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Daily Newsletter, Saturday, 08/23/2008

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Table of Contents

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

Market Wrap

Danger, Low Volume Week Ahead

Market Wrap

This was not an exciting week. The major averages rebounded to close only slightly negative for the week but the rebound was less than exciting. Support was tested but were it not for the Friday short squeeze I am not sure if that support would have held. I am starting to worry that September may live up to its reputation as a rocky month.

NYSE Composite Chart - Daily

Friday's economics were less than exciting despite a drop in the mass layoffs for July. This is a lagging indicator but still one where the trends can be projected into the current forecast. Mass layoffs in July fell to 1,512 from 1,643 in June. Workers involved fell to 151,171 from 165,697 in June. Layoffs spiked in the auto industry to more than 15,000 and temporary help services at just over 14,000. The transportation sector saw 57,761 layoffs. Manufacturing in general still accounted for the majority of the layoffs at 108,733 workers. Despite the big numbers this was the second consecutive month that mass layoffs declined.

There are quite a few reports due out next week but few of any importance. The highlights include the FOMC minutes on Tuesday, GDP on Thursday and the Chicago PMI on Friday. The FOMC minutes of the August 5th meeting will tell us what the Fed was thinking at the last FOMC meeting. This is key since there is another meeting coming on Sept 16th. The Fed is no longer expected to raise rates at this meeting. The Fed funds futures have fallen to only a 13% chance of a 25-point hike. That was as high as a 120% chance just a few weeks ago.

The second look at Q2 GDP is not expected to change from the +1.89% growth in the first release. Several factors have changed but they should cancel each other out. If the GDP were to surprise significantly to the downside it would produce a negative market. Everybody is assuming we dodged a recession and any evidence to the contrary would be detrimental to our fragile market.

Lastly the Chicago PMI on Friday is expected to decline back into contraction territory after five months of growth and a positive move over 50 for July. Should this indicator surprise to the upside it would be market positive.

The rest of the reports should be market neutral. We will get updates on both sentiment and confidence and another round of bad news on home prices. Bad news on all of those reports should be priced into the market. I also added the OPEC and FOMC meetings to the schedule for the following two weeks.

Economic Calendar

Friday was a strange day in the markets. We opened higher on the strength of comments from Buffett, Bernanke and the potential for a buyout bid for Lehman Brothers. Financials exploded to the upside and a new short squeeze was born. With short interest extremely high after a week of declines in the financials it was a powder keg ready to blow.

Warren Buffett started the rally when he said in an interview on CNBC that he was adding to his stake in either American Express (AXP) or Wells Fargo (WFC). The sly old fox would not say which one and that gave a lift to both. He also said he was seeing better opportunities in the stock market now than he has over the last year. Since stocks are 20% lower now that should come as no surprise. Buffett also said he no longer had any bets against the U.S. dollar. Those comments were enough to get the party rolling but not all of his comments were positive.

Buffett also said he believes the economic downturn will be longer and deeper than many people think. The economy won't be better five-months from now but will rebound within the next five years. He believes inflation will continue to rise. He said he made a mistake in selling BUD before the final deal was done. He thought BUD was going to put up a stronger fight and he sold on the initial pop. He expects the government will have to act to bail out Fannie and Freddie and there is a reasonable chance the shares go to zero. On the political side he suggested contributors to John Edwards file a class action suit seeking the return of their money because Edwards misled them about his extra-marital affair. When you are as old as Buffett with his amount of money you can say what you feel and not worry about the ramifications.

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Bernanke added fuel to the rally when he said the Fed should be able to keep interest rates low for some time because the recent drop in commodity prices coupled with reduced demand should reduce the threat of inflation. "If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year." He also acknowledged slowing growth and rising inflation had combined to create "one of the most challenging economic and policy environments in memory." That is even more difficult because the turmoil in the financial markets "has not yet subsided." His comments were seen as an indication that the Fed would not be raising rates in the near future.

Lehman (LEH) opened with a significant pop to $16 from its close at $13.63 after state-run Korea Development Bank said it might be interested in buying the troubled firm. Lehman was valued at $9 billion at Thursday's close and the Neuberger Berman asset management business Lehman owns is thought to be worth $8-$10 billion. That means everything else Lehman owns is being valued at zero. The KDB news came after a newspaper reported Lehman had approached KDB and CITIC Securities, China's biggest brokerage, about a 50% stake in Lehman. Both reportedly walked away saying the price was too high. The KDP CEO had led local operations for Lehman for three years. The Chosun Ilbo daily cited government sources that claimed Lehman had also approached Korea Investment Corp (KIC), a sovereign wealth fund, about a major stake and the fund turned them down. Any of these foreign entities could write a check for Lehman out of petty cash but they would have a hard time getting it approved by American regulators. An analyst quoted on CNBC Friday morning said he believed Lehman would follow Bear Stearns into oblivion. Dick Bove said Lehman is so undervalued several bidders were likely to appear soon. He values Lehman at $20 per share. Bove felt that KDB was going public with the interest in Lehman in hopes of attracting a U.S. partner. Effectively they were saying we want to buy Lehman but we know the regulators won't let us without a U.S. partner. Lehman lost the majority of its early gains to close up only 69 cents as the various analysts downplayed the KDB chances for a deal. The news was enough to help fire up the rally but the Lehman match burned out quickly. Analysts expect Lehman to lose $4 billion in Q3.

Paul McCauley, from Pimco, said in Jackson Hole on Friday morning that another bank failure, including the GSEs could be imminent. Late Friday the FDIC reported they had shut down the Columbian Bank of Topeka Kansas. This was a small bank with $752 million in assets. The FDIC did not give a reason for the closure but said Columbian reported $92 million in delinquent loans in the second quarter. Columbian said five borrowers represented half of the $92 million problem. It was the ninth bank failure in 2008 compared to three in 2007. The FDIC has been rapidly adding to its staff in order to handle the expected wave of bank failures from the current credit crisis. The biggest failure for 2008 was IndyMac at $32 billion. On Wednesday the FDIC announced a program where thousands of troubled homeowners with loans at IndyMac will be able to switch to a 30-year fixed rate mortgage capped at 6.5%. This will be an important test case for future bank takeovers. If the FDIC can avert bankruptcies and foreclosures by rewriting the loans then it will become a standard practice. There were 90 problem banks on the FDIC list in the first quarter. They do not disclose the names for obvious reasons. Historically only 13% of the banks on the list fail with the rest nursed back to health or taken over by some other bank. Of course the current mortgage crisis is not a historical norm so I expect to see more than 13% fail. The FDIC collected $37.1 billion in the first quarter from the member banks to cover losses from soured mortgages. This bank was not on Paul McCauley's radar when he was speaking Friday morning. He was referring to a major bank default ahead.

There was another set of bailouts discussed on Friday. The big three automakers plan to ask Congress for up to $50 billion in low interest loans over the next three years to help them modernize their assembly plants and develop next-generation fuel efficient vehicles. The loans are twice the amount authorized in the last energy bill and automakers claim they need even more to rapidly change the types of cars they build. The loans would provide for up to 30% of the cost of retooling facilities to build hybrids, electric cars and other alternatives. The automakers said they did not see it as a bailout but a government assistance program.

You probably heard last week that the $2 billion Andor Capital Management hedge fund was going to shut down and return money to investors. The founder is retiring after 24 years in the investment business. Strange that he did not sell the fund rather than shut it down. Quite a few hedge funds are reportedly shutting down and they try to do it quietly. Hedge Fund Ore Hill Partners, $3 billion, was in the news on Friday after they were forced to gate their $1.2 billion Ore Hill International fund after investors tried to withdraw $300 million on the upcoming withdrawal date in September. Hedge fund investors typically have to give a 45-day notice of intent to withdraw funds at quarterly withdrawal periods. Gating is a procedure for limiting withdrawals to prevent a run on the fund. Reportedly this could be the first year where more funds close than new funds open. This has been a very tough year to trade with the volatility extremely high from day to day. Funds trying to trade as they always have using increased leverage were crushed as that leverage turned against them.

With the Q2 earnings cycle over the actual S&P earnings came in with a -22% decline. If you take out the financials, energy and consumer discretionary as sectors with the biggest influence the remaining earnings for Q2 were a positive +4%. That is not exciting but still indicates positive growth. If you do the same for Q3 the estimates don't change much from actual of +2.4% compared to +5% with the exceptions. However, there is a qualification. In Q2 of all the companies that issued guidance only 20% actually hit their guidance leaving a whopping 80% doing worse than they expected. If that same trend carries through Q3 then we could see those positive estimates turn very negative.

If its August it must mean there is a hurricane on the prowl. This weekend we still have Fay to kick around and there are two more tropical depressions heading our way with the potential to turn into hurricanes. Fay completed her reversal and is now over water again in the extreme northeast portion of the gulf and headed towards New Orleans. Fortunately her crisscross of Florida reduced her wind speeds but now over water those winds can increase again. The following chart is a history of Fay's track. I have never seen a storm cross Florida west to east and then return to the gulf. The second chart shows Fay and the two new storms that could turn into problems next week. The red circle is going to move right up hurricane alley between Cuba and Mexico and could be a problem. The yellow circle is headed towards Florida.

Storm track charts

The emergence of Fay back in the gulf had zero impact on oil prices on Friday. In fact oil fell -$6.59 for the biggest one-day dollar drop since 1991. The big gain to $122 on Thursday was completely erased when Russia pulled out of Georgia. Suddenly the threat to the three Georgian pipelines was removed as was support for Thursday's short covering spike. Crude closed at $114.59, -$7.50 from Thursday's high and after the beating the new buyers took the odds are good crude is going lower. Those odds would shrink if Fay suddenly rises to category three and continues to move towards the oil patch. There was also a monster 61-cent bounce in the dollar index and that helped deflate all dollar denominated commodities. That 0.8% spike in the dollar equates to a sharp drop in the number of dollars required to buy a barrel of oil. If this trend keeps up you can count on OPEC to announce a production cut in some form on Sept-9th.

Crude Oil Chart - Daily

After last week I am far less bullish than I was a week ago and I was borderline then. I worried all day Wednesday and Thursday we were going to break support and plunge back to the lows. Fortunately that did not happen but only because of the massive short squeeze on Friday. The Lehman news, Bernanke and Buffett speaking in public and the settlements with the SEC and NY Attorney General on the auction rate security front gave traders a reason to cover shorts ahead of the weekend. This was a prime example of what can happen if the financials finally start to rally. Eventually that will happen but with the daily downgrades and people like Buffett, Bernanke and Milton Friedman and major brokers including Goldman, Citi, JP Morgan and Merrill all saying this week that the banking turmoil will continue the odds of a lasting bounce are slim. Without a financial rally the markets cannot mount a lasting bounce.

Add in the historically ugly month of September and we are treading on thin ice. Volume is extremely thin with volume on Friday just barely breaking the six billion share mark and this was a major short squeeze day. If it takes a 200 point rally to break 6B shares that should be a clue that there was no conviction. The wild card here is the election factor. With the Democratic convention next week I would not expect anything material out of the administration. However once the Democratic convention is over and the Republican convention starts I think we can see some government action on things like Fannie and Freddie and anything else the administration can think of to help make voters think the worst is over. I am not trying to be partisan here but it is a historical fact that whichever party is in power they will pull strings to orchestrate events in hopes of influencing the votes. Part of creating that warm fuzzy feeling for the voter is supporting a bullish market. We are a little early in the cycle but be aware it is coming. Next week is not only a holiday week as the last week of summer but also the airwaves will be filled with convention coverage.

The Dow rebounded to just below prior resistance at 11650 on the opening bounce and then failed to add even a single point the rest of the day. It was a prime example of no conviction on a gap open day. Resistance remains strong at 11650-11700 and it will probably take a major news event to produce a breakout. Support is now 11300 and a break there could easily see 11000 once again.

Dow Chart - Daily

The S&P-500 came to a dead stop at 1290 and a level that has been resistance since late June. Following that level is round number psychological resistance at 1300 that held so strongly a week ago. Support is 1265, 1250 and 1210. The Dow and S&P will be held captive to whatever the financial sector is doing. If oil continues lower that will be a double whammy for the S&P with a large energy component.

S&P-500 Chart - Daily

The Nasdaq and the Russell have been the pillars of the market and they both collapsed last week. The Nasdaq managed to avoid a touch of 2350 and the Russell barely missed a touch at 720. Both of those numbers were levels I said I would buy. While both posted decent rebounds they lagged the Dow on percentages. A quick look at the top ten Nasdaq stocks showed only two still rising at the close, INTC and CSCO. I would be more prone to short this rally than buy it.

Nasdaq Chart - Daily

Russell-2000 Chart - daily

All the negativity in the world could vanish in a heartbeat if a Lehman buyout is announced over the weekend and Hank Paulson announces some kind of Fannie/Freddie solution that does not harm existing equity holders. It won't fix the banking system but it would be a vaccination against a complete breakdown. I would be surprised if the administration would give the Democrats that kind of headline to abuse next week. Instead I believe we are in for a real dose of the summer doldrums with no news and no volume. We know that volume is a weapon of the bulls but I think next week they will be saving their ammunition for a bear hunt later in the quarter. If the market moves higher I will remain long but I am also going to be looking for any signs of a failure to exit. I am no longer recommending buying dips to Nasdaq 2350, Russell 720. I could be completely wrong but the signs are starting to suggest the bulls are leaving the building.

I would like to invite everyone to attend the 2008 Peak Oil Conference with me on Sept 21-23 in Sacramento. About 20 Option Investor subscribers and myself will be attending and it will definitely be fun and entertaining. There are dozens of speakers and all the presentations will have reams of data on Peak Oil and its impact. It is not specifically on investing for Peak Oil although there is a presentation on that in the schedule.

The conference will convince anyone that peak oil is real and give you a countdown calendar for its arrival. I have dozens of people email me every week asking questions about peak oil. This is where to get your answers. The first day is the story and all aspects of the coming problem will be presented. The second day covers the impact. What role will coal play? What is the future for aviation? How will governments react to the changes? What hardships will ordinary people be forced to endure?

I have been to two of these ASPO conferences and it is the only conference I would not miss for the world. This is the definitive answer to all your peak oil questions.

All the Option Investor attendees will sit together so we can talk about the presentations during the breaks. I will be holding an evening session just for OI attendees and it will be Q&A and a general discussion about what we heard that day and how to profit from it. I strongly suggest anyone concerned about their future not miss this opportunity.

Go here to register: http://www.aspo-usa.org/aspousa4/

On the third page of the registration put my name in the "How did you hear" box. That way I can track the registrations and send you emails about meeting times and places.

I guarantee you will not be disappointed with what you learn.

See you in Sacramento!

Jim Brown
 

Index Wrap

MINOR CORRECTION

THE BOTTOM LINE:

The slowing advance of week before last led to a minor pullback correction this past week. However, there was no downside penetration of chart support and the Dow made an approximate double bottom relative to its lows of early August. The only penetration of what I consider to be a technical support was the S&P and Dow closing for 3 days running under their 21-day moving averages.

However, as I think I've stressed a number of times, the pivotal chart action is provided by what's happening with the lead Nasdaq indexes. And on this front, the Nasdaq Composite (COMP) only dipped very slightly under the key 21-day average and only intraday and then rebounded. The Nasdaq Composite only TOUCHED its average intraday and this appeared to be the 'signal' for the start of a strong 2-day rally.

Recent highs have yet to be re-tested and there may be more corrective action to come, perhaps with it being more sideways than lower, which would also serve to 'throw off' the overbought condition reached by the strong rally into the mid-March highs. All in all, I remain bullish on the prospects for the Nasdaq indexes at least to challenge their May-June highs.

To temper a solely bullish anticipation and forecast here, I would also note that there is significant technical resistance in the 1956-1966 area in the Nas 100; this view is suggested by closing prices having reached into the 62 to 66 percent retracement zone AND by resistance implied by the weekly chart down trendline (not shown). Pivotal for the bulls is how NDX fares on a return to key resistance at 1956-1966.

QUESTIONS/COMMENTS:
Please e-mail me with any comments or questions at Click here to email Leigh Stevens Support [at] OptionInvestor.com and put "Leigh Stevens" in the Subject line. We have straightened out past months' problems that occurred where e-mails were not getting to me from OI Daily Subscribers.

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

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart remains bullish on a short to intermediate-term basis (a 2-3 day to 2-3 week outlook) and mixed to bearish still on a long-term weekly chart basis; i.e., on a 2-3 month horizon.

A close above 1300 for two or more days running is needed to suggest that SPX was headed into a second up 'leg'. On the recent pullback SPX held a line of support in the low 1260 area, which was also the area of the bottom made back in March.

Near support is in the 1277 area, then around 1262-1263, with next support coming in at 1246-1250.

Near resistance is apparent in the 1300 to 1310 area; next I assume that 1320, representing a one-half/50% retracement of the mid-May to mid-July decline, will provide some further resistance. 1350 begins major resistance in my estimation.

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

One notable aspect to the S&P 100 (OEX) daily chart is the strong resistance overhang in the 608-609 area suggested by the mid-April lows. The 608-610 area marked the 'breakdown' point in June and selling interest may return on a move back to this area and this was seen once already at the 8/11 spike high in this area. Above 610, resistance/selling interest should next be found around 620. Major resistance begins at 640.

As suggested last week, in a common refrain from me, more than a 1-day close below the 21-day average suggests some likelihood for a further downside break. When a technical support is pierced, it's ALSO important to see what happens after that. In this case for 3 days after the break below the average, OEX didn't sell off much and found repeated support in the low-1260 area. Analysis of the 60-minute bar chart clearly showed 'basing' action and once the 21-hour RSI or Relative Strength Index moved down toward a short-term oversold reading, there was another surge of buying.

I also wrote last week that I didn't think there was lot of upside potential in the near-term. From here I wouldn't be surprised to see a rally that carried back into the 600 to 610 zone, struggle to achieve much headway after that. However, if a second advance developed that was equal to the distance covered in the first advance or first 'leg', OEX could get to 640 at a minimum.

MARKET 'SENTIMENT'
It was interesting and insightful to see that at the recent market low, my sentiment indicator shown above, got quite close to an 'oversold' level indicating extreme bearishness.

As I point out from time to time, presenting my sentiment model ON the OEX chart above doesn't mean that this indicator relates mostly or just to the S&P 100 group of stocks. My "CPRATIO" relates to the market overall and tends to be predictive, at extremes, for trend reversals for the market as a whole. Whichever market or market segment that is leading the market will be the one to play for the strongest move however.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Like the S&P 100, the Dow 30 (INDU) also was unable to climb above its line of price resistance or 'supply' line at its prior major March low in the 11700 area. In late-June it was predictable that there was a sharp sell off the day this level was broken; a 'breakdown' point in technical analysis terms. Not surprisingly also, the rally to the prior breakdown point two weeks back was met with substantial selling. Fund managers remember wanting to sell more stock then they could reasonably manage without wholesale 'dumping' when INDU had its rapid late-June break below 11700.

With the late-week rebound INDU looks like it could be headed right back to the 11700 area. Given this past week's support found on the pullback to prior lows in the 11300 area with a corresponding minor double bottom, it suggests INDU could make it through this key resistance this time. The question is also whether there'll be more backing and filling in the 11500-11700 range FIRST and more basing action for awhile.

Pivotal resistance especially on a closing basis, is in the 11700-11850 area. Two consecutive days' close above 11730 would put the chart back on a bullish track. Key next resistance then is at 11950-12000.

Near support is highlighted below at the INDU 21-day moving average, currently at 11479; next chart support is back down in the 11300 area. A close below 11290, not reversed (back to the upside) the next day would be a bearish development.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) completed a relatively minor pullback to the pivotal 21-day daily average and then rebounded strongly this past week; such price action presents a classical bullish pattern for one of the major indexes. If COMP follows through on this bullish pattern, the index will rally again to the area of the upper trading band at 5% above the 21-day average, suggesting a possible next move to the 2500 area and above. Ultimately of course, the anticipation will be that the Composite will re-test it's prior high, in this case the 2550 minor double top of May-June.

Immediate overhead resistance will be at 2460-2485 and then at 2510, on up to what may be tough resistance around 2550. While it's possible that COMP is building another intermediate-term top, the index also remains in a long-term uptrend, although the index has been floundering around some at the LOW end of its broad uptrend channel dating back to the October 2002 low. Until long-term technical support is pierced, the existing major trend is considered to be intact.

Near support is highlighted below at 2373, at the 21-day moving average, with next lower support at 2300.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 Index (NDX) has traded quite predictably in technical/chart terms. The March-June rally retraced 2/3rds of the multimonth decline from late-October last year into March of this year, then began a strong and prolonged rally into early-June. This was followed by substantial sell off that ended up retracing 66% of that advance, into the lows of early-July to early-August. Beautiful TRENDS; ones you could get on board and stay with. Less trading decisions means a longer life I'm convinced!

The Nasdaq 100 (NDX) chart will remain bullish as long as the 'line' of prior highs in the 1870 area is not pierced. This most recent decline reversed in bullish fashion from its 21-day moving average. Near NDX support is at 1892, then around 1870-1871. Major support is in the 1800 area.

Near-term overhead resistance is in the 1970 area, then at 1993 to 2000. A daily close over 2000, not reversed the next day would keep the bullish pattern going strongly and suggest that NDX will re-test its prior highs in the 2050 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) rebounded bullishly from its 21-day average and I continue to peg the average as near support, currently at 46.3. Near resistance begins in the 48.25 area and extends up to 49. A close over 49.0, not reversed the next day, would suggest potential for the Q's to work back to the area of prior highs in he 50.5 area.

Near support as mentioned is at 46.3, with next support well below this, around 44.25.

Daily QQQQ trading volume declined on the last pullback as you see above and which makes the volume pattern consistent with a bullish price chart, since volume will typically decline on a sell off and expand on a rally in a bullish period.

Of course, if you look at daily volume graphed above, the end of the week rally brought NO corresponding jump in volume. We'll see how it unfolds but, as commented on before in recent weeks, I've begun taking the relatively low volume during rally phases as reflecting LOW bullish expectations; in a contrarian sense this may be reinforcing the idea that QQQQ will continue to move higher.

RUSSELL 2000 (RUT) DAILY CHART:

On the recent decline the Russell 2000 (RUT) held above the top end of its prior consolidation, suggesting that resistance (once penetrated) had 'become' support. The chart will retain bullish potential ASSUMING that the 763 double top is exceeded at some point, otherwise it's a double top and bearish. However, if the 763 area is pierced, this could lead to an eventual re-test of prior highs in the 800 area.

RUT has support at 720, then 712 and at 700. Near resistance is at 740, then pivotal resistance as mentioned, is in the 760 area.

GOOD TRADING SUCCESS!

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

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

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

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


Trader's Corner

Getting Real

You'd have to have been in isolation for the last few years not to have picked up some Dr. Phil-isms. When researching this article, I even discovered websites that allow people sick of the pervasive Dr. Phil-isms to pretend to gun him down. I'm not going to be linking you to those.

We're going to get real in this article, a la Dr. Phil. We're not going to be talking about "name it to claim it," but we are going to apply some of his relationship advice to trading.

Your relationship to the market is likely to have been through some bad times lately. Market action has been dreadful. A slightly panicked mood has seeped out of the financial pages and into the mainstream press. "Retirement on Hold," "Struggling students turn to food banks," and "5 big losers in the banking crisis" are just a few of the headlines discovered in a cursory search of mainstream press headlines beginning a few weeks ago. Friday morning's headlines detailed unexpectedly dire news out of the U.K., news that we're not alone as our economy weakens.

Traders feel their fear levels escalate, their shoulders literally hunching as they read one dread report after another. Looking for new investments or studying new types of trades becomes overwhelming. Distrust of brokers grows.

Let's get real. Once, when Dr. Phil counseled a woman whose distrust of her husband had grown out of bounds, he told her that the person she really distrusted was herself. She distrusted her ability to exit a relationship if it were to go bad. It's the same with a trader's relationship with the markets. Maybe, if you're feeling excessive fear, what you really distrust is yourself.

More decisively, maybe it's your ability to manage the risk you're taking on. Perhaps you're taking on a manageable about of risk but you distrust your ability to manage specific trades by setting appropriate stops and heeding them. Believe me, it's not heeding those stops and taking a loss that hurts so much. That's not what engenders so much depression, fear, and distrust associated with the trading process: it's a failure to set and heed stops, letting a loss get too big, that does it.

I'm not Dr. Phil; nor do I play him online. However, I can verify from personal experience that there is nothing like the relief of taking a loss and knowing that it was merely the cost of doing business, as Mike Parnos of Couch Potato fame and others say. In the July option expiration cycle, my trading plan for managing condors actually had me exiting some positions for a small loss when it turned out I wouldn't have needed to do so after all. However, managing my trades the way I do keeps me from suffering a catastrophic loss, so I don't mind those times when I've acted according to plan and it turns out that I could have either made a higher profit or not taken a small loss. Most of the time I don't mind it. I'm human so of course I feel a pang now and then, but I certainly don't punish myself with the shoulda-woulda-coulda chant the way I once did. In fact, I was thrilled with the way my personal trading plan worked in the July cycle, because it was one of those times when a big loss could have turned into a catastrophic one.

Keeping a loss as small as possible and acting appropriately to preserve trading capital tells traders that they can trust themselves in the future. For example, while none of my written-down plans will prevent me from a bigger loss in a 1987-type scenario, years of testing my plans have proven that I can mostly trust myself to control what can be controlled. Emotion relating to trading will never go away, but it has certainly declined dramatically as a result.

If you're too fearful, you're probably taking on more risk than you can afford to lose or you distrust your ability to act appropriately to limit losses, if needed. Or both. It's time to work on yourself and your relationship to your trades.

There's help. Along with all those scary media titles, you'll find some more titles consoling and helpful. A check under the CME Group's "Psychology of Trading" webinars includes titles such as "Truth about Impulse Trades," "Win the Emotional Trading War," and "Handling Exaggerated Trading Emotions," all by Denise Shull. The CBOE doesn't tend to feature as many webinars on the psychology of trading, but the Dan Sheridan webinars always delve into the trading plan and the why's and how's of managing an open trade. He covers credit spreads, condors, butterflies, calendars, double diagonals and many other trades that our subscribers might attempt, always emphasizing the exit points, profit parameters, and possible adjustments.

Your online broker may also offer webinars that help. Mine, BrokersXpress, offers webinars on all aspects of the trading platform, including the different types of stops and how they could be set. A future webinar will discuss how to use profit/loss graphs.

Of course, watching these webinars takes up some time that could be better spent obsessing over your trades. And there is the concern that something you learn on those webinars might convince you that you're putting too much money at risk in iffy trades and you need to rein in your trading.

But, how's that working for ya?
 

New Plays

Most Recent Plays

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New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

Play Editor's Note: I recently heard one analyst label this the toughest market to trade in thirty years. I certainly agree that it has been challenging. Readers need to be defensive in their trading and position size. Normally we like to add new candidates on the weekend newsletter but my market bias is bearish and potential plays were a challenge to find following Friday's rally. Look for new candidates on Monday.

FYI: SINA might be a bullish candidate over $42.00 or on another bounce from $40.00.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 

Play Updates

Updates On Latest Picks

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Call Updates

Arch Coal - ACI - close: 55.61 chg: -0.98 stop: 49.95 *new*

After Thursday's big pop higher in ACI it was only natural to see some profit taking on Friday. Shares held up relatively well and were bouncing higher again heading into the close. The stock is up sharply for the week and could see more profit taking if the major indices struggle. We are not suggesting new bullish positions at this time. We're upping our stop loss to $49.95 and more conservative traders may want to inch their stop even higher. Our target is the $58.00-60.00 zone. The P&F chart is bullish with a $68 target.

Suggested Options:
We are not suggesting new positions on ACI at this time.

Picked on August 20 at $ 52.37
Change since picked: + 3.24
Earnings Date 10/20/08 (unconfirmed)
Average Daily Volume = 6.4 million

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Adobe Systems - ADBE - close: 44.91 chg: +0.40 stop: 43.34

Shares of ADBE managed to sneak above its recent trading range but the bulls struggled to get the stock above round-number resistance at $45.00 and technical resistance at its 10-dma. The stock acts like it wants to go higher but the indicators are mixed and you could make a case for a deeper correction in ADBE. We are not suggesting new bullish positions in this stock. Our target is the $47.50-50.00 zone. The Point & Figure chart is bullish with a $71 target.

Suggested Options:
We are not suggesting new positions in ADBE.

Picked on August 05 at $ 43.34
Change since picked: + 1.57
Earnings Date 09/16/08 (unconfirmed)
Average Daily Volume = 6.5 million

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Chesapeake Energy - CHK - cls: 47.65 chg: -1.74 stop: 46.45*new*

Ouch! After a strong Tuesday-Thursday rally in natural gas stocks the group was hammered lower on Friday. CHK gave up 3.5% and the three-day candlestick pattern looks bearish. We are raising our stop loss to $46.45, which is just below the rising 10-dma. A bounce from here could be used as a new entry point but traders need to be defensive and maybe cut back on their position size. We have two targets. Our first target is $52.00. Our second target is $54.85. FYI: As expected CHK produced a brand new P&F chart buy signal that now points to a $62 target.

Suggested Options:
If you are considering bullish positions on CHK we would use the September or October calls. September options expire in four weeks.

Picked on August 20 at $ 48.05 *triggered
Change since picked: - 0.40
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 20.2 million

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Illumina - ILMN - cls: 91.33 chg: -0.67 stop: 89.45 *new*

It might be time to start looking for the exits in ILMN. The stock displayed relative weakness on Friday and the afternoon bounce was already rolling over ahead of the closing bell. More aggressive traders may want to keep their stop loss under the 50-dma around $88.00. We are raising our stop loss to $89.45. Shares still have short-term support near $90.00 and stronger support with its rising trendline of higher lows (see chart). More conservative traders could place theirs closer to $90.00. Wait for a new rally over $92.00 or $92.50 before considering bullish positions. The long-term trend for ILMN is still very bullish but that doesn't mean the stock won't see short-term volatility. We have two targets. Our first target is $95.25. Our second target is $99.50. 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.

Suggested Options:
If ILMN provides another bullish entry point we would use the September or October calls. September options expire in four weeks.

Picked on August 14 at $ 91.55
Change since picked: - 0.22
Earnings Date 07/27/08 (unconfirmed)
Average Daily Volume = 1.2 million

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Itron Inc. - ITRI - close: 104.79 change: +1.36 stop: 99.90*new*

ITRI turned in another decent week after testing support near $100 again. Even though technical indicators look positive this is probably not the place to open new positions. The rally on Friday seemed to run out of steam as ITRI near its mid August highs. There is resistance near $105.00 More conservative traders may want to scalp some profits right here! If the stock does see a dip look for a bounce in the $101.50-102.00 zone. We are raising our stop loss to $99.90. We've set two targets. Our first target is $105.75. Our second target is $109.90.

Suggested Options:
If you are tempted to buy calls on a dip in ITRI we would use the September or October strikes.

Picked on August 14 at $ 101.50
Change since picked: + 3.29
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume = 616 thousand

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Research In Motion - RIMM - cls: 131.45 chg: -0.85 stop: 124.65

RIMM remains a leader in the tech sector but shares under performed on Friday following a nice two-day bounce. We are bullish on RIMM but some of the short-term technical oscillators are suggesting that the stock may be headed for another dip. Therefore we would wait for a dip into the $130-127.50 zone before considering new bullish positions. The $125 level remains support so we're going to keep our stop loss where it is. We have two targets. Our first target is $143.50. Our second target is the $155.00-160.00 zone. However, readers should expect RIMM to encounter some resistance in the $145-150 area.

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

Picked on August 21 at $132.30
Change since picked: - 0.85
Earnings Date 09/25/08 (unconfirmed)
Average Daily Volume = 19.1 million

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CBOE Volatility Index - VIX - close: 18.81 chg: -1.01 stop: n/a

It is not looking good for our speculative bet on the VIX. The volatility index closed at its lowest levels in several weeks. The current trend is lower but that could change pretty quickly. At this point we would consider new bullish positions on a dip in the 17.00-16.00 zone or a new rise above 22.50. If you haven't been following this play we're betting that the market will see another sharp sell-off and investor fear will rise enough to push the VIX toward 30.00 and all before the October option expiration. Our target is 29.75 but readers might want to consider scaling out of positions in the 28-29 region.

Suggested Options:
If the VIX provides another entry point we have been suggesting the October calls.

Picked on August 03 at $ 22.57
Change since picked: - 3.76
Earnings Date 00/00/00
Average Daily Volume = x million
 

Put Updates

Bank of Amer. - BAC - cls: 30.21 change: +1.17 stop: 31.55

News that LEH is a buyout target and could be in serious negotiations with potential acquirers sparked a short covering rally that was focused on financials. BAC bounced more than 4% higher and actually managed to close over the $30.00 mark. The short-term technical oscillators have turned bullish. We would wait for a very clear failed rally near $31.00 or wait for a new decline under $29.00 before considering new bearish positions on BAC. We have two targets. Our first target was $28.00, which has already been achieved. Our second target is $25.50.

Suggested Options:
If BAC provides a new entry point we would consider the September or October puts. Don't forget that Septembers expire in four weeks.

Picked on August 07 at $ 31.52 /1st target exceeded
Change since picked: - 1.31
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume = 90.4 million

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Chipotle Mex.Grill - CMG - cls: 72.00 chg: +1.47 stop: 73.65

The short covering panic on Friday morning sent CMG to an intraday high of $72.86. If we happen to get stopped out at $73.65 we'll be watching for another bearish entry point until CMG can clear resistance near $78.00. At this point we would consider new put positions under $71.00 or under $69.00, whichever best suits your risk tolerance. We have two targets. Our first target is $65.50. Our second target is $61.00.

Suggested Options:
If CMG provides a new entry point we are suggesting the September or October puts.

Picked on August 20 at $ 69.90 *triggered
Change since picked: + 2.10
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume = 888 thousand

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Millicom Intl. - MICC - cls: 80.07 chg: -0.63 stop: 80.75

The market bounce on Friday also led MICC higher. The stock added 2.2% but failed to breakout past its August highs. If MICC can clear the $84.00 level we may want to switch to bullish strategies. Right now we've been waiting for a new relative low and our suggested entry point to buy puts is $78.49. A failed rally in the $83.00-83.50 zone might be an alternative entry point for puts but we'd use a stop loss at $84.05. If triggered at $78.49 we're listing two targets. Target number one is $75.05. Target number two is $72.50.

Suggested Options:
We are suggesting the September $80 or $75 puts.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume = 1.0 million

---

Regional Bank HOLDRs - RKH - cls: 101.04 chg: +3.04 stop: 103.05

Financial stocks popped higher on the LEH news Friday morning. The RKH gapped open at $100.22 and bounced once it filled the gap. The bounce is bad news for the bears. The overall trend is still bearish but short-term RKH could rally to its 100-dma around $107.80. More conservative traders may want to tighten their stops toward the $102 region. We would wait for a new decline under $99.00 before considering new bearish positions. We have two targets. Our first target is $91.00. Plan to exit all or most of your position there. We'll set an aggressive, secondary target at $86.00. FYI: The top three holdings in the RKH are JPM (19%), WFC (13.6%) and WB (10%).

Suggested Options:
We would suggest the October or September puts if the RKH provides a new entry point.

Picked on August 18 at $ 99.80
Change since picked: + 1.24
Earnings Date 00/00/00
Average Daily Volume = 3.1 million

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Uniao de Bancos Brasil - UBB - cls: 118.34 chg: -0.85 stop: 117.75

I listened to one analyst offer a very positive review of Brazil on Friday and he mentioned UBB as one of his best picks for that country. While long-term that may be a good bet short-term the bounce in UBB is struggling. We are still waiting for a breakdown under support and we're not ready to give up just yet. Our suggested entry point to buy puts is at $112.50. If triggered our target is the $102.50-100.00 zone. FYI: More nimble traders may want to switch to bullish strategies if UBB can bounce above the $123.00 mark.

Suggested Options:
If UBB hits our trigger at $112.50 we would buy the September or October puts.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 1.5 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: 14.41 chg: +0.69 stop: n/a

LEH was all over the news on Friday when word got out they were talking to a Korean bank about a major stake in the troubled broker. The stock soared Friday morning as investors placed bets that someone might just buy all of LEH. Shares hit $15.93 intraday and eventually settled with 5% gain. The stock was plunging into the closing bell as enthusiasm waned. At least one analyst expressed their opinion that LEH may follow Bear Stearns and go under completely. A different analyst reiterated his opinion that LEH would be rescued and put a $20 price target on the stock. We don't see any changes from our previous comments and we're not suggesting new strangle positions. We have four weeks left before September options expire and need to see LEH significantly above $24.00 or under $10.00. The options we suggested were the September $24.00 calls (LYH-IR) and the September $10.00 puts (LYH-UB). Our estimated cost is $2.15. We want to sell if either option hits $3.50 or higher.

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

Picked on July 27 at $ 17.05
Change since picked: - 2.64
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 63 million
 

Dropped Calls

None
 

Dropped Puts

NYSE Euronext - NYX - close: 41.14 change: +2.37 stop: 41.05

Strength in the financials on Friday ignited some heavy short covering in NYX and the stock rallied more than 6%. Shares cleared round-number resistance at $40.00 and hit our stop loss at $41.05. The overall trend remains bearish so we are watching the trendline of lower highs as a potential reversal point.

Picked on August 21 at $ 38.77 /stopped 41.05
Change since picked: + 2.37
Earnings Date 11/03/08 (unconfirmed)
Average Daily Volume = 4.8 million
 

Dropped Strangles

None
 

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

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