Option Investor
Newsletter

Daily Newsletter, Thursday, 08/07/2008

HAVING TROUBLE PRINTING?
Printer friendly version

Table of Contents

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

Market Wrap

Just Another 200-point Day for the DOW

Market Wrap

I mentioned last week that if you don't like the direction of the market on a particular day to just wait since it will probably reverse the next day. The volatility has certainly returned and 200 to 300-point days for the DOW is becoming just another trading day in the market. These kinds of moves are hard on the bears and the bulls since each feels they can't make any headway. But the short term trend (since the July 15th lows) has been up and the bulls may not be finished frolicking in the pasture.

Speaking of a 300-point rally for the DOW, I just read an interesting statistic (from BiancoResearch.com) that there has never been a 300-point rally in a bull market. Think about that for a second and you realize how powerful short-covering rallies can be and why you don't see them in a bull market. We are in a bear market and the rally of 300+ points on Tuesday was attributed largely to short covering (even Art Cashin on the floor said the same).

Apparently there have been 24 days in which the DOW rallied 300 or more points since 1998. Of the 24 there were 15 days that occurred between 2000 and 2002 (the bear market decline). None occurred between 2002 and 2007 and the other 9 days were during bear phases in the market. That statistic alone should have traders cautious about feeling bullish this market--we're in another correction of the bear market and nothing more.

I use Elliott Wave analysis to help guide me in identifying where we could be in the larger market moves. An impulsive move is made up of 5 waves which then creates a larger degree first wave and the count continues on a larger degree for another 5 wave move (EW analysis is the study of fractal patterns which the stock market consistently produces and is part of the cyclical patterns that many study). In a bear market the 1st wave down is followed by a 2nd wave correction and these corrections typically get traders feeling bullish again after the big 1st wave decline.

After the October-March decline we had a big 2nd wave correction into the May high and most had turned very bullish the market and many were surprised to see new annual lows when the DOW and S&P 500 broke their March lows. Since the July low we've in a smaller 2nd wave bounce and once again many traders are turning bullish. These upward corrections turn many technical indicators bullish and get most leaning towards the bullish side of the boat again. Then the market lets go and traps those bulls. The reason 3rd waves are so strong is because of the "trick" the market plays on those who got sucked in on the 2nd wave correction.

Once the current bounce finishes (which could have a little higher into the middle of August) we will likely see a period of very strong selling (stronger than we saw between last October and January). From an EW perspective that's the highest probability scenario. There are no guarantees in the market (or else we'd be fabulously wealthy) but EW helps improve the odds and that's all we can play. For new subscribers who don't understand the labeling on my charts, those are EW wave counts. The impulsive moves (moves in the direction of the primary trend) are numbered 1 through 5 and the corrections are labeled with letters, with a 3-wave a-b-c count being a typical correction. If you'd like more information on EW analysis I can send you some information to get you acquainted with it. Drop me an email to support at optioninvestor.com and place a request to have it forwarded to me.

With that let's see what Mr. Elliott is saying about the probabilities for where this market may be headed.

S&P 500, SPX, Weekly chart

The weekly chart shows the move down into the March low as wave 1. From there the bounce into May was a 2nd wave correction and since the May high we've started the 3rd wave down. Each impulsive wave will itself be made up of 5 waves (you can count those in the move down from October to the March low). The July low was the 1st wave of wave 3 and the current bounce is another (smaller degree) 2nd wave bounce. This is important because the next move (dark red down arrow) is going to be the 3rd of the 3rd wave. I call these the "screamer" waves since the move will be very fast and the reason is because of all the trapped bulls (trapped by the 2nd wave corrections who believe in a new bull market.

Advertisement

Get 50% of your trades wrong and still make big profits in the stock market!

We'll show you exactly when to buy and sell stocks with a proven method used by professional traders to manage risk, nail short-term gains, and pile up amazing profits. Master short-term trading with our expert analysis, detailed technical charts, and precise trade setups including specific entry, stop, and target prices. Now Completely FREE for 30 Days!

CLICK HERE: http://www.hotstix.com/public/default.asp?aid=10383

These 3rd waves are called the "recognition" waves because it's when the majority of traders recognize the market is in trouble. For those who like to play the short side of the market, this is the MOAP setup (Mother of All Puts). The only question for me tonight is whether the smaller 2nd wave (wave (ii) on the chart) has finished or whether we'll get a little higher into next week (opex week). The daily chart shows the two possibilities from here:

S&P 500, SPX, Daily chart

Yesterday's rally reversed again from resistance at the 1292 area (38% retracement of the May-July decline) and left a hanging man doji at that resistance. Today's strong down day may have completed a 3-candle reversal pattern. A break below 1260, the uptrend line from July 15th, would be a heads up that the bounce has finished. The short term possibility (shown in pink) is for a move up to the 1320-1325 area next week to finish the bounce, and then a higher upside target to 1350 by the end of the month, which is shown in the 180-min chart:

Key Levels for SPX:
- cautiously bullish above 1292
- bearish below 1234

S&P 500, SPX, 180-min chart

For a higher correction (pink), there are several possibilities for how it could play out but there are two that I consider higher probability, one shown on the SPX 180-min chart and the other shown on the DOW's 180-min chart below. The pattern on the SPX shows a sideways consolidation in a triangle pattern followed by another rally leg into the end of the month and could get as high as 1349 (62% retracement of the May-July decline).

The dark red depiction says the bounce has finished and today's decline was the start of the "3rd of 3rd" wave down. A break below 1260 would be a heads up but it takes a break below 1234 to confirm we've started the next large decline.

Dow Industrials, INDU, Daily chart

The DOW's daily chart looks very similar to the one for SPX. It too is struggling with its 38% retracement at 11710 and there's higher potential to 11800 if a slightly different upward correction is playing out, shown in more detail on the next chart.

Key Levels for DOW:
- cautiously bullish above 11685
- bearish below 11127

Dow Industrials, INDU, 180-min chart

Instead of a sideways consolidation followed by another rally leg, as shown on the SPX 180-min chart, we could be in a rising wedge pattern to finish the a-b-c bounce off the July 15th low. This possibility requires another leg up into next week and could find a high around 11800 (equivalent to the SPX 1320-1325 area.

Nasdaq-100, NDX, Daily chart

I've been saying for a couple of weeks now that the choppy consolidation in NDX is a strong indication that it will be followed by more selling. The bear-flag pattern that I've drawn on the chart suggests today's high may have been it--today's candle is a bearish shooting star doji at resistance. The only question in my mind is whether we'll see a pullback and one more new high next week or if instead the bounce is finished and now we'll see the next leg down kick into gear (dark red). Both are shown in more detail on the 120-min chart:

Key Levels for NDX:
- cautiously bullish above 1920
- bearish below 1800

Nasdaq-100, NDX, 60-min chart

The bear-flag pattern is shown and I'm also showing two equal legs up from the July 15th low. In an a-b-c correction it's very common to see the a-wave and c-wave equal each other and that level at 1898.75 has been tagged. I would be very careful from here if long the market. A break below 1820 would have me out of my long positions if I were long the market (which I'm not).

Russell-2000, RUT, Daily chart

I showed a rising wedge for the rest of the bounce for the DOW (on its 180-min chart) and a similar pattern for the RUT is shown on its chart, with an upside target of 743. This is just a guess but something to watch for if we see the market rally higher into next week. Otherwise a break below 700, confirmed with a break below 694, would be more immediately bearish.

Key Levels for RUT:
- cautiously bullish above 726
- bearish below 694

Banking index, BIX, Daily chart

I've commented on the parallel down-channel for price action since the March low (using a parallel line to the trend line drawn from the March low to the July low and attaching it to the high in May) and how it's a guide for where price might find resistance. The BIX has tried twice now to break out of this channel but again got rejected today. If it manages to rally higher, shown in pink, I think the upside potential is to the 240 area. Otherwise this index may be ready to start back down again (foiling those who keep trying to buy the bottom in the banks). One reason why I think it could start back down is because of the cleaner pattern on the brokerage index:

Brokerage index, XBD, Daily chart

After the bounce back up to its downtrend line from October 2007 the XBD dropped sharply to its July 28th low. It then bounced again to just shy of the downtrend line yesterday and left a doji (hanging man). Today's big red candle, completely reversing Tuesday's strong rally, completed a 3-candle pattern called the evening star. This pattern at resistance is a strong reversal signal. Will it follow through to the downside? Who knows but it's the kind of signal that considerably increases your odds of being correct if you're on the short side. As labeled, the next move is a 3rd of a 3rd wave down, which will be strong selling if it's correct.

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

The sharp move down from the July 23rd high followed by the choppy sideways/up correction is a recipe for a continuation lower. The bear flag pattern since July 23rd should break down but it might continue to chop its way higher into next week and reach its downtrend line from February 2007. I have been thinking for a long time that the home builders index will finally find strong support at 216 (two equal legs down from its July 2005 high) but now I don't think that level will hold. There's much more pain to be felt by the home builders but it's a question of how much of that pain has been priced in so far.

Transportation Index, TRAN, Daily chart

I could argue both the bullish and bearish case for the Transports and don't see a good setup from here, yet. If the index breaks below its August 4th low at 4875 it will support the more immediately bearish depiction. Otherwise there remains the possibility we'll this index head back up for a retest of its May high.

U.S. Dollar, DXY, Daily chart

I've redrawn the up-channel for price action since the March low since the top of it is where the US dollar stopped today. I have no idea if that will be the extent of the rally for the dollar but that's the potential. A push higher than 74.70 would suggest a rally up to its downtrend line from January 2002, currently near 76.50. Typically commodities head in the opposite direction of the US dollar but today oil decided to follow it, or at least it tried:

Oil Fund, USO, Daily chart

Oil closed up today but gave up some of its earlier gains. Its short-term pattern leaves me guessing a bit as to where it might head in the next week or so but even if it manages to bounce higher, perhaps up to its 50-dma near 107, it should have much lower to go. The downside target zone of $70-$80 ($80-$100 for oil) by September is what I expect to see unless something changes the picture.

Oil Index, OIX, Daily chart

Oil stocks are also a little vague in their pattern, like oil. I see the potential for a whippy market in these stocks over the next month or so before the resumption of its decline in the fall.

Gold Fund, GLD, Daily chart

Playing around with the log price scale and arithmetic scale I noticed that the log scale shows price stopped at the uptrend line from October 2006 (which GLD marginally broke when it ran out sideways through it in June-August of last year). Whether it stops there or continues lower to the $80 area is now the question. Bullishly I see the possibility for GLD to rally back up to the top of a bullish sideways triangle that could play out through most of this year before rallying higher next year. But any further drop in gold, especially with a drop below it May low at 83.57, would confirm we've seen the top in gold and can expect much lower prices into the end of the year.

Economic reports, summary and Key Trading Levels

Today's reports did not have much influence over the market and tomorrow's reports probably will not be market moving either. Today's Pending Home Sales report looks positive for the market but one needs to take into account that these are pending home sales. This number gets modified each month as pending sales are or are not converted to actual sales.

One reader, thanks Denise, provided me with some information about pending sales vs. completed sales and it's not encouraging. Denise is a long-time and successful realtor and said lenders are informing her that as many as 25%-33% of pending home sales may not go through (typically for lack of funding for a variety of reasons). As Denise said, realtors are getting desperate to write contracts (as often happens in depressed areas and during depressing times) and hope that something will stick and get funded. Apparently there are many lending officers quitting simply because they can't get funding, not even for their good clients. As reported by one, "I would say that it is harder now than it was even a few months ago. The credit markets are a complete disaster."

Another lender says the lending guidelines are becoming more restrictive. We've heard this reported many times over the past many months but the point is it's not getting any better even though the Fed has opened the spigot wide open to many more banks in hopes of priming the pump with more cash and easier credit. Supply of credit (cash) is not the problem. It is a demand problem and the Fed can't control demand. If banks are afraid to lend money or people are afraid to borrow more (or buy a house, or a car, or a big piece of furniture) it's not going to help them just because money is cheaper.

These reports from the field show the credit contraction continues and we're a long way from seeing improvement in this area. After the biggest credit bubble in the history of this country we've got some serious unwinding to do. It's going to hurt but it's a necessary cleansing process to flush the waste from the system so that we can get back to healthy growth. In the meantime hunker down and protect your capital and stay prepared for some difficult times ahead.

Most people who came into adulthood since early 1980 have no idea what it's like when the stock market is not in a bull market. There just normal cyclical patterns that we need to get through and learn how to trade in. If you don't like trading the short side (which I think is much harder to do than to trade in a bull market) then paper trade and learn. We will be in a trader's market for many years so learn how to trade both directions and not care which way it goes (easier said than done).

Good luck as we head into opex next week. I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1292
- bearish below 1234

Key Levels for DOW:
- cautiously bullish above 11685
- bearish below 11127

Key Levels for NDX:
- cautiously bullish above 1920
- bearish below 1800

Key Levels for RUT:
- cautiously bullish above 726
- bearish below 694


Keene H. Little, CMT
Chartered Market Technician
 


Trader's Corner

Rectangle Bottoms

Before I launch into my topic of the moment, I'll note and you may have noticed that I didn't write this (Trader's Corner) column last week OR my regular weekend Index Trader this past Saturday.

I was away from my office and relying on my trusty laptop to do my trading analysis with, but it wasn't so trusty recently. A virus (Trojan) managed to slow my PC to a standstill; one that escaped my virus guard, as it came in via my browser and ended up taking over so much processing capacity, that I was out of action until a fairly drastic fix was done.

I was advised by my computer geek friends that (Mozilla) Firefox, a free download of a web browser, is considerably less prone to being 'attacked' in the ways that Internet Explorer is. Ah, Microsoft, as is true of many leaders, is also the biggest target of those that want to tear down rather than build up.

I discuss in my book (Essential Technical Analysis) some academic research done in years past that attempted to assess what technical patterns had more than'chance' ability in forecasting tops or bottoms.

Dr. Andrew Lo, at the MIT Sloan School of Management, lead an extensive statistical evaluation of a number of chart patterns and found 5 that yielded "statistically significant test statistics"; i.e., they had a level of predictive value that was greater than any random or chance occurrence.

This study was reported in "The Journal of Finance" back in August 2000. The 5 technical chart patterns that their research found were ones to take notice of are the:

- Head and Shoulders top
- Double top
- Rectangle top
- Rectangle bottom
- Broadening Bottom formation

So, I took NOTICE of a potential 'rectangle bottom' pattern that formed in one of my favorite indexes (for trading purposes), that of the Nasdaq 100 (NDX).

Given yesterday's apparent breakout ABOVE the top end of this NDX possible rectangle bottom, I'll take a look at the future 'measuring' implications of the rectangle formation, once prices break out above or below the top or bottom of this formation. Any pattern, such as a Head and Shoulder's (top or bottom), rectangle (top or bottom), etc., that has an implication for a future upside or downside target in a stock or index is of considerable potential value to options trader.

Trader's are, or should be, always looking at the potential for the next price swing. Duh, this seems pretty elementary and it is, but the objectives implied by certain patterns don't always come to mind. Sometimes, it's been a while since we've seen a lengthily sideways toping or 'basing' pattern that has traced out a fairly well-defined range; i.e., a rectangle.

MOST BOTTOMS

Most bottom patterns, more so than tops, are commonly what are called a 'V' type bottoms. The bottoms highlighted on my first chart, that of the S&P 500 (SPX) index, displays this pattern very well. You've all seen these patterns many times.

The V-bottom chart pattern tells us that we are probably seeing some kind of a low, but it's hard to know from the formation itself, how high the subsequent rebound may carry. In the case of the March second low in SPX, that formed an approximate DOUBLE BOTTOM and is one of the reliable patterns mentioned in the study.

We can assume that a double bottom, especially accompanied by a very oversold RSI, is a call trade worth taking. Chances are that the risk to reward (set an exit point just under the second low) is 3-4-5 to 1. Go for it. But as to a specific upside objective, the double bottom pattern itself doesn't provide a clue.

The recent V-bottom in SPX also tells us nothing as to the upside potential involved. A break out above the 'line' of resistance noted at the red down arrow is needed to suggest that the index was breaking out to the upside. That's about all we predict in this pattern. Maybe a breakout move carries back to the 1350 area, something like that.

You sometimes hear CNBC talking heads speaking about a stock or index undergoing 'basing' action, simply a term for when prices stop going down and start going sideways. The longer this sideways move goes on, the 'bigger' (i.e., wider) the base is. As we all know, something that goes high needs a solid base. It tends to be the same in stocks and indexes. A wide base has later potential for an equally 'high' upside, such as I've highlighted on the Nasdaq 100 (NDX) chart below covering price action from earlier this year.

The sideways move was however is NOT what is considered to be a 'rectangle' pattern. Nevertheless, what we see below IS an example of BASING action and the length of the sideways move suggested that a breakout above the sideways to lower price trend would lead to a strong advance, which is what happened.

A rectangle pattern needs to have a series of highs and lows that stop in the same or a similar price zone. Drawing a horizontal line through the most number of such highs and the most number of such lows makes for the two sides of rectangular type pattern. You can see that the rectangle pattern is more defined in the recent NDX price action.

There was a breakout above the top end of the implied NDX rectangle yesterday, followed by a pullback to the top end of the box like pattern today. If there is a valid breakout that has occurred, what was resistance (the top of the box) ought to now 'become' support. Stay tuned on that!

The measuring implications of a breakout above an apparent rectangle bottom are a 'minimum' one (the conventional interpretation) seen if there's a move ahead equal to distance 'A' and a 'maximum' one, suggested by a move back to retest the 2056 high and equal to distance 'B'.

The Nas 100 may settle back into the price range (1871 to 1785) it was in of course, but right now I'm betting on more upside, but also watching to see if today's low continues to hold up and then if the index starts to work above 1900. If so, I'll be working with an initial upside objective to around 1957 in NDX.

OPPS!

"DEAD LETTER BOX" or E-MAILS NOT ANSWERED!
You'll recall seeing in both this, my (Thursday) "Trader's Corner" articles and my Saturday Index Trader columns, 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, to use only my updated e-mail address dating from my move back from California over a year ago. So, forwarding any e-mail from you to me hasn't happened in many months!! 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!

I apologize to anyone who may have written to me via our Option Investor Support desk for answer or response and never heard back from me. Getting e-mails from those who read my work and opinions is important to me; and, helps me with ideas on future Trader's Corner topics. However the good news is that I'll get any such future mails!

GOOD TRADING SUCCESS!
 

New Plays

Most Recent Plays

Click here to email James
New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
None BAC None
  LM  

New Calls

None today.
 

New Puts

Bank of Amer. - BAC - cls: 31.52 change: -1.93 stop: 34.15

Company Description:
Bank of America is one of the world's largest financial institutions, serving individual consumers, small and middle market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk-management products and services. (source: company press release or website) Don't forget that it was BAC that bought troubled mortgage lender Countrywide.

Why We Like It:
The rebound in the financials is seriously struggling and BAC is beginning to fade from its trendline of overhead resistance. This looks like a good spot to consider new put positions as investors turn fearful again in the financial sector. We're suggesting puts now with a stop loss at $34.15. We have two targets. Our first target is $28.00. Our second target is $25.50.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 32.50 BAC-UZ open interest=20846 current ask $3.35
BUY PUT SEP 30.00 BAC-UF open interest=55497 current ask $2.16
BUY PUT SEP 27.50 BAC-UA open interest=45166 current ask $1.36

Picked on August 07 at $ 31.52
Change since picked: + 0.00
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume = 90.4 million

---

Legg Mason - LM - close: 39.25 chng: -3.08 stop: 43.51

Company Description:
Legg Mason is a global asset management firm, with approximately $950 billion in assets under management as of March 31, 2008. The company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland. (source: company press release or website)

Why We Like It:
The broker-dealers look vulnerable to more selling. We thought about adding Goldman Sachs (GS) as a put play but too many people consider that company "best of breed" and will be quicker to buy the dips in GS. Instead we're suggesting put positions in LM, which just broke down from what appears to be a bear wedge pattern. This should be considered a higher-risk, more aggressive play because the sector and the stock have been so volatile. Due to this volatility we're starting with a wide stop loss. We have two targets. Our first target is $35.75. Our second target is $32.50.

Suggested Options:
We are suggesting the September puts.

BUY PUT SEP 40.00 LM-UH open interest= 1140 current ask $3.70
BUY PUT SEP 35.00 LM-UG open interest= 1086 current ask $1.70

Picked on August 07 at $ 39.25
Change since picked: + 0.00
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume = 3.7 million
 

New Strangles

None today.
 

Play Updates

Updates On Latest Picks

Click here to email James

Call Updates

Adobe Systems - ADBE - close: 43.22 chg: -0.31 stop: 40.95*new*

ADBE held up relatively well during the market's choppy session. Unfortunately, Thursday's session looks like a potential one-day reversal pattern in the NASDAQ. That doesn't bode well for tech stocks. If ADBE does pull back look for a bounce near $42.50 or $42.00 as a potential entry point. We're raising our stop loss to $40.95, which is under its four-week trendline of higher lows. ADBE does have what could be significant resistance near $45.00. Our target is the $47.50-50.00 zone. More conservative traders may want to use a stop loss closer to $40.50 or $40.75.

Picked on August 05 at $ 43.34
Change since picked: - 0.12
Earnings Date 09/16/08 (unconfirmed)
Average Daily Volume = 6.5 million

---

Research In Motion - RIMM - cls: 127.25 chg: -0.05 stop: 119.45*new*

After yesterday's strong gain shares of RIMM spent Thursday churning sideways. Investors bought the dip near $125 late this afternoon. We're raising our stop loss to $119.45. More conservative traders might want to take some money off the table right here. We are raising our stop loss to $118.45. We have two targets. Our second target is $137.00.

Picked on July 31 at $120.50 *triggered
Change since picked: + 6.75
Earnings Date 09/25/08 (unconfirmed)
Average Daily Volume = 18.6 million

---

CBOE Volatility Index - VIX - close: 21.15 chg: +0.92 stop: n/a

The VIX index erased yesterday's losses. This bounce looks like another entry point to buy calls. Remember, this is a very speculative bet that the market will see a sharp sell-off before September's option expiration and that the VIX will surge toward 30 on the move. Our target is $29.75.

Picked on August 03 at $ 22.57
Change since picked: - 1.42
Earnings Date 00/00/00
Average Daily Volume = x million
 

Put Updates

Freddie Mac - FRE - close: 5.89 change: -0.60 stop: n/a

An analyst firm's downgrade this morning gave FRE a little push on the way down today. Shares ended the session off 9% and near its lows for the day. We're not suggesting new put plays at this time. However, if you believe that the government will step in and that such a move would wipe out shareholders then you may want to go ahead and buy some out of the money puts two or three months out. 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
Change since picked: - 3.29
Earnings Date 08/06/08 (confirmed)
Average Daily Volume = 45.5 million

---

VISA Inc. - V - close: 69.50 change: -1.98 stop: 72.55

Our put play in Visa is now open. Shares broke down under the $70.00 level and its three-week trendline of higher lows. Our suggested entry point to buy puts was $69.45. Now that the play is open we have two targets. Our first target is $65.25. Our second target is $61.00. FYI: More aggressive traders may want to use a wider stop loss.

Picked on August 07 at $ 69.45 *triggered
Change since picked: + 0.05
Earnings Date 07/30/08 (confirmed)
Average Daily Volume = 14 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: 163.57 chg: -0.62 stop: n/a

AAPL is still trying to bounce but failed to close over its simple 200-dma for the second day in a row. We are very quickly running out of time. It looks like this week's big two-day rally has killed our strangle play. We have less than two weeks before August options expire and need to see AAPL well above $180 or under $150. 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
Change since picked: - 1.58
Earnings Date 07/21/08 (confirmed)
Average Daily Volume = 31.7 million

---

Popular Inc. - BPOP - close: 7.12 change: -0.13 stop: n/a

BPOP displayed some relative strength. The banking indices were down 5% but BPOP only lost 1.5%. 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
Change since picked: + 1.30
Earnings Date 07/18/08 (confirmed)
Average Daily Volume = 3.4 million

---

DIAMONDS - DIA - close: 114.59 chg: -1.90 stop: n/a

More volatility, that's about all we can expect these days. Every time the DIA looks like it's about to break into a new trend it reverses again. This won't last forever. Depending on your bias the DIA is either in a bullish consolidation with higher lows or a bear wedge pattern that will eventually break lower. We remain very cautious here. We're not suggesting new strangle positions at this time. 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 $5.35 or more.

Picked on July 07 at $112.21
Change since picked: + 2.38
Earnings Date 00/00/00
Average Daily Volume = 15.5 million

---

iShares Brazil - EWZ - cls: 75.91 chg: -1.59 stop: n/a

It looks like yesterday's bounce might already be failing. The trend is lower. More conservative traders may want to adjust their exit target to $3.50 or breakeven. Our new exit target is $5.00. 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 $5.00.

Picked on July 03 at $ 83.06
Change since picked: - 7.15
Earnings Date 00/00/00
Average Daily Volume = 13.6 million

---

FosterWheeler - FWLT - close: 54.79 chg: -1.82 stop: n/a

FWLT encountered some profit taking after yesterday's big post-earnings rally. 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
Change since picked: - 6.45
Earnings Date 08/06/08 (confirmed)
Average Daily Volume = 2.5 million

---

Corning Inc. - GLW - close: 19.81 chg: -0.57 stop: n/a

Hold on to your hats! GLW might be poised to breakout of its recent trading range. This is starting to look like a new entry point for directional put plays. 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
Change since picked: - 0.35
Earnings Date 07/30/08 (confirmed)
Average Daily Volume = 15.9 million

---

Google Inc. - GOOG - close: 479.12 chg: - 7.22 stop: n/a

GOOG erased yesterday's gains with a dip back to its 10-dma. 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
Change since picked: -56.48
Earnings Date 07/17/08 (confirmed)
Average Daily Volume = 4.5 million

---

Internet Holders - HHH - cls: 49.78 change: -0.40 stop: n/a

There is no change from our previous comments on 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
Change since picked: - 0.78
Earnings Date 00/00/00
Average Daily Volume = 132 thousand

---

Lehman Brothers - LEH - close: 17.67 chg: -2.62 stop: n/a

Ouch! LEH just gave up a huge chunk of its recent gains with today's 12.9% loss. We don't have much time left so readers will want to consider an early exit if either option even gets close to our breakeven price. 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
Change since picked: + 0.62
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 63 million

---

Legg Mason - LM - close: 39.25 chg: -3.08 stop: n/a

LM also suffered some serious profit taking with a 7% loss. Shares broke down under the $40.00 mark and its simple 10-dma. 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
Change since picked: - 0.95
Earnings Date 07/25/08 (confirmed)
Average Daily Volume = 3.1 million

---

MarketVectors Agribusiness- MOO - close: 50.90 chg: -1.30 stop: n/a

The MOO just reversed yesterday's gains. What are the odds that this agribusiness ETF will be under $48 before August 15th? If MOO can hit $48.00 that should be enough to hit breakeven on our strangle. Under $48 should be a profit. 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
Change since picked: - 6.35
Earnings Date 00/00/00
Average Daily Volume = 745 thousand

---

Netflix - NFLX - close: 30.46 change: +0.46 stop: n/a

Shares of NFLX added 1.5% as investors reacted positively to an earnings report from rival Blockbuster (BBI). In the report BBI raised its earnings guidance. 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
Change since picked: + 2.48
Earnings Date 07/25/08 (confirmed)
Average Daily Volume = 1.3 million

---

PowerShares QQQ - QQQQ - cls: 46.27 chg: -0.36 stop: n/a

The situation was starting to improve yesterday with the Qs breakout from its trading range. Yet there was no follow through today and the QQQQ failed near its exponential 200-dma for the second day in a row. 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
Change since picked: + 1.37
Earnings Date 00/00/00
Average Daily Volume = 148 million

---

Starbucks - SBUX - close: 14.52 change: -0.42 stop: n/a

There was nothing new to report on for SBUX. Shares continue to churn sideways. 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
Change since picked: + 0.94
Earnings Date 07/30/08 (confirmed)
Average Daily Volume = 14 million

---

UBS Ag - UBS - close: 20.40 change: -0.21 stop: n/a

Financials stocks were hammered again today but UBS out performed its peers with a 1% decline. Bulls shouldn't be too confident here with the stock nearing overhead resistance at its 50-dma. We have less than two weeks before August options expire. 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
Change since picked: + 0.90
Earnings Date 08/12/08 (unconfirmed)
Average Daily Volume: 7.3 million

---

Valero Energy - VLO - close: 32.94 chg: -1.53 stop: n/a

The bears are still in control with VLO. Shares rolled over under its trend of lower highs. The stock gave up 4.4% and closed near its lows for the session. 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
Change since picked: + 1.06
Earnings Date 07/29/08 (confirmed)
Average Daily Volume = 12.7 million

---

Washington Mutual - WM - close: 4.97 chg: -0.33 stop: n/a

Investors turned fearful on the financials again and WM lost more than 6% and closed under the $5.00 mark. 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
Change since picked: - 0.95
Earnings Date 07/22/08 (confirmed)
Average Daily Volume = 57 million
 

Dropped Calls

ArcelorMittal - MT - close: 82.83 change: -1.99 stop: 79.95

I hate to jump in and out of something so fast but the action in shares of MT today looks very ugly. The stock produced a bearish failed rally pattern and a bearish engulfing candlestick. At this point I would expect a dip back toward $80.00 and it's questionable if previous support at $80.00 will hold this time. More aggressive traders may still want to gamble on MT. I'd rather exit early and cut our losses quick. If MT does break down under $80 more nimble traders might want to consider bearish strategies.

Picked on August 05 at $ 83.27 /exit early 82.83
Change since picked: - 0.44
Earnings Date 11/13/08 (unconfirmed)
Average Daily Volume = 4.5 million
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

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