to 8.4 million customers. Management also announced a deal to partner with Microsoft and let Xbox 360 console owners download streaming video this fall. It is unclear at this time what the service would cost and whether or not consumers would need an Xbox Gold membership. NFLX managed a 4% gain on Friday but we were expecting a much bigger move. More conservative traders will want to consider cutting their losses right here and closing the play. There are only three weeks left for August options. We're going to stick with NFLX and see what happens. We're not suggesting new strangles at this time. The options we suggested were the August $32.50 calls (QNQ-HT) and the August $22.50 puts (QNQ-TX). Our estimated cost is $1.20. We want to sell if either option hits $2.20 or more.

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

Picked on July 23 at $ 27.98
Change since picked: - 0.13
Earnings Date 07/25/08 (confirmed)
Average Daily Volume = 1.3 million

---

PowerShares QQQ - QQQQ - cls: 45.27 chg: +0.58 stop: n/a

The NDX is still going nowhere fast. If you look hard enough at the four-week consolidation pattern is appears to be an inverse head-and-shoulders (it's easier to see on a 30 minute or 60 minute chart), which would actually be bullish but only if the Qs can breakout over the $46.00 level. Even if the Qs did breakout over $46 it would encounter plenty of overhead technical resistance with a cloud of moving averages. We're definitely not suggesting new positions and traders will want to consider an early exit now to cut their losses. We only have three weeks left before August options expire. 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.

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

Picked on July 07 at $ 44.90
Change since picked: + 0.37
Earnings Date 00/00/00
Average Daily Volume = 148 million

---

Starbucks - SBUX - close: 14.42 change: -0.12 stop: n/a

SBUX continues to pull back after last week's failed rally at $16.00. The stock came to rest on its 10-dma by Friday's closing bell. This week should see more volatility as SBUX is due to report earnings on July 30th (Wednesday) after the closing bell. If the stock trades back into the $13.70-13.30 zone readers may want to consider opening new strangle positions ahead of the earnings report. Actually, since SBUX has so many options at $1.00 increments in the teens, readers could open new strangles at any time but we would wait until Wednesday, just before the earnings report, to do so. The options we suggested for the strangle were the August $14.00 calls (SQX-HK) and the August $13.00 puts (SQX-TJ). Our estimated cost was $1.38. We want to sell if either option hits $3.50 or more.

Suggested Options:
*See play details above.

Picked on July 15 at $ 13.58
Change since picked: + 0.84
Earnings Date 07/30/08 (confirmed)
Average Daily Volume = 14 million

---

UBS Ag - UBS - close: 20.76 change: -0.24 stop: n/a

UBS pulled back sharply on Thursday during the profit taking in financial stocks. There was no real follow through on Friday and the stock held on to its 10-dma. It doesn't seem to be impacting the share price but New York Attorney General Andrew Cuomo has filed a lawsuit against UBS. Cuomo claims that UBS sold billions of dollars worth of auction-rate securities under the pretense that business was fine while at the same time a number of high-level bank executives were pulling their own personal investments out of the market (source: AP). We only have there weeks left before August options expire. After two weeks the stock has moved less than 10% from our initial entry point. More conservative traders are going to want to evaluate an early exit and cut their losses. I suspect the financials will still see some big moves over the next three weeks. We're not suggesting new positions at this time. We listed two different strangles.

Suggested Options:
We're not suggesting new positions at this time.

UBS Strangle #1) This uses the August $22.50 calls (UBS-HX) and $17.50 puts (UBS-TW). Our estimated cost was $1.90. We want to sell if either option hits $3.00.

UBS Strangle #2) This uses the August $25.00 calls (UBS-HE) and $15.00 puts (UBS-TC). Our estimated cost was $0.90. We want to sell if either option hits $1.90.

Picked on July 13 at $19.49
Change since picked: + 1.27
Earnings Date 08/12/08 (unconfirmed)
Average Daily Volume: 7.3 million

---

Washington Mutual - WM - close: 3.84 chg: -0.19 stop: n/a

It was a very rough week for WM. Last Monday shares hit $6.60 and Wednesday saw a spike to $6.39 but the stock was crushed under concerns about its mortgage defaults, exposure and liquidity. The company came out recently saying it had significantly raised liquidity but no one appeared to be buying. There are renewed concerns that WM will need to raise a lot of capital, which might require diluting shareholders. The lack of bounce following Thursday's huge-volume sell-off is pretty negative. The August $4.00 put traded over $1.00 on Friday. We are adjusting our exit target to $1.95 instead of $2.25 on the options. More aggressive traders may want to keep a higher exit target. We suspect that WM will find support again, at least temporarily near its $3.00 low. A lot of investors would be tempted to buy WM at $3.00 as a speculative "it can't get much worse" kind of trade. At $3.00 a lot of traders see this as a long-term call option that doesn't expire with unlimited upside. That doesn't mean that WM can't go to $2.00 or $1.00 but expect some sort of bounce at $3.00. We are not suggesting new positions at this time. The options we suggested were the August $8.00 calls (WM-HV) and the August $4.00 puts (WM-TH). Our estimated cost is $0.72. We want to sell if either option hits $1.95 or more.

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

Picked on July 20 at $ 5.92
Change since picked: - 2.08
Earnings Date 07/22/08 (confirmed)
Average Daily Volume = 57 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Index Trader by Leigh Stevens, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives