For those of you that pay attention to who is writing I want to let you know that you didnt enter a time warp and miss Tuesday and Wednesday. Jeff Bailey and I have swapped Market Wrap days due to ongoing scheduling conflicts. The equity markets were down most of the day but got a little pop after noon when crude dropped to its lows. Actually the Dow Jones was the only index that went positive for more than 5 minutes. Both the NASDAQ 100 and Russell 2000 opened weaker and stayed that way throughout the day. The crude affect isnt causing the market to advance on declining oil prices. Last Thursday I mentioned that the inverse affect may be over since last Wednesdays advance and Thursdays decline in the equity markets and the crude oil contract. My read on this movement is that the energy complex has become such a major component within the market averages that declines in the prices of energy and material stocks are pulling the equity markets down further. Not to mention the impending financial sector turmoil. Tomorrow should stay fairly constant until about 2:15PM when the Federal Reserve Board of Governors report their economic bias. It is widely assumed that there will be no change in the Fed Funds or Discount interest rates at tomorrows meeting. However, the Fed may choose to input some confusing statement which may affect the markets direction for the remainder of the day.
As for today the market fell on concerns regarding financials and the June Personal Income and Spending report that showed higher than expected inflation. Personal Income rose 0.1% versus the prior 1.8% increase. The market was expecting a -0.2% decline in Personal Income. Personal spending increased 0.6% versus the 0.4% consensus estimate and last months 0.8% reading. The consumer is spending with money they dont have. Reduction in income growth can signal a recession.
On the New York Stock Exchange (NYSE) there were 2 to 1 losers. More specifically there were 2101 declining issues and 1048 advancing issues on 1,526 million shares traded, which is below the 50 day average of 1,596 million shares. The NYSE fell 1.32% to 8268.65 and the S&P500 (SPX) fell 0.90% to 1249.01. There were 22 new 52-week highs and 100 new 52-week lows. The NASDAQ Composite fell 1.1% on 1,954 million shares, which is less than the 50 day average 2,197 million shares. There were 28 new highs and 110 new lows today. Finally, 965 issues advanced against 1909 decliners. In summary a fairly negative day occurred. The only bright side is that todays declines occurred on less than average volume.
Oil was trading fairly flat in early trading today. All of a sudden at about 11:25 am the market dropped over 4 points to a low of $119.50 a barrel. There was no real news that triggered the sudden sell off. However the rumor is that a hedge fund had to take off their long positions. Something like that would cause the market to drop that fast.
I have been reading about how many of the hedge funds that posted stellar returns in 2007 have barely made any profits this year so far. Those that are about breakeven have done so by reportedly selling short financials and going long energy and agricultural commodities. With capital further tightening up hedge funds may be in a crunch to raise capital for distributions or post gains on something that worked. That would explain the sharp declines we are seeing in the commodity markets.
Lets review my assessment from last week. I said it looked like crude oil could increase to its 21 day moving average (green line) and then possibly the 133 area for a 50 percent retracement of the July 11th high to Wednesdays low. The 50 day moving average (blue line) also served as resistance if the crude contract had broken above the 21 day moving average. Therefore I was somewhat wrong about a breakout up to resistance but kind of right on the fact that crude really needed to break above the 21 day EMA. The 8 day EMA (pink line) continues to decline quickly and widening the spread between it and the 21 day EMA. Bollinger bands are beginning to contract after two weeks of expansion. The lower band is at 113.
Coincidentally the 127.2% Fibonacci retracement is also at 113. However, the 120 area has served as good support and must be broken significantly for oil to reach down another 8 points. By the time oil dips down to 113 (if it does this time) the 200 day moving average should also be near 113 and serve as support. Both RSI and Stochastics have turned over and have room to decline until becoming oversold. My call is down oil. What does this do for the equity markets? It could continue to pull the markets down further for a few days until the consumer related sectors can find support and strength on their own to pull the markets back up. The majority of investors and the financial advisors I talk to think that down oil equates to an up market. As a contrarian I might take the opposite stance because down oil is due to decreased oil demand and which might mean that decreased demand to go shopping.
Per usual we are going to review the S&P 500 first and then cover the NASDAQ 100. Because the Consumer Discretionary and Staple sectors were among the only standouts today we will look those charts to see where there is support and resistance. The S&P 500 has declined three days in a row since last Wednesday while the Money Flow has continued to advance higher (see chart).
Todays low on the S&P 500 (SPX) of 1247 came close to the 50% retracement level of the July low to high range. As the chart above shows the low was from an intraday dip to 1200.44 while the high occurred six days later and 90.73 points higher. The past three day decline is the second sell off to occur since the low on July 15th. So far the lows are higher and the highs are relatively the same. Therefore we are potentially looking at an advancing wedge forming. But a break below last weeks low and the 61.8% retracement level (1235) may put the SPX down to the previous low.
The Lower Bollinger band in the above chart is beginning to curl downward. This indicates an increase in volatility and might provide greater downside range for the SPX to achieve. The Stochastics have confirmed their intention to revisit oversold territory. It was assumed that the 8 day EMA would be crossing above the 21 day EMA within a day or so when I last wrote about the SPX. It goes to show us all that technical analysis primarily represents visual representations of supply and demands (a.k.a. price) tendencies to repeat historical patterns. Charting is important to determine price points to enter and exit as well as confirmation for maintaining or reducing existing positions. If you bought last Wednesday according to the uptrend and potential breakout technical analysis you might set a stop loss at the break of the uptrend line (the black line). Therefore that position would have been stopped out today. Even thought both RSI and Stochastics are heading south the market could go up tomorrow and pull those indicators upward. You would want to set a reason to cover a short position. Technical levels and indicators are really reasons to make a trade. If your reason to short is that the SPXs 8 day EMX failed to break above the 21 day EMA then a reason to cover that short would be if the SPX bounced back and closed above the 21 day EMA.
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A long time ago I was introduced to tracking the support and resistance levels of an index or equity by looking at the peak open interest levels. Peaks in put option open interest indicate support while peaks in call option open interest indicate resistance levels. The assumption is that the majority of the open interest is from short options and the institutions that placed these short bets dont want them assigned. Therefore those that have the big bucks will sell short the market in attempt to keep the short calls from being assigned and buy the market in attempt to keep the short puts from being assigned. I realize that not all of the volume is from selling to open. When I was trading the market neutral allocation for the hedge fund I would try to sell the premium at or slightly below the peaks in open interest to increase the probabilities of profiting the maximum.
The SPX closed at 1249 today which is slightly below the peak put open interest at the 1250 Put Strike. There are 132,770 options open there. There is support at 1225 and 1200 as referenced by the yellow highlight. The peak call option open interest is at the 1300 strike price. The resistance seen at 1290 has proven that price resistance and open interest resistance is at work. There are currently 1.5 puts open to each call open. The market is usually oversold at ratios near 2 puts to 1 call.
The NASDAQ 100 (NDX) continues to trade within the range between 1752 and 1875. Money flow continues to reach higher even though the market maintains stuck trading within 125 points. Last Thursday the NDX ran up to the 50 day EMA and closed lower on the day. That is a negative signal and was confirmed with Fridays and todays sell off. There is still major resistance at 1875 from price and the 50 day EMA. After that the 50 day SMA and the 89 day SMA will be heavy resistance to break. There will have to something good out of technology stocks to push the market up through these levels. Since CSCO is one of the only major stocks yet to report we may need to wait another two and a half months for the good news.
The chart below shows the NDX with Bollinger bands, RSI and Stochastics. In addition I have drawn the trend lines that defined the previous upward pennant. Notice that the lower line (uptrend line) was broken today. In my opinion, the break of this support is negative and may put the NDX down to the 1752 support. My lower Bollinger band is currently serving as support but appears to be turning downward. RSI and Stochastics are also heading sharply lower and have room to travel until becoming oversold. The 8 day EMA failed to close above the 21 day EMA on the NDXs last thrust upward. Having a positive bias on the contrarian signals is tough when the markets arent behaving.
The open interest support from the puts is at the 1800 strike. The peak support level is at 1600 with 14,472 options open. The NDX closed at 1804.84 which using simple math is 204 points above the major support and 4.84 above the minor support level. The peak open interest is on the 2025 calls with 10,919 contracts. But the next resistance level in play is at 1900 with 6,240 contracts open.
As you can see Healthcare, Consumer Staples and Discretionary and Technology were the only sectors in the S&P that advanced. The energy and materials sectors were the main culprit for todays decline.
The SPDR Consumer Staples ETF (XLP) bounced nicely from the March lows and appears to be basing above the 50 day SMA (blue line). The 200 day SMA is the main resistance. Most likely the consumer stocks will move inversely to oil for a while. Strength in oil means weakness in the consumers.
The SPDR Consumer Discretionary ETF (XLY) only traded up 0.21 today. Discretionary stocks have less of a tendency to bounce at the first sign of reduced energy costs. Lets get real, oil is down from major extreme highs and is still too high for the economy to grow. Even at $110 a barrel the oil service stocks are vastly profitable. At $110 a barrel gas is still over $3.50 a gallon and will continue to reduce demand for shoppers to drive around to cruise the stores.
The SPDR Healthcare ETF (XLV) has remained within a very tight range over the last six months. At the beginning of the year healthcare was a dog versus energy and technology. The only negative is that the money flow on the XLV has peaked at 80 twice in the last few weeks. The last time the Money Flow reached this level the XLV declined from 32 to about 30.
I believe I counted about 300 companies reporting earnings tomorrow. The above list represents the companies that I follow and assumed most people do as well. Sorry if your company isnt on the list. Consumer discretionary related stocks that can move the markets include: EAT, WFMI, WEN, BID, RUTH, TAP, MGM and NILE. PG is one of the main staple stocks. UPL, VMC, PXD, HRS and DUK are some energy stocks that can move the respective sectors.
Tomorrow morning the ISM services for July will be released. The market expects
a slight increase from last month to 48.7. As mentioned earlier the FOMC policy
statement is released. At the close of this months expiration I plan on
attempting to create and manage a market neutral position that follows the
contrarian newsletter. So look for that. I will most likely run the trade as a
Double Diagonal or a Short Iron Condor. Have a good day.
Research In Motion - RIMM - cls: 116.43 chg: -3.72 stop: 114.45
RIMM dipped at the open but was holding relatively steady above the $118 level until another last-hour sell-off pushed the stock to a 3% decline. At the moment we're looking for some short-term support near $115. Over the weekend we raised our stop loss to $114.45. The $115 level should be underpinned by the simple 200-dma. A decent bounce near $115 could be used as a new bullish entry point. However, with the major market averages looking vulnerable I would hesitate to open new bullish plays. We have two targets. Our first target is $129.00. Our second target is $137.00.
Picked on July 31 at $120.50 *triggered
SunPower - SPWR - close: 73.26 change: -3.16 stop: 76.45
SPWR just posted its third loss in a row. It's not looking good for this solar energy stock. Fortunately, we're still on the sidelines. If SPWR doesn't attempt some sort of bounce tomorrow we'll drop it as a bullish candidate. Right now our strategy is to wait for a breakout with a trigger to buy calls at $81.75. If triggered our target is the $89.75 mark (or the 200-dma).
Picked on July xx at $ xx.xx <-- see TRIGGER
CBOE Volatility Index - VIX - close: 23.49 chg: +0.92 stop: n/a
We knew the market was vulnerable and the VIX jumped 4% today as stocks slipped lower. We would still consider new speculative call plays at current levels. We're gambling on another market meltdown before September's option expiration. Our target is $29.75.
Picked on August 03 at $ 22.57
Freddie Mac - FRE - close: 7.52 change: -0.46 stop: n/a
There were several analysts issuing new comments today about how the housing downturn still has much further to go before finding a bottom. This undermined the financials and FRE lost 5.7%. We remain bearish and do not see any changes from our weekend comments. 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.
Picked on July 20 at $ 9.18
VISA Inc. - V - close: 72.50 change: +0.77 stop: 72.55
There is no change from our weekend comments for V. 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.
Picked on August xx at $ xx.xx <-- see TRIGGER
(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: 153.23 chg: -3.43 stop: n/a
We are not surprised to see AAPL sinking again. The stock has been acting weak since the oversold bounce following its earnings report. 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.
Picked on July 20 at $165.15
Popular Inc. - BPOP - close: 6.78 change: -0.17 stop: n/a
BPOP spent another day trading sideways. We don't see any changes from our weekend comments. 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.
Picked on July 16 at $ 5.82
DIAMONDS - DIA - close: 112.77 chg: -0.35 stop: n/a
The path of least resistance seems to be down but the DIA has not yet broken down from its sideways consolidation. 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.
Picked on July 07 at $112.21
iShares Brazil - EWZ - cls: 75.65 chg: -3.43 stop: n/a
The Brazilian Bovespa index plunged another 3.5% on Monday and the EWZ responded with a 4.3% decline. The August $75 puts jumped to $2.45 intraday. 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 (EWZ-TO). Our estimated cost is $3.95. We want to sell if either option hits $5.90.
Picked on July 03 at $ 83.06
FosterWheeler - FWLT - close: 50.75 chg: -5.33 stop: n/a
Shares of FWLT were just crushed today. The stock lost almost 10% and closed at new four-month lows. The August $50 put spiked to $2.60 intraday. More conservative traders may want to exit now! 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.
Picked on July 15 at $ 61.24
Corning Inc. - GLW - close: 20.10 chg: -0.24 stop: n/a
There is still no movement in GLW. We do not see any changes from our weekend comments. 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.
Picked on July 10 at $ 20.16
Google Inc. - GOOG - close: 463.00 chg: - 4.86 stop: n/a
GOOG continues to sink and it looks like shares are headed for the $450 level. The August $480 puts rose to $22.70 intraday. More conservative traders might want to consider an early exit since we have less than two weeks before August options expire. Currently, with GOOG moving in our favor, we're going to keep the play open. 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.
Picked on July 16 at $535.60
Internet Holders - HHH - cls: 49.10 change: +0.06 stop: n/a
There is no change from our weekend comments on the HHH. 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!
Picked on July 03 at $ 50.50
Lehman Brothers - LEH - close: 17.94 chg: -0.71 stop: n/a
We do not see any changes from our weekend comments on LEH. 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.
Picked on July 27 at $ 17.05
Legg Mason - LM - close: 40.00 chg: -0.76 stop: n/a
LM is still trying to rise with its bullish trend of higher lows but momentum is definitely fading. We don't see any changes from our weekend comments. 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.
Picked on July 23 at $ 40.20
MarketVectors Agribusiness- MOO - close: 51.55 chg: -3.00 stop: n/a
Anything related to materials and commodities, including the fertilizer stocks, were crushed hard today. A lot of the fertilizer stocks were down 10%. The MOO lost more than 5% and closed at a new four-month low. 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.
Picked on July 03 at $ 57.25
Netflix - NFLX - close: 29.83 change: +0.61 stop: n/a
NFLX provided a little bounce on Monday but it stalled near the $30.00 level. We don't see any changes from our weekend comments. 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.
Picked on July 23 at $ 27.98
PowerShares QQQ - QQQQ - cls: 44.43 chg: -0.45 stop: n/a
The QQQQ has pulled back toward the lower edge of its $46-44 trading range. 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.
Picked on July 07 at $ 44.90
Starbucks - SBUX - close: 14.06 change: -0.36 stop: n/a
As expected shares of SBUX continue to drift lower. We don't see any changes from our previous comments. 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.)
Picked on July 15 at $ 13.58
UBS Ag - UBS - close: 19.07 change: -0.32 stop: n/a
UBS spent another day trading sideways. We don't see any changes from our prior comments. 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.
Picked on July 13 at $19.49
Valero Energy - VLO - close: 30.99 chg: -1.81 stop: n/a
It doesn't matter what direction oil prices go the oil refiners just can't seem to win. VLO lost another 5% today and is nearing round-number support at the $30.00 level. 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.
Picked on July 27 at $ 31.88
Washington Mutual - WM - close: 4.87 chg: -0.45 stop: n/a
WM took a turn for the worse. New comments about how the housing crisis still has a long way to go undermined the buying interest in financials, especially anyone who deals in mortgages. Shares of WM lost more than 8%. 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.
Picked on July 20 at $ 5.92
United States Nat.Gas - UNG - cls: 40.53 chg: -3.28 stop: 40.99
UNG was weak from the start this morning. This natural gas ETF gapped open lower. Then midday, an unexpected and unexplained spike down in crude oil helped push the UNG to $40.21 intraday. This move looks very bearish even though the UNG might have round-number, psychological support near $40.00. UNG traded at our stop loss of $40.99 closing the play.
Picked on July 30 at $43.39 /stopped out 40.99
United States Oil - USO - close: 97.52 chg: -3.52 stop: 97.40
I happened to be watching CNBC when oil spiked lower today. The commentator said that oil traders on the floor were scratching their heads unable to explain why oil was falling when it should have been rising. More tough comments from Iran, more violence out of Nigeria, and a tropical storm off the coast of Texas should have been more than enough to inspire a rally. Unfortunately, the USO followed crude oil lower and hit our stop loss at $97.40 closing the play.
Picked on August 03 at $101.04 /stopped out 97.40
Today's Newsletter Notes: Market Wrap by Robert Ogilvie and all other plays and content by the Option Investor staff.
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