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Daily Newsletter, Thursday, 08/14/2008

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. The Contrarian

Market Wrap

Stocks Mixed as Op-Ex Nears

Market Wrap

The major averages put in a mixed-to-lower trade as traders fine-tune positions into this week's option expiration.

The big guns in the Dow Industrials ($INDU) provide the bulk of the activity and gyrations. Earlier this week it looked as if the Dow Diamonds (DIA) $115.40 -1.00% were going to pull free of their August "Max Pain" theory tabulation of $115.00, which is a culmination of all option open interest (calls and puts), but with two sessions left, the diamonds appear pinned.

Such may also be true for the S&P 500 SPDRs (SPY) $128.57 -0.60%, where after some decent short-covering action on Friday that saw this tracker's parent S&P 500 Index (SPX.X) 1,285.83 -0.29% lurch to as high as 1,313 on Monday, a seemingly gravitational pull with the SPY's August "Max Pain" theory of $128.00 keeps traders on their toes.

The small caps of the Russell 2000 (RUT.X) 747.69 +0.36% and its tracker the iShares Russell 2000 (IWM) $74.58 +0.36% continue to hold steady, with the IWM holding well above its August "Max Pain" theory value of $71.00.

A resurgence of bullish optimism in shares of Apple Computer (NASDAQ:AAPL) $179.30 +1.45% in recent days has this most heavily weighted NASDAQ-100 Index (NDX.X) 1,942.02 +0.04% and its tracker the QQQQ $47.70 -0.20% back above its August "Max Pain" theory tabulation of $46.00.

It wouldn't be a volatile session that saw stocks dart lower at the open, then reverse losses by mid-afternoon, to then finish mixed-to-lower unless there were economic reports, some weekly energy inventory data, weekly housing data, Fed speak, limit up conditions in the grain markets and chatter surrounding the financials.

Oh, don't be disappointed, as there was plenty of that.

Economic data released prior to the opening bell here in the U.S. had July total retail sales falling for the first time in five (5) months, as shoppers avoided buying cars as they paid more for gasoline. Total retail sales fell 0.1% month-over-month, which was slightly below consensus of 0.00%, while core retail sales (excluded automobiles, which can be volatile) rose 0.4%, but was below economists' forecast of +0.5%.

While traders, investors and economists were chewing on the retail data, US import prices (m/m) were also being released. After rising 2.9% in June, import prices rose 1.7% in July, which was above economists' forecast for a 1.0% rise.

The benchmark 10-year Treasury Yield ($TNX.X) darted lower on the retail data, with its yield falling to as low as 3.869%, but then began reversing course, hitting a high intra-day yield of 3.966% just before the 02:00 PM EDT tick.

Then at 10:00 AM it was time to see what U.S. business was doing with inventories. The Census Bureau said inventories rose 0.7% from May, which was above economists' forecast for a 0.5% The closely watched inventories/sales ratio at the end of June was 1.23, as June sales rose 1.7% from May.

Then, roughly 35-minutes later, at 10:35 AM EDT, it was time to see just what the Energy Information Agency (EIA) had to report on weekly crude oil-related inventories, and see just what the heck those refiners had been doing.

Some benchmark prices I noted in the OptionInvestor.com market monitor just seconds before the EIA release had the DIA at $115.33 -1.06%, the USO $91.96 +0.51%, Petroleo Brasiliero (NYSE:PBR) $49.09 -0.70%, which I had profiled deep out-the-money August $45 puts (07/17/08 as the stock was trading $57.62), Exxon/Mobil (NYSE:XOM) $77.50 +0.81%, Chevron (NYSE:CVX) $84.15 +0.70% (DIA and SPY heavyweights).

Then the numbers hit.

The EIA said U.S. crude oil stockpiles fell by 400,000 barrels, but it was the U.S. total gasoline stockpile decline of 6.4 million barrels that seemed to garner trader's attention.

Refiners weren't taking holiday, but it looked like it, as total distillates fell by 1.76 million barrels. The decline here looks to have come from ULS Diesel (less than 15ppm sulfur), which fell by 1.13 million barrels. Heating oil (greater than 500 ppm sulfur) inventories rose for 10th-straight week, up 1.0 million barrels to 34,777. It's remarkable, but heating oil stockpiles now down just 3.77 million barrels from a year ago, or -9.88%. This spring, heating oil stockpiles were down roughly 30% from year-ago levels.

Still, I think the two-weeks of consecutive draws in the gasoline complex certainly had to have some oil bears coming in and covering shorts at the institutionally monitored Quarterly S1 and Monthly S1.

My "chart of the week!"

U.S. Oil Fund (USO) - Daily Intervals

Airline bulls and oil bears probably stepping up some profit taking today. PBR traders could feel the pressure each day as we neared Friday's expiration, but I don't think today's data and technicals were going to give it to us.

Using the USO as a guide, I think a close above $94.60 could see bears further locking in gains, or stepping up their short covering. If bull's nerves aren't frazzled enough with the sudden reversal in the euro/$, then a move below Quarterly S1 ($90.45) will bring trader flash-backs to hedge fund Amaranth, which went belly up as natural gas prices plummeted before JP Morgan came in an picked up the pieces for penny's on the dollar.

Global Equities, Currencies, USO, GLD, HUI.X, OIX.X and XLF

Fascinating, fascinating indeed.

Asia struggles for a second Wednesday-to-Wednesday benchmarking. I can't say for certain, but while the Olympic Games are taking place, some of the "shut down" to control pollution on the mainland may be taking its toll.

European bourses give back the bulk of prior week's gains. Note the sharp 3.10% decline in the euro (FXE/euro) as depicted by the Euro CurrencyShares (FXE) $149.50 +0.05% on the session. Certainly some jitters here. MARKETS do NOT like that type of move in a currency.

Remember when the greenback had some sharp down days?

This week, I added the CBOE Oil Index (OIX.X) 810.69 +3.01% on the session, and the Financial SPDRs (XLF) $20.57 -2.88% on the session.

While the S&P 500 (SPX.X) 1,285.83 -0.29% is a broad-based index, financials and "energy" are heavy-weights.

Now, one thing I think I do need to follow up on is what we are observing in the Russell 2000 Index ($RUT.X) and how it is really starting to show signs of "outperformance" relative to some of its peers (INDU, OEX and SPX).

I've been warning some commentators of being "general" with their market calls in recent weeks and the RUT.X has been anything BUT a good short with a stop just above the day's high.

One reason I think this is not only because of the "stable" underlying economic trends here in the U.S., but market participants may have been factoring in a recovery in the U.S. Dollar, or the weighted basket of foreign securities against the dollar and the U.S. Dollar Index (DXY).

Please believe me when I tell you that I have probably looked at three (3) "small cap" earnings reports, and I can't say for certain, but smaller companies probably don't have the exposure to exchange rates that some of the LARGER cap companies do.

What's rather FASCINATING about the RUT.X performance is that its HEAVIEST WEIGHTED GROUP is FINANCIALS!

That then begs the question ... "what the heck are the BIG caps of the NASDAQ doing then?" Why aren't they "mirroring" the INDU, OEX, SPX?

Aha! the NASDAQ-100 Non-Financial Index (NDX.X) 1,942.02 +0.04% and its tracker QQQQ. Or maybe we should call it the NASDAQ-99 and one energy stock index.

The NDX/QQQQ has just one (1) "energy" stock in it. Patterson UTI Energy (NASDAQ:PTEN) $27.01 +2.81%.

On June 30, 2008, which would have been the END of Q2, PTEN was trading $36.13! Right near its all-time high for several days of $36-ish. If I slapped PTEN in the above table as an "oil" type of stock, its Q3 2008 would be about -25%. On Wednesday of last week, PTEN closed $26.41, so up about 2.25% from last Wednesday.

Please note that PTEN is what many would consider to be an OIL SERVICE company, and while I'd love to have the Oil Service HOLDRs (OIH) $185.57 +4.14% in the above table too, there's only so much I can update, and still meet, or be late for editors deadline.

Note the DXY +5.1% so far Q3.

But hold on a minute!

On Monday evening, I was looking at Dorsey/Wright and Associates table of New Highs and New Lows on a sector-by-sector observation.

What SECTORS do you think showed the GREATEST number of stocks hitting new highs?

Here's what I saw and I just about fell out of my chair.

52-week High/Low Summary - 08/11/08 Conclusion

"Banks" showing 16 new highs and right up there with healthcare and retailing?

I reviewed the 16 names in the "banks" and they were NOT stock symbols many of us would recognize. There were likely SMALL CAP.
(CHCO, FFIN, FFKT, HBHC, HOMB, IBKC, IBOC, MSFG, NBD, NBTB, PGC, RBCAA, SCB, THFF, UMBF, WIBC).

What this would suggest to me is that the "financial problems" can't be so wide spread. Isn't the MARKET smart enough to not have ANY bank trading a 52-week high?

In the above sector breakdown, I quickly point to other "financial" and "energy" related New Highs and New Lows.

Yes, just as I'll do the same on some very BEARISH days, or inflection points, I do the same on some BULLISH days.

I like to see what was LEADING (new highs), or strong; and what was LEADING (new lows), or weak.

U.S. Market Watch - 08/13/08 Close

What do you think? Some short-covering in oil/energy and gold/silver miners?

Could be a more sustainable rebound, but U.S. Dollar Index (DXY) was steady today.

If playing any type of oversold bounce, I'd stay ENERGY-related, not GOLD/SILVER/Miner related.

This week's Mortgage Bankers Assoc. weekly survey didn't show much again. Purchases index up 0.3%. The government purchase index (largely FHA) was a more notable +7.2%.

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The Dow Jones U.S. Home Construction Index (DJUSHB) 281.71 -1.34% on the session. They're "hanging tough," but 300 resistance holding. Not that far below their 12/31/07 close of 324. Stability is "good," but broader market bulls would like to see this group wake up again as they did this spring.

No MAJOR observations since last week's wrap.

However, here is something I noted today as it relates to STRONGEST iShares Russell 2000 (IWM) and a back test of another downward trend being broken to the UPSIDE.

Similar action as to what we saw in early July.

IWM - Daily Interval Chart

Small caps may not have as much option open-interest surrounding them as the LARGE cap names.

Most technicians see an UPSIDE break of DOWNWARD trend as a sign of strength, and we'll monitor the broken trend. If BEARS are giving up, they'll turn to cover at the trend.

Now the also-broad but still WEAK S&P Depository Receipts (SPY).

SPY - Daily Intervals

About the ONLY thing the IWM and SPY have in common would be HEAVIER financial sector(s) weightings, broadness of stocks. SPY/SPX components may be about 50/50 domestic economy/foreign economies as it relates to revenue/earnings.

I did have Market Monitor traders SELL the UNDERLYING ProShares Ultra S&P 500 (SSO) $61.52 -1.17% last Thursday at $60.40 for a decent gain.

Staying BULLISH, but REDUCING capital exposure, I thought bulls should get back on board Friday morning with a SUC-IJ at $3.10 as the SSO was $61.41.

At Tuesday evening's close, INTERNAL measures were still suggesting BULLISH bias.

To be HONEST, IWM and QQQQ are technical LEADERS.

SPY and OEX are "weak"

INDU/DIA are "weakest."
 

New Plays

Most Recent Plays

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

New Calls

Itron Inc. - ITRI - close: 100.92 change: +0.79 stop: 98.45

Company Description:
Itron Inc. is a leading technology provider to the global energy and water industries. Itron Inc. consists of Itron in North America and Actaris outside of North America. Our company is the worlds leading provider of metering, data collection and utility software solutions, with nearly 8,000 utilities worldwide relying on our technology to optimize the delivery and use of energy and water. Our products include electricity, gas and water meters, data collection and communication systems, including automated meter reading (AMR) and advanced metering infrastructure (AMI); meter data management and related software applications; as well as project management, installation, and consulting services. (source: company press release or website)

Why We Like It:
I mentioned ITRI in my play editor's note on Tuesday night as a possible bullish candidate. The stock displayed relative strength on Wednesday and bounced back from its intraday lows right to previous resistance near $101. Volume has been pretty light on the recent rally and that does concern us but we're also in the slowest time of year (late summer) for stocks and thus volume. We want to see a bullish breakout higher before initiating positions so we're suggesting a trigger to buy calls at $101.50. There is potential resistance near $106 at the April 2008 highs. We're setting two targets. If triggered at 101.50 our first target is $105.75. Our second target is $109.90. We strongly suggest you take some money off the table at the first target.

Suggested Options:
We are suggesting the September calls although the Novembers would also work just as well. Our trigger is $101.50. We don't see any Sep. $110 calls available yet.

BUY CALL SEP 100.00 IUP-IT open interest=215 current ask $5.60
BUY CALL SEP 105.00 IUP-IA open interest= 24 current ask $3.20

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume = 616 thousand
 

New Puts

None today.
 

New Strangles

None today.
 

Play Updates

Updates On Latest Picks

Click here to email Linda

Call Updates

Adobe Systems - ADBE - close: 45.36 chg: -0.53 stop: 41.50

ADBE's chart and the shape of its daily candles show that it's getting stretched to the upside, and it's been showing its slowing momentum through sideways consolidation. That's the way that bulls would prefer that its overbought status be burned off, by that sideways consolidation. As long as ADBE continues to produce daily closes above about $45.30, the strongest potential for a move up to at least $47.50 is preserved, and ADBE is doing that so far while it consolidates. As suggested last night, conservative traders may want to take some money off the table, and all traders need to assess the possibility that if that $45.30 support is lost on a daily close, ADBE could make a quick trip down to $44.50-$44.66 to test previous resistance levels and determine whether they're now support. Our target is the $47.50-50.00 zone, but the more conservative of the traders who elected to stay in the trade with full positions might consider taking at least some of those positions off the table if $47.50 is approached. The Point & Figure chart is positive with a $71 target.

Picked on August 05 at $ 43.34
Change since picked: + 2.02
Earnings Date 09/16/08 (unconfirmed)
Average Daily Volume = 6.5 million

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Illumina - ILMN - cls: 93.75 chg: +2.89 stop: 86.95

Yesterday, ILMN announced that it had completed its public offering of 7 million shares. The company raised $342.6 million through that public offering. Today, the stock rose through the $91 level that had given it difficulty yesterday and pushed through our trigger, too. As noted yesterday, the official stop loss has been changed to $86.95, but more conservative traders may want to use a stop loss closer to the $88.00 level. That's just below the rising channel in which ILMN has been climbing since its June low. We have two targets. Our first target is $95.25 and we advise traders to take partial positions off at that target. Our second target is $99.50, just below the top trendline of its rising price channel. FYI: ILMN has a 2-for-1 stock split scheduled for September 23rd. Traders might also want to note that ILMN's short interest is about 19% of the 50 million-share float. That's high enough to spark some short squeezes.

Picked on August 14 at $ 91.55 *triggered*
Change since picked: + 2.20
Earnings Date 07/27/08 (unconfirmed)
Average Daily Volume = 1.2 million

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Itron Inc. - ITRI - close: 102.65 change: +1.73 stop: 98.45

Today, ITRI shot past the resistance that had held it back in late June and again recently, moving through our $101.50 trigger. ITRI presented at a Global Growth Conference earlier this week, but no news accompanied the breakout this morning. The action produced a bullish engulfing candle on the daily chart. As mentioned last night, volume has been light on the recent rally. That did concern us, but today, ITRI climbed on volume slightly above the three-month average daily volume, somewhat easing our concerns. Potential resistance exists near $106 at the April 2008 highs, and some charts suggest that resistance may begin to kick in around $105.10. We're setting two targets. Our first target is $105.75, but conservative traders may elect to take at least partial profits as ITRI passes $105. Our second target is $109.90. We strongly suggest you take some money off the table at the first target, if not as ITRI passes $105.

Picked on August 14 at $ 101.50 *triggered*
Change since picked: + 1.15
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume = 616 thousand

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Research In Motion - RIMM - cls: 130.73 chg: +3.83 stop: 122.50

After a third day of profit-taking, RIMM managed to close yesterday above its 10-sma. This morning's bounce from that 10-sma was likely reassuring to those who have been in this trade since it was first triggered or those who bought the dip, entering this morning. We continue to believe that conservative traders should raise their stops to just under $125 and would like to raise our official target to that level. However, with RIMM frequently producing daily ranges in the 5-8 point category, doing so may stop out readers if RIMM should dip to test its 10-sma again and exceed that during the intraday level, only to rebound by the end of the day. We're going to leave our stop loss at $122.50 for now but urge readers to give consideration to their own preferences and risk profiles tonight, thinking over the risks of each stop loss. We further suggest that the more conservative of those who have not stepped out of partial profits as the first target was hit consider doing so if RIMM should approach $132.50, ahead of this week's high and near the midpoint of RIMM's almost two-month-long broadening pattern from earlier in the summer. RIMM has already exceeded our early target at $129. Our secondary target is $137.00.

Picked on July 31 at $120.50 /1st target exceeded
Change since picked: +10.23
Earnings Date 09/25/08 (unconfirmed)
Average Daily Volume = 18.6 million

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CBOE Volatility Index - VIX - close: 20.34 chg: -1.21 stop: n/a

After showing signs of life earlier in the week, the VIX dropped sharply today to test a rising trendline off its 5/19 high. It continues to find resistance just below 22.50, with the shape of its daily chart and its inability to scale back above 22.50 both proving somewhat problematic for this long trade. However, the good news is that it tests potentially significant support. That includes that provided by that rising trendline and historical support/resistance in the 20.00 zone as well as the 6/17 low of 20.02, the 6/25 low of 20.34, the 8/05 low of 20.06, and the 8/11 low of 19.66. Intraday charts suggest the possibility the VIX may test the 8/6 and 8/11 lows again before support was found and perhaps today's drop may have been the predicted test. This was always an aggressive trade, and, with the VIX's formation looking a bit like a broadening formation, aggressive traders who understand what they're risking might want to let the VIX drop slightly below the 8/11 low of 19.66 before they decide that near-term support has been broken. As stated last night, this is an aggressive and speculative bet that with all the troubles this market (and economy) is seeing that there will be another significant sell-off before October options expiration. Normally when the market sees a super sharp sell-off the VIX spikes to the 30.00 level and beyond, and now it's poised to either bounce or fall lower. We continue to suggest that subscribers wait for a new rise over 22.50 before considering new positions. We were suggesting the October calls. Our exit target is 29.75 on the VIX, although the least aggressive of the aggressive traders entering this trade might consider locking in at least partial profits as the VIX moves through and above 28.80.

Picked on August 03 at $ 22.57
Change since picked: - 2.23
Earnings Date 00/00/00
Average Daily Volume = x million
 

Put Updates

Bank of Amer. - BAC - cls: 30.18 change: +1.32 stop: 34.15

After yesterday's collapse, BAC found support just above its 30-sma and bounced this morning. We had warned subscribers last night not to be surprised by an oversold bounce from near $28.00. So far, the bounce looks like a rise to retest Wednesday's gap lower. That's as far as bearish traders would prefer it get, however, into a test of that gap. Be wary of a trap for bears if BAC should gap high tomorrow and hold above the gap into the close. THESTREET.COM included BAC in a list of financials covered in an article discussing Jim Cramer's recent call for a bottom in banks, but the bounce in financials may have come from a different source. New York State Attorney General Andrew Cuomo held a press conference today announcing that MS and JPM had agreed to pay fines and buy back troubled securities from retail clients as part of an ongoing investigation. WB is thought to be on the verge of a settlement, too, and some buyers felt optimism toward financials. As suggested yesterday, conservative traders may want to lower their stops. However, in order to give BAC any room, we're leaving our official stop well above Monday's $32.02 high. Whatever optimism buyers felt toward financials today, BAC's troubles aren't finished. Yesterday's update included information about BAC's continuing difficulties, including a rising tide of lawsuits, after its acquisition of Countrywide. That update also noted the expiration of the temporary rule to limit short selling in certain stocks might have had in the financials' downturn yesterday and perhaps in the future. As of yesterday, the MACD on the daily chart had finally rolled over into a new sell signal. We have two targets. Our first target is $28.00. Our second target is $25.50.

Picked on August 07 at $ 31.52
Change since picked: - 1.34
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume = 90.4 million

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Freddie Mac - FRE - close: 5.94 change: +0.39 stop: 8.15

FRE benefited today from the bounce in financials, including news of settlements detailed in the BAC update. In addition, the Securities Industry and Financial Markets Associated took steps that some believe could shore up the mortgage market. They agreed to include newly originated jumbo loans in a market for mortgage-backed securities, the details of which are yet to be announced. We advised readers last night to strongly consider an early exit right away, and even aggressive traders might consider locking in at least some profits. Despite today's action, however, FRE remains well below our new $8.15 stop, and it remains to be seen if the Securities Industry and Financial Markets' action made any material change to the situation. Many on Wall Street still believe FRE and FNM will not be able to survive the housing crisis without the government stepping in. The big fear is that if the U.S. government does step in they will wipe out the shareholders. Our short-term target has been the $5.00 level. More aggressive traders may want to aim lower, but all traders might consider locking in some profits now.

Picked on July 20 at $ 9.18
Change since picked: - 3.24
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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Lehman Brothers - LEH - close: 16.20 chg: +0.63 stop: n/a

LEH is churning, today reversing all by one cent of yesterday's decline. Although news sources would have market participants believing that financials are ready to rebound, LEH didn't present a convincing case for that today. It did, however, manage to hold its own, trading basically in the same range as that it did yesterday. The change was enough to flatten the MACD near the zero level, but not to turn it higher again. We have several weeks left before September options expire and need to see LEH significantly above $24.00 or under $10.00. 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: - 0.85
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 63 million
 

Dropped Calls

None
 

Dropped Puts

Focus Media - FMCN - cls: 25.61 chg: +0.1.23 stop: 26.05 *stopped*

Our intention had been to close this trade at the close on August 15, before the earnings announcement scheduled for August 17. FMCN decided an earlier exit was needed. Prices hit our $26.01 stop today. As of last night, we feared that FMCN could be setting up for a rebound back toward $26.00 or the simple 50-dma, and it was certainly headed for and above $26.00. And, unfortunately, it failed right where it has failed so many times in the past, right after hitting our stop.

Picked on August 10 at $ 25.00
Change since picked: + 0.61
Earnings Date 08/17/08 (confirmed)
Average Daily Volume = 3.9 million
 

Dropped Strangles

Apple Inc. - AAPL - close: 179.32 chg: +0.02 stop: n/a

That two-cent change from yesterday's level, on the Thursday of option-expiration week, tells the whole story of why this strangle was closed. Today news articles blamed an Infineon chip for the problems with dropped calls on AAPL's new iPhone, but the news didn't appear to impact AAPL greatly either direction. Last night, we mentioned that AAPL continued to look strong if a little short-term overbought. Today, AAPL looked stretched even thinner as it reached toward the 7/09 swing high of $180.91, reaching a morning high of $180.45. Even then, the day's high for the August $180 calls (APV-HP) was only $2.40, and that was before AAPL retreated again. The exit price has been hit for the strangle, composed of that option and the August $150 puts (APV-TJ). Due to our dwindling time frame, we recently adjusted our exit price to $4.00 on the options. We suggested an exit for more conservative traders as of yesterday, and today's action confirmed that suggestion. Our estimated cost was $8.90.

Picked on July 20 at $165.15
Change since picked: +14.17
Earnings Date 07/21/08 (confirmed)
Average Daily Volume = 31.7 million

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DIAMONDS - DIA - close: 116.41 chg: +1.01 stop: n/a

Today did see the bounce we'd hoped to see, but the $115 calls (DIA-HK) never traded above $2.27 and the $109 puts (DIA-TE) dropped almost to zero. While the Dow Jones Industrial Average was pushing higher, a falling VIX zapped the options' prices. Charts indicate that the DIA may be trapped mostly between $114.80 and $117.25 into expiration. Our exit price of $2.00 was hit today. Our estimated cost was $4.35.

Picked on July 07 at $112.21
Change since picked: + 4.20
Earnings Date 00/00/00
Average Daily Volume = 15.5 million

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Washington Mutual - WM - close: 4.36 chg: +0.24 stop: n/a

Our gamble on the financials sinking into the weekend did not turn out to be a beneficial one today. WM printed one of the smallest daily candles we've seen on daily charts, with a range of only $0.29. As a result, both the August $4.00 puts (WM-TH) and the August $8.00 calls (WMHV) have dropped to near zero. The strangle went through our suggested exit of $0.40, and the trade is closed. As suggested yesterday, with an estimated cost of $0.72, aggressive traders may have decided to wait and not close out as the exit price was reached today, but they'll likely need a big downdraft tomorrow to benefit from that decision.

Picked on July 20 at $ 5.92
Change since picked: - 1.56
Earnings Date 07/22/08 (confirmed)
Average Daily Volume = 57 million
 


The Contrarian

The CBOE Equity Put/Call Ratio

As the chart below is showing there have been a few blip ups in the 10 day moving average. Up until today, the tick ups havent alerted me to a change in sentiment. The reason is that the 10 day moving average is nearing 0.70. Mondays low was 0.707. However, the signal usually turns negative when the 10 day moving average dips to 0.65 or 65 puts to 100 calls traded. The Put/Call ratios 10 day moving average is bearish at levels near 0.60 because this indicates that there has been a peak in bullish call volume and less than normal protective put buying. We could read into all of the reasons investors trade options but it is best to assume for the purposes of the Put/Call ratio that all call volume is from bullish speculation and all put volume is from bearish speculation and portfolio protection.

The CBOE Equity Put/Call ratios 10 day moving average curled up a little to 0.713 from Mondays low of 0.707. This is options expiration week and may be causing the indicator itself to post strange results. That is one of the reasons I prefer to use the moving averages; to smooth out the data. I am moving the signal to Neutral from Positive. The signal will be moved to Negative if the 10 day moving average crosses above the 20 day moving average. The 20 day moving average closed at 0.723. Bearish signals occur when a peak in call volume is achieved and confirmed by the 10 day moving average curling upward. SIGNAL: NEUTRAL BIAS

The CBOE Volatility Index ($VIX)

Volatility continues to evaporate from the S&P 500 options. The chart below shows the CBOE Volatility Indexs (VIX) 10 DMA and 20 DMA. While many traders look for the VIX to peak above 30 to signal a capitulation buy signal and spikes to around 20 to signal a sell off, the purpose of utilizing the moving averages is to smooth out the erratic movements of the VIX and therefore provide signals for portfolio adjustments. I trade the spikes but use the trend to lean either positive or negative with the options DELTAs.

The peak in the 10 day moving average (DMA) from July 16th established the current Positive bias and has continued to decline with only one slight blip in the line. Last week I noted that The slightly flat movement of the 10 DMA appears to be just a pause. The 20 day moving average of the CBOE Volatility Index is confirming the current signal. However, the 10 day moving average closed at 21.47 and is approaching the low of the current range (which is between 21 and 26). A sharp move up in the 10 DMA toward the declining 20 DMA will make the signal Neutral. As I mentioned last week there is some chance that the market is short term overbought and that the VIX is near its lows. The markets began to decline yesterday may continue until VIX spikes up to the 20 DMA. A break above the 20 DMA would confirm the decline to me. When the market dropped last time from 1284 to 1249 in a few days the VIX spiked up to a high of 23.49; which was less than the 20 day moving average. If the VIXs 10 DMA breaks and closes below the 21, the current range will be extended to 17 as a low and 25 as the high. When the VIX is High its time to buy; when the VIX is low its time to go! The 10 day MA closed at 21.47 while the 20 day MA continues to decline and closed at 22.35 SIGNAL: POSITVE BIAS

The Investors Intelligence Polls

The Investors Intelligence polls represent the percentage of newsletter writers that are bullish, bearish and calling for correction. The name is somewhat of a misnomer in that the only investors represented are the newsletter writers themselves. Newsletter writers are loosely referred to as advisors. However, those polled to write their bias and tend to write in the direction that they feel will garner more subscribers. I dont think that I am on their list of newsletters to read. For positive signals we want the majority of those polled to become Bearish and few Bullish; as seen on 7/16 on the grid below. Peaks in Bullishness is considered to be Negative for the market and a sell signal.

We have been on a Positive bias for a few weeks now. The Bullish Percent decreased to 31.8% from 34%. Those that were Bearish increased back above 45.5% from 43.6%. The Spread between the Bullish and Bearish percent decreased to -13.7 from -9.6. This negative territory is unusual and therefore difficult to read. Now that the Bearish percent is back above 45 again and the percent Bullish decreased the Signal is being changed to Neutral. The Signal will become Negative next week if the Spread declines again. SIGNAL: NEUTRAL BIAS

Summary: The overall signal is now a neutral bias.

Robert J. Ogilvie
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey, The Contrarian by Robert Ogilvie, and all other plays and content by the Option Investor staff.

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