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Daily Newsletter, Sunday, 08/03/2008

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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

Mixed Economics, Mixed Markets

Market Wrap

It was a week of heavy economics but the numbers were mixed. GDP was up but still disappointed and jobs improved but only slightly. The ISM was better than expected but still lower than June. Jobless claims spiked to a 5-year high. New mortgage applications fell to a 7-year low. Overall it was not a good week for economics but given the recession outlook 60-days ago I think we should be counting our blessings.

Wilshire 5000 Broad Market Index Chart - 60 min

The big report for Friday was the Non-Farm Payrolls for July. The economy lost 51,000 jobs and right inline with the prior three months. Analysts had expected job losses of 70,000 to 80,000. The unemployment rate increased by 20 basis points to 5.7% and the highest level in four years. Manufacturing continued to lead the list of job losses with a loss of 35,000 jobs. June job losses of 62,000 were revised lower to 51,000 and May losses of 62,000 were revised to only 47,000. Overall it was a good report for a depressed economy. Losses were less than expected and prior losses were revised lower. We should be celebrating except that the rising unemployment claims to a five-year high suggest that next months report could be more negative.

The average workweek fell to 33.6 hours meaning employers are cutting back on employee hours as a way to trim payrolls without necessarily cutting employees. This was the seventh consecutive month of job losses but those losses have been minimal. Normal job losses in a recession run in the 250,000 to 350,000 per month range. The unemployment rate at 5.7% is considered a lagging indicator and is expected to top out around 6% in mid-2009. The recently approved extension of unemployment benefits will provide support for the economy by giving aid to those who have been out of work for an extended period.

Non-Farm Payroll Chart

The ISM Index for July declined fractionally to an even 50.0 from 50.2 in June. The move was insignificant but positive. Several analysts had speculated it would fall back in contraction territory around 49. The index is consistent with a struggling economy that has avoided a recession. Manufacturing output is muted but still functioning normally. New Orders fell to a new six year low at 45.0, down from 49.6. On the bright side the employment component rose sharply to 51.9 from 43.7 and the prices paid component fell to 88.5 from 91.5. These internal components suggest the August report could be a little stronger as manufacturers gear up for the holidays. Evidence of the global slowdown was seen in the drop of export orders to 54.5 from 58.5. Still in expansion territory but cooling.

IISM Chart

The economic reports for next week are mostly filler with the FOMC meeting on Tuesday the only possibility for fireworks. For next week's FOMC meeting the Fed is faced with an economy that pulled back from the brink but is still peering over the cliff. Manufacturing firmed but only barely. Jobs firmed in that they are not declining into normal recession ranges but are still weak. The financial sector is facing another round of write-downs and recapitalization. There were record borrowings at the Fed's discount window for each of the last two weeks. The Fed may have been considering fighting inflation with a rate hike at this meeting but economic indicators last week have cooled that need. The price of oil eased and as we saw in the ISM the prices paid weakened. There is suddenly no urgency for the Fed to raise rates in this volatile environment. With three Fed members already on the record for wanting to hike rates it should be a volatile meeting and although analysts are now favoring a no hike decision anything is still possible.

Economic Calendar

In stock news GM led the list with a monster $15.5 billion Q2 loss from huge restructuring costs, labor problems and sales declines. The loss per share was -$27.33. That sounds like a lot of money but it only ranked as the third largest quarterly loss for GM. Revenue fell to $38.2 billion, a drop of $8.5 billion from Q207. Analysts were only expecting a loss of $2.62 per share on revenue of $44.57 billion. To say it was a disaster would be an understatement. Any other company would already be in bankruptcy or closing their doors. GM ended the quarter with $26 billion in cash and credit and they only burned through $2.9 billion in cash for the quarter. Analysts believe that without further significant weakening of demand GM has enough liquidity to make it through to 2010. GM dropped to $10 on the news but the real damage was to market sentiment. With July auto sales coming out later in the day the expectations were very low.

Turns out there were good reasons to be worried. Autodata reported late in the afternoon that vehicle sales dropped nearly a million units from the June level to an annualized rate of 12.55 million vehicles in July. This is down from 16.3 million as recently as December. The sharp increase in fuel prices produced an equally sharp decrease in vehicle sales. GM reported a -32.4% drop in sales for July, Chrysler -34.2%, Ford -21.5%, Toyota -18.7% and Honda -9.2%. The last time sales were this low was April 1992 during the recession of the early 1990s. Sales of only the big three fell to an annualized rate of 5.4 million units with market share of imports climbing +29%. When this decade began the big three were selling about 12 million units annually. They only account for 43% of U.S. market share today. Toyota sold 30,000 more vehicles than Ford for the quarter. Analysts claim that consumers have always reacted to previous fuel spikes with a temporary slowdown in buying but always expected normal prices to return and flocked back to trucks and SUVs when prices dropped. They claim this time is different and most consumers surveyed now expect fuel prices to remain high and eventually move higher. Evidently the hundreds of hours of TV news and countless pages of print have finally impressed on Americans that oil will not last forever and it is time to rethink their love for SUVs.

The Yahoo shareholder meeting passed quietly and all the board members were reelected. Jerry Yang retained his position with 85% of the votes cast. Most everyone angry with Yahoo management have already dumped their shares in disgust and those currently holding are expecting somebody to perform a miracle and resurrect Yahoo's stock price. Carl Icahn took the fight out of the remaining shareholders when he agreed to take three positions on the board in lieu of open warfare at the meeting. Icahn was losing support for his board slate after his potential deal with Microsoft failed despite his best efforts. Some shareholders were angry that Yahoo did not allot enough time for shareholder questions. Yahoo's leaders spent an hour defending the Microsoft decision then only allowed 30 minutes for shareholder questions. One shareholder said "it appeared they were more interested in going to lunch than hearing from shareholders." Chairman Roy Bostock staunchly defended the board's actions by listing numerous points regarding the Microsoft negotiations. Microsoft said after the meeting this was "Yahoo attempting to rewrite history yet again with statements that are not supported by the facts." Eric Jackson, a shareholder representing 150 other shareholders, called on Bostock to resign because he overplayed his hand in the negotiations. Another shareholder criticized Bostock for spending so much time defending the handling of the Microsoft negotiations, likening him to a spurned lover in a broken romance trying to "save face." Obviously there were still some hard feelings despite the overwhelming election of the board. YHOO closed at $19.80, just 72-cents over where the stock was trading when Microsoft made the first offer. I am sure there is a number where Microsoft will take another run and this time Icahn will be ready to beat the board into submission. $15 a share, $12, who knows but with every dollar of decline the urge to accept the next offer will be growing. If Microsoft will just keep quiet for a couple months they could get a bargain.

YHOO Chart - Daily

Citigroup got some bad news on Friday from the New York Attorney General. The AG is going to charge Citi with fraudulently marketing and selling auction-rate securities and destroying documents that had been subpoenaed. Reportedly Citi destroyed tapes of phone calls concerning sales of the auction debt. Cuomo's office also sued UBS on July 24th calling it a multi-billion fraud in steering customers into the debt. Merrill is also under attack for the same reasons. The letter from the AG office said any settlement would require Citi to buy back the debt at face value, pay damages to investors and incur a "significant penalty" for its misconduct. I would not hold my breath about a quick settlement. Citi also disclosed it had received subpoenas from the SEC about the sale of the securities. Citi also disclosed subpoenas from state regulators in New York, Texas and Massachusetts and said some of its hedge funds were also targets.

The FDIC announced on Friday it had issued warnings to four U.S. banks that lacked sufficient reserves to cover potential loan losses. The warnings told the banks to raise more capital, expand their loan loss reserves and diversify their loan portfolios or risk being shutdown. Eight U.S. banks have been shutdown so far including First Priority Bank, which was closed on Friday. Sun Trust Banks agreed to take over First Priority and reopen the bank on Monday as Sun Trust. Every Friday now as I start to write the weekend commentary I have a check off list that includes "what bank got shutdown today." You may remember IndyMac Bank was closed two weeks ago and taken over by the FDIC and not another bank. On Friday IndyMac Bancorp, the holding company, filed for Chapter 7 bankruptcy and will be liquidated to pay its creditors. IndyMac Bank was severed from the holding company when the FDIC took over, leaving the holding company without any material assets to repay its liabilities of as much as $500 million. The FDIC is estimating it will cost the FDIC fund up to $8 billion to cover the losses in IndyMac.

Elsewhere in the financial sector you have probably seen the press increasing on the Merrill CDO sale to Lone Star Funds for $6.7 billion. Merrill initially said it was $30.6 billion of CDOs. However, Merrill only carried them on the books for about $11 billion just a couple weeks earlier. Either way they sold them for $6.7 billion but had to loan Lone Star $5 billon to take them. Merrill claimed this cleared the books of billions in risk when actually it just shifted the risk from one category into another by using a $5 billion loan against collateral they already admitted was crap. I described this last week when it happened and as the week progressed several of the major papers have started exposing the ugly details. The latest rumor at the WSJ on Friday had Merrill coming clean with all the details on Monday to shutdown the rising criticism. Should be interesting. Remember you heard it here first.

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Sun Microsystems (JAVA) posted profits that fell -73% due to slumping sales to big U.S. companies. Sun also announced a $1 billion buyback saying the 50% drop in shares has made them a value. Wall Street did not agree and JAVA fell -12% to $9.30. Sun had been riding a wave of profitability of six quarters out of the last seven. Sun still posted profits of 35 cents per share and that beat analyst estimates of 25 cents. Nearly every point in Sun's report including guidance was interpreted as negative by analysts and suggests major companies are withholding purchases until they see the economy recover.

The biggest loser for Friday was Elan (ELN) with a -$10, -50% drop that followed a -39% drop on Wednesday. Its partner Biogen Idec (BIIB) followed with a -$20, -28% drop on Friday. Elan and Biogen Idec were being crushed after two new cases of a potentially fatal brain disorder were reported. The MS drug Tysabri was originally taken off the market in 2005 but reintroduced in 2006 under restricted sales conditions. Patients have to sign a statement acknowledging the risks. 32,000 patients are on the drug with a target of 100,000 according to Biogen. Sales of Tysabri tripled in Q2 to $200 million. Biogen said they did not believe the drug will be withdrawn but they did expect investors to panic. I would say that was an understatement with ELN down -70% in two days and BIIB down 28%.

Oil prices continued to firm around $125 after several attempts to move in either direction. It appears there is plenty of support at $122 but still plenty of sellers waiting at $127. This stalemate will eventually end and I am starting to hear more bullish scenarios than bearish. Crude closed at $125.10 but not before trading at a range from $122 to $128.60 on a flurry of sound bites over Iran. Israel caused a major spike when deputy Prime Minster Shaul Mofaz warned, "Iran is continuing to advance toward a military nuclear capability and is heading towards a major breakthrough." Also, "For Israel, Iran as a nuclear power is an existential threat - and is unacceptable." Mofaz warned that they estimate Iran will reach military enrichment capability as soon as 2010. He warned that Iran is just playing for time as they continue to delay the U.N. group while they continue making strides in their technology. Mofaz said time was a decisive element and the window of influence was becoming smaller and about to close. It is a race against time and with no action time is winning.

Crude Oil Chart - Daily

The deadline for a decision to the U.N. committee is this weekend and Iran stepped out in front of the deadline with tough words. Iran's President ahmoud Ahmadinejad said, "the nuclear issue is just an excuse for the country's foes" and, "Iran will stand against its enemies with its power." The White House was quick with a negative reaction along with spokesmen from other U.N. nations. All were quick to emphasize this weekend was the deadline for a "clear answer" from Iran. Iran replied that there was no deadline but they had "already replied." Given the sharp rhetoric from the P5 nations they failed to get the reply. The P5 are the five permanent members of the U.N. Security Council. Reportedly one idea the P5 nations are discussing is to target Iran's gasoline imports with sanctions. Iran imports a lot of its fuel and shutting that down would cause some serious pain in Tehran. I would worry that civilian hostility towards the U.S. would increase and actually might increase the support for Ahmadinejad.

Oil prices appear to be firming as the deadline approaches. There is also a new tropical depression forming east of the Caribbean and heading in our direction. Forecasters believe this depression has a moderate chance of turning into a storm as it moves over warmer waters but it is still several days away.

The markets were as mixed as the economics and about as exciting as trip to the dentist. Volatility was very strong but only in index movement not in the VIX. Friday saw a little spike in the VIX but it quickly diminished. There is no conviction in the market in either direction and no real movement. The Dow continued to trade in its two-week range from 11200 to 11600 with no surprises. This equated almost exactly with the two-point range in the XLF over the same period. The markets rallied off the financial lows on July 15th but then ran into some serious doubt the rally was going to stick as bank failures increased, write-downs increased and discount window borrowing hit record highs the last two weeks. I keep hearing the bottom is in for financials but then other analysts are heard saying there is another $500 billion in write-offs ahead. Then Greenspan takes to the tube in an interview and says a recession is still more likely than not and home prices could lose up to 35%. It is tough to believe in a bottom with those factors in play.

Dow Chart - Daily

I believe Friday's lack of a rebound was due to anxiety over the FOMC meeting next Tuesday. There are about equal reasons for a hike as there are for a continued pause. Despite late week analysts now saying there is no way they will hike, one said it would be suicide, there is always a chance of a surprise. I actually heard one analyst on Friday saying they should cut rates to give the economy another boost. Even if they don't hike the statement could be detrimental. Don't forget there is an election in 90 days and a convention in three weeks. Politics are definitely in play and every time Obama finds another tax to propose the market is going to stumble. His proposal on Friday to tax oil companies to fund a $1000 emergency energy rebate for consumers did not go over well.

Nasdaq Chart - 90 Min

The Nasdaq faired only slightly better and gaining less than a point for the week. The lack of financials was a positive but several tech disasters did not help. Next week is Cisco's turn in the earnings confessional. They scheduled their earnings for Tuesday and I can't help but wonder if they did it in hopes to get by unnoticed while everyone is talking about the Fed decision. Nortel reported earnings on Friday and lost more than expected and guided lower for the rest of 2008. Nortel said they faced a tough economic environment ahead and lower spending by major customers. Cisco is not Nortel and commands a much stronger share of their market but it will be interesting to see if John Chambers can remain upbeat when the rest of the tech sector seems to be guiding lower. The Nasdaq managed to peek over 2325 more than once but was knocked back to 2300 both Thursday and Friday. The Nasdaq has a feeble uptrend in progress but Cisco could end that trend if they disappoint on guidance. The uptrend can also be viewed as a bearish flag pattern that normally resolves to the downside.

Earnings Calendar

The S&P chart looks slightly better than the Dow this weekend as though it is finally going to break ranks and move higher. I suspect it was the firming in the energy sector that helped provide the lift since the financials have given up the lead. S&P 1285 remains resistance and 1240 support.

S&P-500 Chart - 90 Min

The Russell is still confounding logic with the strongest chart in a seasonal period where it should be lagging. The Russell is still wedging up to resistance at 720 and a breakout could come any day if only it could get some help from the other indexes. A large number of earnings reporters next week are in the Russell-2000 but that is a double-edged sword. The smaller companies don't have the breadth to prosper in a weak economy and we have been seeing some weak results. Fortunately the Russell is broad enough to be able to absorb some hits and keep moving. Resistance is still 720 and support is 697.

Russell-2000 Chart - 180 Min

For next week the Tuesday Fed meeting is the key along with the Cisco earnings. Nothing material should happen before the Fed announcement and the Cisco earnings after the announcement should seal the deal for techs. Just looking at the Dow I would be neutral to bearish with that lower high and routine end of day selling. The asdaq uptrend coupled with the tight wedge forming on the Russell give me a cautiously bullish view as long as I focus on just the charts. Fundamentally I am expecting a retest of the lows. August and September are the two worst months of the year for the stock market. With the record borrowing at the Fed's discount window for the last two weeks I believe there is something happening in the financials that we don't yet know about. If the credit crunch had seen its worst days then the amount of borrowing would be slowing. The rising unemployment claims are also troubling and you have Greenspan on TV saying a recession is still likely. He may not have a clue but his comments still carry weight. When fundamentals and technicals conflict we should go with the charts because they represent the votes of the investing public. However, we should always leave an escape route whenever the outlook is confusing. Custer thought he would win that last battle and he did not plan for things to go bad. My plan is to continue buying the dips as long as the Russell-2000 is above 697. Under 697 we pull the ripcord and bail out of any longs. Under 690 we want to be short. Fund managers tend to clean house after Labor Day and August markets tend to reflect that expectation. Hope for the best but be prepared for the worst.

Jim Brown
 


Trader's Corner

For the Birds

Dictionaries define the phrase "for the birds" as an idiom that means that something is useless or worthless. Lately, even those of us who love technical analysis have sometimes felt with disgust that it's for the birds.

Annotated Daily Chart of IWM:

The IWM is the IShare Russell 2000 Index, one many employ for their RUT-related trades.

When studying charts such as this one, it's clear that the action must be scrambling intraday charts, and it is. That's often where the disgust with technical analysis begins. Intraday setups are often and often brutally reversed. All the technicals, including breadth indicators, can be in favor of an intraday trade, only to reverse and leave traders with gains that evaporated seemingly instantaneously.

It's tempting under such circumstances to chuck out technical analysis. Although some talented and lucky scalpers can benefit wildly from action such as this, traders with sound account and trade management practices may be hurting, punished for their good management skills. They're repeatedly whipsawed out of trades that were entered on solid trade setups or trade setups that certainly appeared solid at the time.

Such action might prompt some traders to decide that since so many reversals are occurring, they should just hold onto their trades gone wrong. A reversal is bound to come, some reason, and will soon put them right again. Or if not, they prefer to suffer one big loss rather than go through whipsaw after whipsaw that amounts to the same thing.

Big mistake.

Traders will of course find times that ignoring a stop and hoping for a reversal works in their favor, at least minimizing losses if not producing gains. I've heard from a few in recent weeks who were delivered such reprieves. They were grateful. They should not have been.

Those traders were terribly unlucky.

Why unlucky? They were rewarded for bad trading practices. Such practices will eventually decimate their accounts if not changed.

Let's take a second look at that IWM chart and see if technical analysis is really for the birds, if traders should chuck out technical analysis and sound account and trade-management practices, too. Let's start with a look at the candles, with candlestick theory being a valid technical analysis study in my opinion and those of many others.

Annotated Daily Chart of the IWM:

Indecision mixed with emotion-based trading: that's not a mix that's predictive of solid gains for traders, except those with deep pockets, well able to endure the whipsaws or to hang on through those whipsaws. Technical analysis of this chart signals loudly and clearly that retail traders need to exercise caution. Front-month options will be suffer theta-related (time) decay all the while this whipsawing action is going on. They'll suffer vega-related (volatility) decay when those indecision days arrive and volatility measures drop.

Adding in other technical analysis indicators provided other clues to traders. They alerted traders when their profit-protecting plans needed to be updated. They alerted other traders when a countertrend entry might be attempted, when logical stops were nearby. Sometimes those warnings weren't needed and new trades were stopped, but the function of technical analysis is to allow planning time, not to offer a crystal-ball prediction.

Annotated Daily Chart of the IWM:

The wild chop also alerted traders that the IWM was in a period of disorganization and that they should watch for it to settle into some kind of tradable formation. Such formations would allow traders to make more reasoned decisions.

Annotated Daily Chart of the IWM:

Technical analysis can't predict when that channel will be broken or even the direction in which it will be broken, but it can do many other things. As noted earlier, technical analysis can alert traders to places where their trades might be in trouble and profit- or stop-losses should be updated. Such plans can help avoid that deer-in-the-headlights paralysis when prices reverse. Technical analysis can allow traders to make reasoned what-if or just-in-case plans.

Technical analysis does not offer crystal-ball predictions. More importantly, in my opinion, even the most rudimentary technical analysis--a glance at a candlestick chart to notice the size of the candles and the pattern of those candles--can immediately identify a disorganized market, one signaling all but the most experienced and well-heeled traders to exercise caution.

Traders should note that this article was written midday Friday, August 01, 2008. By the close of that day, the IWM might have broken through that channel to the downside or bounced up toward the 200-sma again. The charts presented here are up-to-date only through midday.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
USO V None
VIX    

New Calls

United States Oil - USO - close: 101.04 chg: +1.05 stop: 97.40

Company Description:
The United States Oil (USO) fund is an exchange traded fund (ETF) that mimics the performance of West Texas Intermediate (WTI) light, sweet crude oil.

Why We Like It:
We are going to try calls on the USO again. After a 20% decline this oil ETF is poised to bounce. The greatest challenge is the volatility, which stopped us out last week. The current situation with Iran is only going to get worse in the next three to five months. If something were to happen, like an Israeli air strike on Iran, crude oil would shoot up $80-$100 a barrel overnight as Iran tries to shut down the Straits of Hormuz. We are suggesting calls on the USO. Right now our target is $109.50. We're considering a secondary, more aggressive target near $115.

Link to map of Persian Gulf
http://tinyurl.com/pnh2l

Suggested Options:
We're suggesting the September calls. Strikes are available at $1.00 increments.

BUY CALL SEP 100.00 IYS-IV open interest=2612 current ask $7.30
BUY CALL SEP 105.00 IYS-IA open interest=1803 current ask $5.10
BUY CALL SEP 110.00 IYS-IF open interest=1837 current ask $3.50

Picked on August 03 at $101.04
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 14.7 million

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CBOE Volatility Index - VIX - close: 22.57 chg: -0.37 stop: n/a

Company Description:
VIX measures market expectation of near term volatility conveyed by stock index option prices. The original VIX was constructed using the implied volatilities of eight different OEX option series so that, at any given time, it represented the implied volatility of a hypothetical at-the-money OEX option with exactly 30 days to expiration. The New VIX still measures the market's expectation of 30-day volatility, but in a way that conforms to the latest thinking and research among industry practitioners. The New VIX is based on S&P 500 index option prices and incorporates information from the volatility "skew" by using a wider range of strike prices rather than just at-the-money series. (source: company press release or website)

Why We Like It:
Think about what the market is facing. Banks are not lending to each other and borrowing from the Fed is at record levels. Analysts expect another wave of write downs to the tune of $500 billion. The FDIC is closing banks every week now. Inflation is rising. The economy is losing jobs. Oil is still near record levels. Iran's saber-rattling is heating up as the West gets tougher on the nuclear issue. Housing prices are still in decline. We're facing the worst two months of the year for stocks with August and September directly ahead. It would appear that odds are growing for another market sell-off in the next several weeks. We're suggesting a very speculative call position on the VIX to capture any such sell-off. Normally if the stock market moves sharply lower the VIX tends to surge higher. Right now the VIX actually looks poised to move lower but that could change in a heartbeat but it's another reason we're calling this a very speculative play. We're gambling on another market meltdown before September's option expiration. Our target is $29.75.

Suggested Options:
We are suggesting the September calls.

BUY CALL SEP 25.00 VIX-IE open interest=71293 current ask $1.55
BUY CALL SEP 27.50 VIX-IY open interest=17040 current ask $1.00
BUY CALL SEP 30.00 VIX-IF open interest=34997 current ask $0.65

Picked on August 03 at $ 22.57
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = x million
 

New Puts

VISA Inc. - V - close: 71.73 change: -1.33 stop: 72.55

Company Description:
Visa Inc. operates the worlds largest retail electronic payments network providing processing services and payment product platforms. (source: company press release or website)

Why We Like It:
Visa rallied ahead of its earnings report last week and then immediately sold off after beating estimates by 11 cents. Everyone seems to love this stock and they quickly point out that Visa doesn't have credit risk since they just process the transactions. Yet the stock is in a two-month bearish trend of lower highs. This past week has produced a bearish reversal under that line. We're suggesting that readers buy puts on Visa if the stock trades at $69.45 or lower. If triggered we have two targets. Our first target is $65.25. Our second target is $61.00.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 70.00 V-UN open interest=4651 current ask $4.40
BUY PUT SEP 67.50 V-UU open interest=2998 current ask $3.30
BUY PUT SEP 65.00 V-UM open interest=5137 current ask $2.40

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/30/08 (confirmed)
Average Daily Volume = 14 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Research In Motion - RIMM - cls: 120.15 chg: -2.67 stop: 112.45

RIMM gave back a good chunk of Thursday's gains but shares managed to hold near the $120 region. We would use this dip as another entry point to consider buying calls. However, if you're patient, we might get another dip near the simple 10-dma around $117. Obviously RIMM would show a lot more relative strength if it can rally from here so if we do see a dip near $117 you might want to wait for signs of a bounce first. We're adjusting our stop loss to $114.45, just under the simple 200-dma near $114.70. Our play was initially triggered on the breakout over resistance at $120.00 this past Thursday. There is potential technical resistance at the 50-dma around $126.40 and its late May, early June lows around $127.60. More conservative traders may want to evaluate these two areas and consider an early target. We have two targets. Our first target is $129.00. Our second target is $137.00.

Suggested Options:
We are suggesting the September calls. August calls expire in two weeks.

Picked on July 31 at $120.50 *triggered
Change since picked: - 0.35
Earnings Date 09/25/08 (unconfirmed)
Average Daily Volume = 18.6 million

---

SunPower - SPWR - close: 76.42 change: -2.35 stop: 76.45

If you were thinking about buying a dip or a bounce near $75.00 then this is your chance. SPWR bounced around the $75 region on Friday before surging higher into the closing bell. If you do choose an aggressive entry point here we'd use a tight stop under today's low. Officially we're going to stick to our original plan and wait for a breakout higher. Our trigger point to buy calls is at $81.75. A move over the $81.50 region should be a breakout above its trendline of lower highs and also a breakout from what looks like an inverse (bullish version) head-and-shoulders pattern. If triggered our target is the $89.75 mark (or the 200-dma). We are starting the play with a wide stop loss because shares can be so volatile.

Suggested Options:
If triggered at $81.75 we are suggesting the September calls.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume = 2.8 million

---

United States Nat.Gas - UNG - cls: 43.81 chg: +1.21 stop: 40.99

Oil and natural gas rebounded this morning and traders began buying the dips throughout the session. Friday's bounce looks like another bullish entry point to buy calls. The next hurdle for the bulls is the simple 10-dma near $44.35 and then round-number resistance near $45.00. This remains an aggressive play because we're trying to pick a bottom, even a short-term one, in natural gas. It's been almost instant death to try and pick a bottom for the last three weeks. It is essential that you play with a stop loss and you might want to use a tighter stop. Our target is the $48.40-50.00 zone.

Suggested Options:
We are suggesting the September calls. Strikes are available at $1.00 increments.

Picked on July 30 at $43.39
Change since picked: + 0.42
Earnings Date 00/00/00
Average Daily Volume: 2.9 million
 

Put Updates

Freddie Mac - FRE - close: 7.98 change: -0.19 stop: n/a

Shares of FRE continue to slowly drift lower. The bounce in this stock is definitely over and Thursday's comments from Greenspan didn't help shareholders. Greenspan has been wary of FNM and FRE for years calling them accidents waiting to happen and warned that if these two institutions were to fail it would be a catastrophic event to the financial system. We would consider new put positions at this time. While we are not playing with a stop loss more conservative traders may want to use a stop above $10.00 or above $11.00. Those are pretty wide stops but FRE has been exceptionally volatile this past month. We consider this a lottery-ticket style of play. The put option is our ticket. If we win, we should win big. If we lose, we lose it all. Our short-term target would be a move back to $5.00. More aggressive traders may want to aim lower. We are thinking about moving the target closer to $4.00.

Suggested Options:
We would suggest the September or October puts.

Picked on July 20 at $ 9.18
Change since picked: - 1.20
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.)

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Apple Inc. - AAPL - close: 156.66 chg: -2.29 stop: n/a

AAPL continues to under perform and Friday's session produced a little bearish reversal pattern for a stock that was already in a short-term bearish trend. We only have two weeks left before August options expire. I'm going to repeat our previous comments that more conservative traders may want to make an early exit now. The current trend is lower so we need to see AAPL significantly under $150 if we're going to be profitable. If you don't want to exit early then consider lowering your exit target. We are not 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 strangles in AAPL.

Picked on July 20 at $165.15
Change since picked: - 8.49
Earnings Date 07/21/08 (confirmed)
Average Daily Volume = 31.7 million

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Popular Inc. - BPOP - close: 6.95 change: +0.08 stop: n/a

Shares of BPOP, a regional bank, have spent the last couple of sessions trading sideways. Volume has been evaporating, which probably isn't good news for the bulls. We only have two weeks left before August options expire and need to see BPOP well above $7.50 or significantly under $5.00 if we hope to make a profit. More conservative traders may want to consider an early exit now. 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 strangles on BPOP.

Picked on July 16 at $ 5.82
Change since picked: + 1.13
Earnings Date 07/18/08 (confirmed)
Average Daily Volume = 3.4 million

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DIAMONDS - DIA - close: 113.12 chg: -0.58 stop: n/a

We've seen some huge swings in the DJIA in July but for the entire month the end result was mostly sideways. Now we only have two weeks left before August options expire. If we're going to make any money on this play the DIA needs to be significantly above $115 or below $109. It's closer to $115 right now but several technical indicators are suggesting a move lower. More conservative traders may want to exit early. 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 strangles in the DIA at this time.

Picked on July 07 at $112.21
Change since picked: + 0.91
Earnings Date 00/00/00
Average Daily Volume = 15.5 million

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iShares Brazil - EWZ - cls: 79.08 chg: -2.16 stop: n/a

It has been a very volatile week for the Brazilian markets. The Bovespa index surged more than 3% on Wednesday and Friday just saw a 3% plunge. The Brazilian market was already in a bearish trend so this looks like another failed rally/bearish reversal pattern. The EWZ reacted today with a 2.6% loss and another close under the $80.00 level. We have two weeks left before August options expire. More conservative traders will want to seriously consider an early exit. 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 strangles on the EWZ.

Picked on July 03 at $ 83.06
Change since picked: - 3.98
Earnings Date 00/00/00
Average Daily Volume = 13.6 million

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FosterWheeler - FWLT - close: 56.08 chg: -0.69 stop: n/a

It was not a good week for FWLT shareholders. The stock has produced a bearish reversal under the $60.00 level, which leaves it poised for a new leg lower. We are down to our last ten trading days with FWLT before August options expire. More conservative traders may want to exit early or lower their target. 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 strangles in FWLT.

Picked on July 15 at $ 61.24
Change since picked: - 5.16
Earnings Date 08/06/08 (confirmed)
Average Daily Volume = 2.5 million

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Corning Inc. - GLW - close: 20.34 chg: +0.33 stop: n/a

GLW has been going nowhere for three weeks and the earnings report did not produce any dramatic moves. This is killing our strangle play. We don't see any changes from our previous comments. We have two weeks left before August options expire. If there was any value left in the options we'd consider an early exit to salvage some capital. At this point more conservative traders may want to exit if either side of this strangle gets back into the $0.65-0.85 range to recoup our cost. We are not suggesting new strangle positions. 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.

Suggested Options:
We are not suggesting new strangles in GLW.

Picked on July 10 at $ 20.16
Change since picked: + 0.18
Earnings Date 07/30/08 (confirmed)
Average Daily Volume = 15.9 million

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Google Inc. - GOOG - close: 467.86 chg: - 5.89 stop: n/a

GOOG is back to its post-earnings lows and the stock actually hit a new three-month low today at $462.50. This lifted the August $480 puts to an intraday high of $23.80. The trend in GOOG definitely appears to be down. However, if you think the market (or GOOG) is ready to bounce then you should strongly consider an early exit right here, which should allow you to exit at breakeven. We only have two weeks left before August options expire and a bounce would cut deeply into the puts' value. A move close to $453-450 might be enough to lift the $480 put to $30 or more. Right now the put already has an $11 intrinsic value. It's remaining time premium is going to erode pretty quickly in the next two 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 strangles in GOOG at this time.

Picked on July 16 at $535.60
Change since picked: -67.74
Earnings Date 07/17/08 (confirmed)
Average Daily Volume = 4.5 million

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Internet Holders - HHH - cls: 49.04 change: -0.16 stop: n/a

The monthly loss on the HHH for July was just over $1.00, which is rather pathetic considering all the volatility the market has seen. If the trend prevails then the HHH should continue lower from here. Unfortunately, I do not expect shares to trade under $45.00 before August options expire. We've already lowered our exit target to breakeven. Readers may want to lower their target to even less in hopes of recouping some capital here. We are not suggesting new positions at this time. 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 $1.50 or higher!

Suggested Options:
We are not suggesting new strangles on the HHH at this time.

Picked on July 03 at $ 50.50
Change since picked: - 1.46
Earnings Date 00/00/00
Average Daily Volume = 132 thousand

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Lehman Brothers - LEH - close: 18.65 chg: +1.31 stop: n/a

News on Friday morning that LEH was considering a sale of $30 billion in mortgage-backed assets helped lift the stock to a 7% gain. Volume remained weak but the stock definitely out performed its peers and the market. We're not suggesting new positions at this time. The options we suggested were the September $24.00 calls (LYH-IR) and the September $10.00 puts (LYH-UB). Our estimated cost is $2.15. We want to sell if either option hits $3.50 or higher.

Suggested Options:
We are not suggesting new strangles in LEH.

Picked on July 27 at $ 17.05
Change since picked: + 1.60
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 63 million

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Legg Mason - LM - close: 40.76 chg: +0.41 stop: n/a

The financials and the broker-dealer stocks were the market's best performers on Friday. LM managed a 1% gain and continues to slowly build on its three-week trend of higher lows. We only have two weeks left before August options expire. More conservative traders may want to exit early, which is an idea we've been suggesting since the stock failed to move on LM's earnings report. We are not suggesting new strangles 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 strangles on LM.

Picked on July 23 at $ 40.20
Change since picked: + 0.56
Earnings Date 07/25/08 (confirmed)
Average Daily Volume = 3.1 million

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MarketVectors Agribusiness- MOO - close: 54.55 chg: -1.45 stop: n/a

The agribusiness and fertilizer stocks just can't decide what direction they want to go. July had both bullish breakouts and bearish breakouts and they all proved to be fake. Given the late week reversal lower I would expect more downside but that's not much better than flipping a coin if you look at last month. We are down to our last ten trading days before August options expire. 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 strangles on MOO.

Picked on July 03 at $ 57.25
Change since picked: - 2.70
Earnings Date 00/00/00
Average Daily Volume = 745 thousand

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Netflix - NFLX - close: 29.22 change: -1.67 stop: n/a

NFLX was crushed on Friday morning and the stock gave up more than 5% after a pretty good week following its earnings report. Friday's drop back under $30.00 and its 50-dma is short-term bearish. NFLX might be able to redeem itself with a good bounce from the 200-dma and the $28.00 region. However, we're running out of time with just two weeks left before August options expire. More conservative traders may want to exit early or adjust their exit target. 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 strangles on NFLX.

Picked on July 23 at $ 27.98
Change since picked: + 1.24
Earnings Date 07/25/08 (confirmed)
Average Daily Volume = 1.3 million

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PowerShares QQQ - QQQQ - cls: 44.88 chg: -0.58 stop: n/a

The Qs have been a huge disappointment. The NASDAQ-100 ETF, aside from a couple of intraday spikes, has been stuck in a $2.00 trading range for the entire month of July. Now we're down to our last two weeks before August options expire. We are not suggesting new strangles and more conservative traders will want to consider closing this play. 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 strangles on the QQQQ.

Picked on July 07 at $ 44.90
Change since picked: - 0.02
Earnings Date 00/00/00
Average Daily Volume = 148 million

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Starbucks - SBUX - close: 14.42 change: -0.27 stop: n/a

Last week's earnings report for SBUX was a dud as far as producing any volatility. The stock saw a spike ahead of earnings but shares have been drifting since the actual report. The overall prevailing trend is still down and I would expect it to continue. Unfortunately, it's going to be a really close call whether or not SBUX will move enough to make this play profitable before the August options expire. It could happen but not at the current pace. More conservative traders may want to adjust their exit price to breakeven. Please note that we are adjusting our exit target to $2.10. We are not suggesting new strangles. 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 $2.10 or more. (FYI: The $14 calls hit $2.10 on the July spike to $16.00.)

Suggested Options:
We are not suggesting new strangles on SBUX.

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

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UBS Ag - UBS - close: 19.39 change: +0.08 stop: n/a

Our strangle play was looking pretty good several days ago when UBS was trading near $23.00. Unfortunately, the rally in the financials has died and UBS has been trading sideways the last few sessions. We're back to where we started from and with just two weeks left that's terrible! More conservative traders may want to consider an early exit now or adjust their exit target to 75% or 100% of breakeven. We're not suggesting new positions at this time. We listed two different strangles.

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.

Suggested Options:
We are not suggesting new strangles in UBS.

Picked on July 13 at $19.49
Change since picked: - 0.10
Earnings Date 08/12/08 (unconfirmed)
Average Daily Volume: 7.3 million

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Valero Energy - VLO - close: 32.95 chg: -0.46 stop: n/a

If we exited now we would only be able to recoup about $0.30 but if VLO doesn't start moving real soon that 30 cents is going to evaporate. We were betting on a big move on VLO's earnings report last week and it didn't happen. We immediately suggested an early exit on VLO's failure to move. Now we're down to our last two weeks before August options expire. We are not suggesting new strangle positions. The options we suggested were the August $37.50 calls (VLO-HU) and the August $27.50 puts (VLO-TS). Our estimated cost is $1.38. We want to sell if either option hits $2.25 or higher.

Suggested Options:
We are not suggesting new strangles on VLO.

Picked on July 27 at $ 31.88
Change since picked: + 1.07
Earnings Date 07/29/08 (confirmed)
Average Daily Volume = 12.7 million

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Washington Mutual - WM - close: 5.32 chg: -0.01 stop: n/a

The last few weeks have been extremely volatile for WM. Some of the short-term technical indicators are suggesting that WM will roll over again. This last week's high was a lower high and under the trendline of resistance (see chart). We are down to our last two weeks. More conservative traders will want to consider an early exit or adjusting their exit target toward breakeven. We are adjusting our target to $1.45. 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 $1.45 or more.

Suggested Options:
We are not suggesting new strangles on WM.

Picked on July 20 at $ 5.92
Change since picked: - 0.60
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, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

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