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Daily Newsletter, Thursday, 10/02/2008

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Table of Contents

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

Market Wrap

Slippery Slope of Hope Redux

Market Wrap

Two weeks ago this day the market experienced a huge rally that extended into Friday. The DOW gained a little more than 1000 points in those two days. There was great hope that the Fed or the Treasury or someone was going to bail out the big investment banks after the Treasury changed its mind and decided to save AIG from bankruptcy. Six trading days later that entire 1000 points was given back as hope gave way once again to fears of more bank failures.

We've now seen multiple 300, 400 and even 500-point days (not to mention Monday's 778-point decline) up and down as fear gives way to hope which is then dashed upon the rocks again and fear takes over. Today fear prevailed. The Senate passed the pork-laden version of Secretary Paulson's bailout plan last night but equity futures sold off right after that. Paulson's plan was 3 pages while the Senate version was some 400 pages and it was clearly evident that the Senate leadership bought just about every vote with promises of more money doled out for nonsensical stuff (such as wooden arrows for children, help for stock-car racetrack owners and Virgin Islands rum makers). The Senate clearly feels it's not their money, they have a great retirement plan and health care and are not terribly concerned about the people they represent (who have been voicing their extreme displeasure at this bill, by about 200:1 against from what I've read). I can only hope that people remember this when it comes time to vote.

It seems that each rally that's based on hope that the government will save us is being reversed faster and faster. This is that slippery slope of hope that I've often mentioned. The whipsaws are playing havoc on traders' accounts and investors are really starting to worry what's happening in the stock market. Like we heard in 2000-2002 I'm hearing more and more reports that people are simply not opening up their 401(k) statements. They just don't want to know how much their investments have deteriorated. They keep hearing "just hold on, the market always comes back up" and yet they can't tolerate knowing how much damage is happening to their accounts. Most investors have been brainwashed into believing we'll always be in a bull market (it's what most people today only know).

As some of you are aware, the past two weeks I've been involved as the Executor of my aunt's estate. Before she recently died (age 76), and knowing she had a pretty good nest egg, I had been showing her evidence of why I thought it prudent to scale back in her riskier investments. She was 50% in stocks and about 25% in higher-risk bonds. Yes, I too wonder if I caused her too much stress in talking about this and will now live with that the rest of my life. But I think she was really stressing about how much her retirement account had dwindled but did not know how to approach her financial advisor, whom I've now since met and understand why my aunt had difficulty telling her what she wanted to do. Her account had dropped over 30% just this year and the only thing the financial advisor kept saying was "don't worry, it will always come back". My aunt was 76 years old!

After my aunt's death I instructed the financial advisor to sell everything and immediately go to cash. The financial advisor started arguing with me! She then called me back the next day to tell me an Israeli bond valued at $39K would only fetch $35K today. She suggested holding onto it because it was getting 7.25%. I explained to her that it was getting a higher return because it was a riskier bond and that the value would likely drop further. She sounded incredulous that I wanted her to sell that too. My aunt's account is now thankfully all in cash (stocks were sold last Friday, just before Monday's crash) and ready for distribution to her beneficiaries (no I'm not one of them, but thank you for asking).

Why do I tell you all this? Because it's a problem multiplied a million times over. Financial advisors only know one thing--buy and hold. You'll need to help your family and friends get through this period of time and learn how to do what's right for their own accounts and not what's good for the financial advisor's account. I had exactly the same problem with the financial advisor for my parents in 2000. They trusted their financial advisor who they credited for the increase in their account in the 1990s (who didn't make money on the long side back then?). I felt bad arm twisting my poor mother but felt it was important enough to keep pressing. To say they're thankful now is an understatement and my reward was I'm now saddled with managing their account (wink). Retired people need to protect their capital as the number one priority and most financial advisors seem to forget that.

OK, I'll get off my high horse now and get back to what's happening in the market. The bailout bill is becoming recognized for what it is and worry is creeping in that it's not going to accomplish what the "experts" say it will. I've seen a plethora of stories on the internet (not mainstream media which is corporate owned and clearly has an agenda to see this bill passed) exposing the bill for what it is, and what it won't be able to do. Relieving the big banks of their toxic waste assets (which could cost us top dollar if the SEC waves the mark-to-market rule and allows mark-to-whatever-they-want) will only help the banks and their top executives make money (same as the S&L bank bailout in the 1980s).

Bailing out the banks won't help ease the credit crunch because the credit crunch is due to fear. Lenders are fearful to lend and borrowers are fearful to borrow. That's it, it's really that simple. The pendulum needs to swing from excessive exuberance (greed), massive credit creation and over-inflated asset prices during the past decade to the opposite side where very little credit is being created and the economy goes into a tailspin. Will it be painful? You bet. Will it be more painful after the bailout? Probably more so since it will saddle the taxpayer with much higher debt levels on top of declining asset prices.

The good news is that the American people are making their voices heard loud and clear on this issue. They're being ignored for now but if the anger is strong enough and lasts long enough then just maybe we can start clearing house and get new representatives to replace them. I'm not nave enough to believe that will fix everything since our political machine is broken with undue influence by big money. Money has truly corrupted our political system and my hope is that over the next many years we'll see a quiet social revolution start and the people will be heard.

Speaking of heard, we need to figure out what the herd is doing. We've got cattle running every which way and the cowboys are getting stampeded, in both directions. I want to show a couple of weekly charts with the daily charts so that we can keep things in perspective. The huge up and down swings sometimes gets us in so close that we don't see the forest for the trees. Or we study intraday charts and study the veins on the leaves and don't realize there's a big tree in front of us. By the way, did you notice the number of new 52-week lows vs. the highs in the table at the top? We could be getting a little overcooked to the downside.

Considering you're probably hearing and/or reading how oversold we're getting and how bearish the sentiment is getting, I'll offer one word of caution. These are normally good indicators to watch for an extreme as it often means we're about to reverse but this is not a normal time. The market is more vulnerable to a true market crash than it was in 1987. If you start looking for buying opportunities because you see bearish sentiment or VIX or Put/Call ratios or new 52-week lows or MACD hitting new extremes there's a good chance you'll be stepping in front of a freight train this time. Once we make a longer-term tradeable bottom (might not be until November or even December) we will very likely see a retest of that low. Remember, the second mouse gets the cheese.

S&P 500, SPX, Weekly chart

The decline from October is a slow-motion version of a waterfall decline. It is amazing how well and how long the market has been holding up. We of course know of the blatant government interference and manipulation of the market now so it comes as no surprise that the market has been holding up. But the EW (Elliott Wave) counts remains very bearish and suggests the selling will begin to accelerate lower. At this point I see the possibility for the 2002-2007 rally to get completely retraced by the first quarter of 2009, as hard as that is to believe. And I don't believe the 2002 low will hold later in 2009.

As you can see, SPX has dropped down to the bottom of a parallel down-channel from October and normally we should expect a bounce from this support level, and the way the shorter-term charts look we just might. But it looks to me like the support level could break sooner rather than later. When these parallel channels break (either out the top of an up-channel or below the bottom of a down-channel) you will usually see an acceleration of the move, down in this case. We'll see how this progresses over the next week or two.

S&P 500, SPX, Daily chart

I've drawn in another parallel down-channel for price action since the May high and you can see how the bottoms of the two channels could now potentially support SPX. Also, the wave count supports the idea that we could see support at the bottom of the channel soon, maybe even tomorrow if the decline continues a bit more (could get a little bounce/consolidation before another low). I've got some Fibs and trend lines pointing to 1070-1090 as potential support from which we could see a bounce into next week before heading lower again.

Key Levels for SPX:
- cautiously bullish above 1200 and bullish above 1350
- bearish below 1188

S&P 500, SPX, 120-min chart

A test of Monday's low is showing a bullish divergence, particularly evident on the 30 and 60-min charts. Therefore a stronger bounce tomorrow could develop some legs. I show a rally (pink) back up to Tuesday's high where there's a Fib projection and downtrend line at 1167. Higher Fib potential for the bounce would be up to 1201.

But ideally, from an EW perspective, we'll see a minor bounce/consolidation tomorrow morning followed by another leg down and then a multi-day rally into next week, perhaps back up to about 1180, before rolling over into a full-fledged selloff.

Dow Industrials, INDU, Weekly chart

The DOW's weekly chart shows the same parallel down-channel with the DOW currently sitting on the bottom of the channel. Whether from here or just a little lower I like the setup for a bounce into next week but on a weekly chart it would only be a blip before dropping below the channel and then finding it to be resistance on any further bounces. The possibility for a much larger rally (pink), back to 12K, remains as long as price stays inside the down-channel. It's a much lower probability but I'll let price tell when to remove it or acknowledge it (with a move back above 11400).

Dow Industrials, INDU, Daily chart

As I get in closer on the DOW's wave pattern I see a messy pattern. Whether it's because it's such manipulated index or because it's just a choppier index on a daily basis, I'm not sure. So the wave count on the DOW is not as reliable as SPX or especially NDX which I like the best at the moment. For now I'll follow the trend lines, channels, and more importantly other indices for a better idea what the market is doing. After the RUT's chart below I'll show the NYSE which also is showing a clearer pattern (for me anyway).

Key Levels for DOW:
- cautiously bullish above 11400 and bullish above 12000
- bearish below 10700

Nasdaq-100, NDX, Weekly chart

The weekly chart of NDX shows how the indices are showing a very similar pattern in that they're each at or nearing the bottom of parallel down-channel from October 2007. Also note that NDX is nearing the Fib projection at 1485.16 where the move down from October would have two equal legs. Normally this would be a strong setup for a long play for at least a multi-week rally. It might even be a good setup for that at this time as well. But dare I say this time is different? The wave structure is very clear here and does not support the idea that we'll get a strong bounce off potential support near 1485 (3-wave move down from June is not an ending pattern). However, we could see a sideways/up consolidation for a few weeks before it heads lower again so if you're in October puts, or even November puts, understand that a sideways market from here could chew up your time premium.

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Based on the short-term chart pattern I think the most we'll see is a relatively small and short-lived bounce into next week before NDX drops below the bottom of its channel. Just stay aware of the short-term bounce potential. The bottom of its channel is near 1470 tomorrow and is shown on the daily chart:

Nasdaq-100, NDX, Daily chart

If we get a minor new low tomorrow, possibly after a minor bounce in the morning first, it could set up a strong bounce into next week. The upside potential is probably 1580-1600 before rolling back over and heading for much lower lows into the end of October

Key Levels for NDX:
- cautiously bullish above 1700
- bearish below 1600

Nasdaq-100, NDX, 120-min chart

The fact that I can draw parallel down-channels that capture price action from the weekly chart down to intraday charts shows how well NDX is trading technically. The 120-min chart shows a channel based off the trend line along the lows since August 19th and the parallel attached to the high on September 19th (wave (2) high) and then another channel for price action since the September 19th high. I'm showing potential support in the 1450-1470 area where the bottom of the larger down-channel is located (as well as the bottom of the weekly down-channel) and the mid line of the shorter-term down-channel (which is often support for the 5th wave of a move). As depicted, a rally into next week, up to the 1580 area, would be a very good setup for a short play.

Russell-2000, RUT, Weekly chart

I'll continue to stick with just the weekly chart of the RUT because getting in closer makes this index look like a mess. The weekly close below the uptrend line from 2002 through the March 2008 low would be significant. The bulls can save this with a monster rally on Friday and get it back above 678 on a closing basis. Otherwise we'll have a weekly sell signal on the chart.

Key Levels for RUT:
- cautiously bullish above 768
- bearish below 678

As I've done several times now, I'll show the NYSE since it should be a better reflector of the stock market as opposed to more easily manipulated DOW and even SPX.

NYSE, NYA, Daily chart

No real surprise--NYSE is at the bottom of its parallel down-channel for price action since its May high. The wave count for the move down from September 19th supports the idea that we'll get a bounce into next week to correct that leg down and then a rollover into a much stronger leg down.

The weekly chart shows where it's weaker and is giving us a heads up for what's coming for the rest of the market:

NYSE, NYA, Weekly chart

This week it's looking like NYSE will close below the bottom of its parallel down-channel from October. A bounce next week up to the bottom of its channel would have NYSE finding resistance around 7500. I show a slightly stronger bounce than that on the daily chart but that could be a little optimistic. Continue to watch NYSE for clues as this too is trading well technically and is harder to manipulate.

Banking index, BIX, Daily chart

The banks are in favor and out of favor on a daily basis as a bailout is in or is out or we're not sure what it is. But the bounce in BIX has taken it up to its broken uptrend line from July so a kiss goodbye here would be clearly bearish.

As to the thoughts by many that Warren Buffet's investment in the banks, and in GE announced today, I liked Bill Fleckenstein's assessment of it:

"Also in the misconception department, folks have heralded Warren Buffett's investment in GE (similar to the one he made in Goldman Sachs) as something akin to a vote of confidence. In fact, it's actually quite the opposite. What he's doing is making the most senior equity investment that he can, and getting paid quite a large coupon to do so, with call options thrown in. Buying the common would be a vote of confidence. This is an investment you make when you're still worried about lots of damage yet to play out."

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

The home builders index remains in what looks like a bear flag but no signs of breaking down yet. In fact the 50-dma continues to support pullbacks. I don't have a high-confidence call yet on this one as I see an equal possibility for another leg up within the flag pattern or for a breakdown from here. It's been consolidating the past few weeks for what should be a big move out of this.

Transportation Index, TRAN, Daily chart

I'm not hearing many people talking about the breakdown in the Transports. This is a very bearish sign and yet it's been hush-hush, don't scare the sheeple. After breaking its uptrend line from January through the July low the Trannies have dropped hard and now the index has dropped below the bottom of a parallel down-channel. As depicted it could now bounce back up to the bottom of the channel, near 4300, but should continue lower again.

U.S. Dollar, DXY, Daily chart

For as much trouble as the U.S. is having with real estate, stock prices, investment bank failures, etc., the US dollar is still perceived as a safe haven when the rest of the world is heading for the honey bucket. It's looking like the dollar could hit a high near 82 before pulling back again and the importance here is that a new high (dark green) would signify a longer-term turning point for the dollar and much more rally to go after pulling back into the end of the year.

Oil Fund, USO, Daily chart

I had been thinking we'll see a larger a-b-c bounce into mid October, shown in pink, but I'm having second thoughts about that possibility. If people start selling they'll probably start selling everything that's of value (that's what causes deflation) and hoarding cash out of fear of the unknown (that's what causes a depression). If oil stays inside the down-channel, now it dropped back inside, we'll probably see it head lower right away rather than after a bigger bounce. I've been saying we'll see oil come down sharply because of lack of demand from a slowing global economy and I think we're witnessing it.

Oil Index, OIX, Daily chart

Oil stocks look like the rest of the stock market at this point--OIX has dropped down close to the bottom of its down-channel and looks like it's set up for a rally into next week. How high of a bounce is the question before it turns back over and heads lower again.

Gold Fund, GLD, Daily chart

Gold is showing strong potential for continued selling to new annual lows right from here. A break below 76 would confirm that likelihood. It takes a rally back above 91.34 to suggest new highs well above 100 are coming.

Economic reports, summary and Key Trading Levels

The economy is slowing down and everyone recognizes that. So reports about it are not affecting the market that much. Not to worry though, the government will bail out the manufacturers by buying their inventory so that the companies can make more. Don't laugh. With the idiots we have in office now I wouldn't put it past them. A nasty surprise tomorrow morning in the payrolls number could shock the market into selling again and a gap down opening that doesn't reverse relatively quickly would suggest we're in an even more bearish wave count than I'm showing.

Guessing how the market will react to news or bailouts is a 50-50 proposition. I'd rather not bet my money on a coin toss. So if I stick with the price patterns I like the probability for perhaps a small bounce tomorrow morning followed by another leg down to hit support where we'll see a multi-day rally unfold into early next week. Perhaps it will mean our non-representatives vote for the bailout bill and the market, for whatever reason, gets excited about the deal and rallies next week. Or the government will pull another stunt over the weekend to fry the shorts before Monday's open. Or Congress won't pass the bill and people will be cheered. Who knows. Stick with the charts and the support/resistance you identify. It's the only way to trade--where to enter and where to place your stops.

It could be a wild week coming up so be careful out there. And good luck--I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1200 and bullish above 1350
- bearish below 1188

Key Levels for DOW:
- cautiously bullish above 11400 and bullish above 12000
- bearish below 10700

Key Levels for NDX:
- cautiously bullish above 1700
- bearish below 1600

Key Levels for RUT:
- cautiously bullish above 768
- bearish below 678


Keene H. Little, CMT
Chartered Market Technician
 


Trader's Corner

Short Selling and Puts

OIN SUBSCRIBER QUESTION:
9/29/08: "What effect, do you think, has the limitation of short sales on your sentiment indicator that is based on equity only calls to puts? I have found it a very useful indicator in timing my trades."

RESPONSE:
I certainly agree and have found the ratio of daily equities-only call to put volume to be highly useful in timing my trades. Especially in that I tend to trade somewhat infrequently by waiting only for extreme market situations; i.e., overbought and oversold extremes, including extremes of bullishness and bearishness.

As an 'indicator', as a chart, allowing an analysis of the call/put volume over time compared to price activity, it's very useful as it taking out INDEX option volume from this ratio, which reflects significant market hedging.

On your question, prohibition of short sales in certain sectors of the market might increase put volume beyond normal speculative and hedge activity but it's not clear that it does. More on that, but I'll first say a bit about on the current short-selling limitation.

THE SHORT-SELLING BAN
Speculative shorting of a stock is of course making a bet that a stock's price will fall. An order to sell short requires that the transaction can only be done on an 'uptick', requiring that the sell may only be done if the price is above the prior reported sale. The shares are 'borrowed' in order to sell what you don't own. If the price falls, or not, a short seller has to eventually buy the actual shares to 'cover' the stock 'short' in their account. 'Naked' short selling is when sellers don't even borrow the shares before selling them. The SEC now order requires short sellers to actually borrow shares before selling them.

Analysts and government regulators blamed aggressive short selling for exacerbating the plunge in Fannie Mae and Freddie Mac's stock, as well as that of Lehman Brothers and put an emergency order into effect on July 15 after a major decline in Fannie and Freddie. The Securities and Exchange Commission (SEC) emergency order baned short sales in FINANCIAL stocks, saying the changes were needed to ensure the continued smooth operation of orderly markets. Their order was extended late last month.

The SEC kept in place an exception to the short-selling ban for bona fide market making in derivatives of any of the 799 targeted stocks. There are certain short-sale exceptions for NYSE market makers, where most if not all of the financial stocks in question are traded. These relate to keeping an 'orderly' market, such as in periods when there are large order imbalances; e.g., on the open, large unfilled buy orders in a stock and the market maker for that stock sells borrowed shares to those buyers and covers his short position later. (A market maker may sometimes buy puts when going short to hedge against a steep decline in the stock they are short.)

The SEC modified the aforementioned exception recently so that for new positions, market makers may not sell short if they 'know' a customer or counterparty is increasing an economic net short position in the shares of that stock. This would seem to put a lot of responsibility on the market maker to know this, but it's not out of line with the basic charge to basically know the counterparty to your trade.

The SEC ban on short selling includes banks, savings associations, broker-dealers, investment advisors, and insurance companies, whether domestic or foreign, and the owners of any of these entities. These companies can opt out by notifying the exchange to exclude their securities from their list.

SEC Chairman Christopher Cox said the order was helping prevent potential "distort and short" manipulation of stocks, which occurs when rumors and misinformation are used to drive down the price of a stock that has been shorted. In addition to continuing the earlier order against naked short selling, the SEC is going to explore other remedies for the broader marketplace to further protect investors from 'distort and short' artists according to SEC chairman Cox.
After the ban runs out, regulators are supposed to draw up formal rules to provide additional protections against abusive naked short selling in the broader market, while allowing 'legitimate' short selling.

NO SHORTING RULE AND INCREASED OPTION ACTIVITY
Back to the question about how the limitation on shorting some stocks might impact equities option trading. The financial stocks make up a significant portion of the S&P index.

Who shorts stocks to begin with and how big an impact it shorting anyway?

Short sales in recent years have represented as much as a quarter of NYSE average daily volume and around 30 percent of Nasdaq share volume. There is shorting related to market making and pertains mostly to providing liquidity and there is of course opportunistic risk taking by short-sellers.

Given the cost of short-selling, the bulk of short-sellers are predominantly institutional traders. For example, one study found that about 75 percent of all short-sales are executed by institutions, while individuals represent less than 2 percent, with the rest specialists and some other small categories. Since many institutions are prevented from shorting (e.g., many mutual funds), the ones that use short-selling as part of their strategy tend to be more sophisticated. You have to assume that short-sellers as a group are likely to be sophisticated traders.

ALTERNATIVES TO SHORTING
1.) Buying puts of course, but this can be costly in times of high volatility where put premiums escalate
2.) Synthetic short sales; i.e., long put and short call

Shorting calls is not really co-equal to the two alternatives to shorting, but does provide some downside participation to the extent of the premium taken in.

Since we're trying to figure if the prohibition on shorting will distort our call to put volume ratios, we can rule out a synthetic short position as the calls and puts will be in balance there. This leaves the potential that we see put volume increases that are solely related to institutions buying puts on stocks that they can't short.

My assumption is that call-to-put ratios are NOT being distorted much at all or not overly much. If they were, I would expect a sizable jump in put volume on big down days and this in fact was NOT seen on the major decline on Monday. I commented on this in a Monday Trader's Corner article and took this as an apparent LACK of 'capitulation', leading me to anticipate further declines such as today, as traders on Monday figured that a bottom wasn't far off.

Assuming short-sellers are heavily institutional, they are not going to be able to get off anything equivalent to large short positions by going into puts. Executing a 50,000-share short position in a big financial stock isn't that difficult in the right market conditions; e.g., on a day where there is at least some buying interest due to the 'uptick' rule. Getting off an order for 500 puts in the same stock, without a huge jump in the option price, presents a much higher degree of difficulty.

The chart of the S&P 100 (OEX) here has a downtrend channel highlighted that reflects my take on the parameters of the ups and downs of the current downtrend. My CPRATIO 'sentiment' indicator displayed below the OEX chart reflects overall market 'sentiment' and doesn't just pertain to the big cap S&P stocks.

The 'sentiment' indicator I've been discussing above has two key days highlighted this week as to the call to put volume ratios. The huge down day on Monday (see the sideways pointing blue arrow) saw CBOE equities call to put volume at 1.3; i.e., total call volume was 1.3 times that of put volume. If the absence of the ability to short financial stocks was driving up put volume it wasn't reflected here, as a 1.3 call/put reading doesn't reflect a highly bearish trading stance. 1.1 and under, such as the reading at the green up arrow at .87 does.

Today's decline saw a fall in my sentiment indicator to 1.12, which is getting near the kind of bearish extreme that gets us into bullish territory in this 'contrary opinion' indicator. It seems funny when you first start working with this concept, since a lot of bearishness reflected in put activity starts suggesting future RALLY potential. When everyone who wanted to sell in a given period has done so, a relatively small amount of speculative buying can make for a sizable, tradable, rally.

The amount of selling today and the high put volume relative to calls suggests that we may be getting near another bottom, even if just a temporary one. Another shot down would even better suggest a set up for this. Over to you House of Representatives!

GOOD TRADING SUCCESS!

Please send any technical and Index-related questions for possible use in my next Trader's Corner article to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.
 

New Plays

Most Recent Plays

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

Play Editor's Note: Tomorrow could be another extremely volatile day. First we have the non-farm payrolls report due out 8:30 a.m., one hour before the market opens. Now it's widely expected that the jobs report is going to come in negative. The question is how negative? If it's a blow-out to the downside it could spark another market sell-off. That's one wildcard for tomorrow. What I think will happen is stocks drift sideways or drift lower as investors wait on the next congressional vote on the bailout plan. Congress meets on Friday at 9:00 a.m. but I can't tell you when the vote will occur. They could debate the bill for hours but a vote is expected tomorrow. If the vote occurs during the trading session and it is passed I'm expecting a bounce. I would expect the bounce to probably last through Monday. The goal here is to use the bounce as another entry point for bearish positions. As I've said before the bill doesn't change the fact that our economy and the global economy is slowing. It's the slow down that fueled the market sell-off today. If you're really nimble you could try scalping some gains from the post-approval bounce. I'm not listing any new plays for Friday except the XLF strangle. I will provide a big list of stocks I'll be watching for possible bearish entry points as the post-approval bounce begins to stall. Remember, the best trade in this environment is probably just sitting on the sidelines and watching.

Here is my current list of candidates: LEAP, SIAL, MMM, BA, GOOG, AXP, MLM, CERN, ESI, CEPH (bull trap pattern), MHK, UNH, NIHD, LRCX, XLNX, LOGI, HOLX, SBUX, CAKE, HAS, LINTA, LVS, HD, TXN, CBS, DNEX, LNN, PPD, TTC, NILE, and AYI. This is not supposed to be an exhaustive list. Frankly, you could probably just throw a dart at the market today and find a bearish candidate.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

Financial Sector SPDR - XLF - cls: 19.64 chg: -1.03 stop: n/a

Company Description:
The Financial Select Sector SPDR is an exchange traded fund (ETF) that offers exposure to banks, diversified financials, insurance and real estate.

Why We Like It:
Congress is expected to vote on the latest version of the $700 billion bailout plan this Friday. Where the financial sector goes from there is a toss up. Does the sector see a "sell the news" event? Or do financial stocks rally? I'm expecting a short-term pop but if it lasts longer than a couple of days I'd be surprised. Whatever happens the XLF could see some big price moves. That's why I'm suggesting a strangle on the XLF. We're using Octobers because the options are cheaper than Novembers but that only gives us two weeks. Our biggest risk is that the XLF bounces around a lot but doesn't pick a new direction.

Suggested Options:
A strangle involves buying both an out-of-the-money call and an out-of-the-money put. We don't care what direction the stock goes as long as it moves one direction. If the stock moves far enough one side of our trade will rise in value and pay for the entire trade and make a profit.

We're suggesting the October options listed below. Try to open positions in the $19.50-20.50 zone. Our estimated cost is $1.54. We want to sell if either option hits $2.25. We only have two weeks left before October options expire.

BUY CALL OCT 22.00 XLF-JV open interest=273481 current ask $0.67
-and-
BUY PUT OCT 18.00 XLF-VR open interest=108415 current ask $0.87

Strikes are available at $1.00 strikes so it would be easy to pick a different pair of options to trade.

Picked on October 02 at $ 19.64
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 222 million
 

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Call Updates

Apple Inc. - AAPL - close: 100.10 chg: - 9.02 stop: 97.45

Thursday turned out to be another ugly day on Wall Street. Once again tech stocks were some of the worst performers and AAPL helped lead the charge lower. Shares gave up more than 8% as AAPL plunged to psychological support at the $100 level. We were suggesting readers buy calls in the $102.50-100.00 zone so the play is now open. We are facing a risk that AAPL spikes under $100 tomorrow before rebounding. I'm expecting a rebound tomorrow if congress approves the bailout bill but the jobs number tomorrow morning could be bad enough to spark another morning sell-off. Readers may want to wait for a new bounce over $102.50 or $105.00 before initiating new call positions. We have two targets. Our first target is $112.00. Our second target is $118.50.

Picked on October 02 at $102.50
Change since picked: - 2.40
Earnings Date 10/22/08 (unconfirmed)
Average Daily Volume = 28.5 million

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JPMorgan Chase - JPM - close: 49.85 change: +0.60 stop: 44.45*new*

JPM continues to out perform the market. Traders bought the dip near $46.75 today and JPM bounced back toward resistance near $50.00. We are going to raise our stop loss significantly to $44.45 - as wide as that is it may still be too tight given the volatility in the financials. Our first target is $53.00 and suggest readers exit 50% to 75% of their position at $53. Our secondary target is $57.50.

Picked on September 30 at $ 46.70
Change since picked: + 3.53
Earnings Date 10/15/08 (unconfirmed)
Average Daily Volume = 50.6 million

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Wells Fargo - WFC - close: 35.16 change: -1.54 stop: 32.95

WFC ran into some selling pressure today despite some positive analyst comments for the stock. This dip back to $35.00 can be used as a new bullish entry point although I want to point out that many of the technical indicators are turning negative. This is really a bet that WFC is one of the biggest banks that will survive this credit crisis and when this bailout package gets enacted the stock could see a huge move higher on the news. Our first target is the $42.50 mark and suggest readers sell 50% to 75% of their position there. Our secondary target is $47.50.

Picked on September 30 at $ 37.53
Change since picked: - 2.37
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume = 54.5 million
 

Put Updates

Sears Holding - SHLD - cls: 87.61 chg: -1.43 stop: 95.15

SHLD continued to slip on Thursday but shares found some support at its 100-dma. We would still consider new put positions here or on a failed rally under $90.00 or the 200-dma near $92.90. The Point & Figure chart is bearish with a $77 target. The fourth quarter is shaping up to be a very bad quarter especially as consumer spending begins to slow. SHLD has showed some support at $85.00 in the past so don't be surprised to see an oversold bounce. We have two targets. Our first target is $81.00. Our second target is $76.00.

Picked on October 01 at $ 89.04
Change since picked: - 1.43
Earnings Date 11/28/08 (unconfirmed)
Average Daily Volume = 3.1 million

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Volatility Index - VIX - cls: 45.26 chg: + 5.45 stop: n/a

It is only natural to see the VIX spike the day ahead of what could be the second congressional vote on the bailout plan. Investors could also be nervous about the jobs report tomorrow. This rally over 45.00 looks like another bearish entry point to buy puts on the VIX. We would use the November strikes. Our September 16th position (suggested entry at 30.30) has a 25.50 target. The September 29th position (suggested entry at 46.72) has two targets at 36.00 and 31.00.

Picked on September 16 at = 30.30 first position
Change since picked: +14.96
Picked again Sept. 29 at = 46.72 second position
Changed since picked: -1.46
Earnings Date 00/00/00
Average Daily Volume = --- million

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Whirlpool - WHR - close: 76.38 change: -6.06 stop: 85.25

WHR almost hit our first target today. The low today was $75.33. The under current behind today's market weakness was concern over the economic slow down. This is exactly why we added WHR as a put play and the stock reacted sharply with a 7.3% decline. It's possible the stock could see an oversold bounce near $75.00 and its 100-dma but readers can use failed rallies near $80 or the 10-dma as new entry points for puts. We're setting two targets at $75.25 and another one at $70.25. More aggressive traders may want to aim lower. The P&F chart points to a $64 target.

Picked on October 01 at $ 83.00 *triggered 10/01
Change since picked: - 6.62
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume = 1.6 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

WYNN Resorts - WYNN - close: 73.84 chg: -6.35 stop: 82.65

Target achieved. It's hard to trade when stocks gap open several points. WYNN gapped open lower at $76.59 and then plunged to $70.25 intraday. Our suggested entry point was $77.49. We were expecting the move lower but not all in one day. Our target was the $70.50 mark. Keep an eye on WYNN for a "fill the gap" and failed rally type of move in the $79-80 zone, which may be a new entry point for puts again.

Picked on October 02 at $ 76.59 *triggered/gap down entry
Change since picked: - 2.75 *target hit $70.50
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume = 2.0 million
 

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.

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