Option Investor

Daily Newsletter, Thursday, 10/30/2008

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Table of Contents

  1. Market Wrap
  2. Trader's Corner
  3. In Play Updates and Reviews

Market Wrap

Fed Funds to the Rescue

Market Stats
[Image 1]

The title of today's newsletter is a little play on words. This week the Federal Reserve dropped the Fed funds rate by .5% to 1.0% and wants to see the market hold up while mutual funds have been making an effort to paint the tape for month/quarter/fiscal year-end. The combination has been a one-two punch to the bears this week.

As for what the Fed is doing to our financial system, I came across a cute quote, "Zero score and seven years ago, Fed Father Greenspan brought forth, upon this continent, a new era of easy credit, conceived in lunacy, and dedicated to the proposition that all paper monies were ultimately combustible." And now the Fed funds rate is back to 1%.

That quote is from Joel Bowman at agorafinancial.com. Greenspan had dropped the Fed funds rate to 1% and injected lots of faux money into the system back in the early 2000s and since it worked so well the first time, leading to the greatest credit bubble in all of history, Bernanke seems to feel a 2nd round of cheap credit and massive liquidity injections will do the trick again. I'm reminded of the analogy of a drug user coming off a high and not wanting to come down so he injects himself with an even larger drug dose than what got him high the first time. We all know how well that works out in the end. Are we doing the same thing to ourselves?

Back in June 2003, just after Greenspan made the final cut in the Fed funds rate to 1% the DOW closed near 8990. Yesterday after getting the rate back down to 1% the DOW closed near 8990. Does the market have a memory? It was a nice little round trip there--up above 14K and back to 9K, 5 years later. The first time the DOW hit 9K was April 1998. Ten years and we're back to the starting line but at 1%, massive debt and money creation out the wazoo. The Fed is rapidly running out of ammunition but like the good American he is, and remembering the story of the Alamo, he's going to go down fighting. Or is it Custer's last stand? No matter, both work.

It's been a strange week. After dribbling along at the October lows for 1-1/2 days the market suddenly bolted to the upside Tuesday afternoon. Did the idea of a drug injection wake our poor overdosed market? And more importantly will the little spike up hold this time? The price pattern leaves much to be desired in trying to figure it out but the last time the market was tagging its 20-dma (September 19th) it was followed by a wicked selloff. Yesterday and today it's finding resistance at the 20-dma.

The crazy whippy price action looks so much like a big 4th wave correction within the move down from May that I think we could be stuck in this for another few weeks. It's an idea that I've been considering for the market (basically one large sideways consolidation from the October 10th low through November to work off the severely oversold conditions) and as this whacky price pattern continues I'm thinking more and more we're going to be stuck with this a while longer.

The 907-point rally in the DOW on Tuesday, low to high, was one of the strongest on record. Just another one in a string of huge moves in the last month. Here is a little tidbit from Todd Harrison at Minyanville.com that you may want to remember as it relates to bear market rallies: there have been 36 times over the last 80 years (37 now after Tuesday's rally) when SPX rallied more than 6% in a single session. Thirty-two (32) of the 36 occurred between 1929 and 1933. Two of those >6% sessions were October 13th and 28th, also in a bear market. The other times were also during bear markets. The point is, strong rallies like that happen in bear markets, not bull markets. There's nothing like a short-covering rally for strength, but they don't stick.

When looking at the most recent strong rallies this month--October 13th, October 20th and October 28th--we see a bearish development:

NYSE vs. Advance-Decline Line, Daily chart:

[Image 2]

As noted on the chart, each of the strong rallies is getting weaker and weaker when looking at the internal market breadth for each day, such as the advance-decline line. Even Tuesday's very strong point move could not equal the strong move up from the October 10th low or even the October 20th rally which was not as many points. Stronger point move on weaker breadth is a warning sign. It's a warning that buyers are becoming weaker even if the major indexes are showing large point gains. The market can certainly press higher but we have a warning here that it's very likely the bear-market bounce variety rather than the start of something more bullish.

With the Fed dropping their rate to 1% and more credit being made available to anyone who wants it (only requirement is that they can fog a mirror) we're all watching to see if it starts to have a positive impact on credit spreads. As reported last week, the TED spread (difference between the 3-month LIBOR, or interbank rate, and the 3-month Treasury) dropped initially from a high of 4.64 on October 10th to a low of 2.53 on October 22nd, a week ago last Wednesday. Since then it's been creeping back up and today finished at 2.82. It's not continuing lower in spite of what all the central banks of the world are doing. That's not a particularly good sign.

TED Spread, data and chart courtesy Bloomberg.com

[Image 3]

I've drawn a line across the high from back in December 2007 and you can see the drop in the TED spread hasn't even come down that far. In fact it's only retraced about 50% of the climb off the lows in June. Is this a correction or the start of larger decrease in the spread?

Worse, the commercial credit market continues to remain frozen. The updated chart of the spread between the Moody's Corp. Bond Indices BAA and the 30-year Treasury yield has shown virtually no improvement:

Moody's Corp. Bond Indices BAA vs. 30-year Treasury yield, courtesy Elliott Wave International

[Image 4]

After big rate reductions (1% this month) and massive liquidity injections we've got no change in the corporate spreads. Nada, zero, zilch. This has to be worrying the Fed. There's so much money in the banking system right now that the big banks feel they can still hand out billions in bonuses (they've set it aside for year-end) and use the rest to buy up other banks. But they're not lending it out. Welcome to a credit freeze that the Fed and Treasury are powerless to stop. They just haven't recognized that fact yet. But we taxpayers are now going to pay those huge bonuses for failed leadership in the banking industry. On top of that, word is out that Hanky Panky Paulson paid double for stock and warrants for bank stocks than what Warren Buffett paid. He has handed out $125B so far and essentially gifted the banks, including to his Goldman Sachs, from the taxpayers, roughly $62B so far. And that's being handed out as bonuses. Grrr...

With all the talk of so much cash/credit for bailing out the banks, mortgage holders and just about anyone else who feels they need debt relief, you knew it would only be a matter of time before the states came calling. I don't know if he's the first but NY governor David Patterson has apparently hit up Uncle Sam for a loan. He feels the federal government must provide states with "immediate fiscal relief for deficit". It seems everyone has their hand out begging for money. One can only imagine the unimaginably huge debt we're saddling future generations with. Unless of course the government simply devalues the dollar at some point after monetizing the debt.

We've got one more day to get through the week, end of month, end of quarter and for some, end of fiscal year. We had an FOMC announcement where the Fed used one more of their precious bullets and I'm sure "they" did not want to see a market selloff on that (what a waste of a bullet in that case). Add in funds doing their paint-the-tape thing to make their books look somewhat presentable to their gullible clients and we've had the perfect excuse for lots of market buying. They've managed to hold prices up but as shown above, market breadth is giving away what's really happening underneath the hood. Lots of clanging and squeaking going on in there. So let's see if the charts are telling us much these days.

S&P 500, SPX, Weekly chart
[Image 5]

The consolidation we're seeing since the October 10th low, albeit with large price swings, continues to fit as a 4th wave correction. While the price swings feel huge at the moment, you can see that relatively speaking they're rather small. The only question in my mind as I look at this chart is when the next leg down starts, not if. SPX could find support at the October 2002 low at 768 or, as depicted, drop below it. There's an important Gann level at 661 if 768 gives way (assuming of course the market drops further).

It may seem unreasonable for SPX to drop all the way down to its 1994 low by early next year and I'll admit that seems like an awfully long way down (cuts the market in half again from where it is). But it seemed unreasonable to me at the time when I projected back in January that we'd see a drop down to 768 by the end of the year. The rest of the EW (Elliott Wave) count needs to finish and the projection that I'm showing is based on typical wave relationships in both time and price).

As I mentioned, how and when price makes a new low is the bigger question in my mind. I've mentioned more than once since the October 10th low that we'll be entering a 4th wave correction. If ever there was a time you don't want to trade the market it's in a 4th wave. They are the whippiest and choppiest time you'll see. The price action since October 10th is just convincing me more every day that we're in a 4th. EW corrections can be any one of 11 different types and it's a challenge figuring them out real time. That's why it's usually best to wait until the move out of it gets started (down in this case) before entering new trades.

It's a bit messy looking but the daily chart shows what I think are the higher probability wave counts in and out of the 4th wave correction:

S&P 500, SPX, Daily chart
[Image 6]

It's possible that we'll see a continuation of this week's rally into next week and top out around 1050 (light dashed line). That would create a typical A-B-C bounce off the October 10th low. I consider that possibility to be less probable than the others but would become a top count if SPX rallies much above 1000.

The other possibility, of the three scenarios I'm presenting, is for the market to sell off hard next week (dark red). As long as SPX stays below the high on October 20th (985.44) the sharp selloff idea remains a valid possibility. But I'm beginning to think that is a less likely possibility.

The pink count shows a large sideways triangle forming, a very common pattern for a 4th wave correction. These are probably the whippiest of all the corrections, full of reversals and reversals of reversals. It fits. It also says we're going to be stuck in this pattern through November. I of course have no idea if this will play out but it's my latest thinking and I'll be updating it every day (on the Market Monitor) and every week here until we get resolution. These are great to trade once it's finished. It's an a-b-c-d-e wave count inside the triangle and once you figure you're into wave-e (where pink wave 4 label is at the end of November) you enter your trade (short in this case) and ride the 5th wave down. In the meantime those are treacherous waters inside that pattern. Enter at your own risk.

Key Levels for SPX:
- cautiously bullish above 986 and more bullish above 1060
- bearish below 824

Dow Industrials, INDU, Weekly chart
[Image 7]

The DOW's weekly chart looks just like SPX. It should be in a 4th wave correction in the 5-wave move down from May and once it completes we should see a 5th wave down into either November or as late as December (depending on long the 4th wave takes). That would complete the one larger degree 3rd wave for the move down from October. That means the new low would be followed by another, and larger, 4th wave correction into next year before a final low in the spring of 2009. As noted on the SPX chart, but not mentioned, the low next year should set up a cyclical bull market that lasts at least a year, possibly longer.

Key Levels for DOW:
- cautiously bullish above 9800 and bullish above 10500
- bearish below 7880

Nasdaq-100, NDX, Weekly chart
[Image 8]

Different index, same picture--a 4th wave correction since October 10th should be followed by another leg down, which could find support at the 1998 and 2003 lows near 940. I'm showing a Fibonacci 55 weeks from its October 2007 high. That marks a potential turn week. Whether it will be a high (or the end of the 4th wave correction) or a low can only be known as we approach the date. This week was a similar 55-week turn window for SPX and DOW but at this point it's hard to say it will be a turn window.

One thing I will say about the potential turn window for SPX and DOW--sometimes these turn windows turn into acceleration windows. So if you go back to the SPX daily chart where I showed the possibility for a fast decline from the current bounce (dark red), that would fit as an acceleration of the move out of its turn window (which is this week). I would not want to be long the market right now, even if we instead just go sideways for another few weeks.

Nasdaq-100, NDX, Daily chart
[Image 9]

The NDX pattern since the October 10th low does not look quite the same as the one for SPX and DOW. So instead of a sideways move over the next few weeks this raises the possibility for either a little more rally up to the top of its down-channel (near 1450) before heading lower again, or dropping hard from here. As long as NDX stays below 1368 the more immediately bearish scenario (dark red) remains a possibility. It would be particularly bearish because of the short term 1-2, 1-2 wave count to the downside since the October 14th high and it would point to another strong decline that likely breaks the 940 level.

The RUT looks similar to NDX in that it made lower lows in October and continues to look potentially more bearish. If we suddenly start to sell off hard I suspect the RUT will be leading the way.

Key Levels for NDX:
- cautiously bullish above 1500
- bearish below 1368

Key Levels for RUT:
- cautiously bullish above 553
- bearish below 442

Broker index, XBD, Daily chart
[Image 10]

The broker index had me thinking it might not be far from a bottom. It (and the banks) should bottom before the broader index and once it shows signs of that then we'll have a better heads up for watching a bottom in the broader averages (could be months apart). I like the down-channel for XBD and think we'll see it run down the bottom of it and potentially make a tradable bottom by the end of the year (perhaps at the same time the broader market is making its wave-3 bottom).

U.S. Home Construction Index, DJUSHB, Weekly chart
[Image 11]

The home builders are bouncing off their 2001 low and the bottom of small parallel down-channel from the May high. Ideally we'll see an up-down sequence to finish its decline next year with the broader averages. It shouldn't be much lower now before the selling is done in this sector.

Commodity Related index, CRX, Monthly chart
[Image 12]

The commodity index has made a very steep drop from its June high and I think, like the stock market, it's forming a 4th wave correction off the 78.6% retracement of its rally from its 2002 low (201.78). There's a good chance it will do a complete retracement of that rally by early next year if not sooner.

Oil Fund, USO, Daily chart
[Image 13]

Oil has been beating the commodity index to the downside. It too should be ready for a bounce/consolidation before proceeding lower. It might find support in the $45 area before getting a much bigger bounce back up ($70 maybe $80).

Gold Fund, GLD, Weekly chart
[Image 14]

After finding support at the bottom of a parallel down-channel last week gold is getting a bounce. We could see it make it back up to the $80 area before heading back down again. The pattern supports an eventual drop to the $55-$60 area by early next year (it will probably bottom with the stock market).

Economic reports, summary and Key Trading Levels
[Image 15]

The U.S. economy shrunk by a -0.3% annualized rate in the third quarter, primarily because consumer spending slowed dramatically. As we know, consumer spending is about 70% of our GDP (pretty sad to think we have to spend our way to wealth now). Domestic sales fell -1.8%, the largest decline in 17 years and consumer spending fell -3.1%, the first decline in 17 years and the biggest drop in 28 years. Business investments fell -1.0% while investments in homes fell for the 11th straight quarter.

A picture is worth a 1000 words and the one for consumer spending isn't pretty: [Image 16]

You can see consumer spending actually peaked back in 2000 and the whole stock market rally from 2002-2007 was really built on hope that everything was better. The only thing that was better, if you can call it that, was the huge run up in credit which inflated all assets. A look underneath the hood was telling us the economy itself was not doing that well, led by a weakening consumer. It's all coming home to roost now and we need to flush the system of the waste (otherwise known as financially engineered by-products).

Friday morning's economic reports have the potential to move the market. If there are any negative surprises, all the stock that mutual funds have been picking up for their end of month/quarter/year reports could get dumped in a hurry if the state of the economy continues to spook them.

Summarizing tonight's charts, we're in a correction of the strong decline from September but I do not see any evidence suggesting we've put in a bottom. The correction that we've been in since October 10th could end at any time or it could extend sideways for another few weeks. I would not want to be long the market considering the fact that the wave pattern clearly calls for more downside work to be done and this is being confirmed by lack of market breadth even as we see large point gains.

The kind of correction we're in, a 4th wave, kills traders. Any money they made during the previous strong move (3rd wave down in this case) is often given back to the market with whippy price moves and stops getting hit left and right. The large price swings require wide stops and they're getting hit anyway. Death by a 1000 paper cuts. I made the recommendation three weeks ago to stay out of the market until this correction finishes and I can't comfortably say it's finished yet. As shown on the SPX daily chart, we could see this sideways chop continue through November. Know when to trade and more importantly know when not to trade. I learned long ago to not trade 4th waves. I'll nibble at the edges and I've added to my short position at the highs of the swings but even those have been relatively small additions. I prefer to bet heavier once I have a good idea that the correction is finishing or has finished. No evidence of that yet.

Because of the risk that remains in this market, with downside surprises right around the corner and an EW pattern that shouts for more downside, long is simply not the place to be yet. After the next low we'll have a good trading opportunity to pay the long side into early next year. Flat or short--those are my only two suggestions. But be careful if you're short by owning some long November puts. If we go sideways into Thanksgiving you can kiss those puts goodbye. That would even do some damage to December puts, especially if they're OTM. Decide on a drop-dead date or price to pull the plug if we haven't dropped yet.

In the "what could surprise this market" category, I recently read that a very large bank in Japan, Norinchukin, is heavily exposed to the derivative mess and it could take them down. Who cares you say? Well, it turns out Goldman Sachs has been reliant on funding from Norinchukin. Goldman has been rumored recently to be courting Citigroup about a merger. Is Goldman too big to fail? Could they break the Treasury bank? Just asking.

It's a rough market out there. Trade carefully and good luck. I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 986 and more bullish above 1060
- bearish below 824

Key Levels for DOW:
- cautiously bullish above 9800 and bullish above 10500
- bearish below 7880

Key Levels for NDX:
- cautiously bullish above 1500
- bearish below 1368

Key Levels for RUT:
- cautiously bullish above 553
- bearish below 442

Keene H. Little, CMT
Chartered Market Technician

Trader's Corner

Technical Signs of a Bottom

"...this week's rally is looking pretty strong. Do you think we've seen a bottom?"

There are a number of technical aspects to look for to suggest that a final bottom for a move has been reached. Some of these things are the same as for an interim bottom, but the developments are not necessarily the same.

I'll try to distinguish or separate what suggests a 'final' bottom, versus an interim bottom. Both types of bottoms are of course tradable, especially with all the creative and possible strategies with options. However, an interim bottom will make buying near the lows more important and make it more crucial to exit at a pre-set objective or to exit as soon as an upside rebound is giving signs of fading momentum.

1.) Successful retest of a prior major low
2.) Major oversold condition seen on both daily and weekly charts
3.) Extreme bearishness that does not shift quickly
4.) Greater than a 62-66% retracement of last major downswing
5.) Rallies exceed prior rally highs

This most recent bottom had 2, of 5, of my technical conditions met so far. Point 4, or the extent of the percent retracements of the last major downswings for the major indexes, isn't determined yet. What develops re point 5 isn't known: SPX would have to close above 1300 to exceed its prior major rally high.

Only the S&P 100 (OEX) retested its major prior low from 2002-2003, at 400; I should note that there were two other weekly lows in OEX in '02-'03 that hit 386. The S&P 500 (SPX) for example would have had to reach the 800-775 area; the Nasdaq Composite (COMP) would have had to fall all the way to 1257.

1.) Major oversold condition, at least on daily charts
2.) Extreme bearishness, but such sentiment can shift quickly
3.) Retracements of last downswing average 38 to 50% only
4.) Bullish price/RSI divergences
5.) Rallies struggle to hold about the 21-day moving averages

Of the common signs of a rebound, or interim bottom, 3 of 5 of the conditions have been seen. Bearish sentiment for example reversed too quickly on my indicator to suggest that we're seeing a major reversal to what may be a prolonged bear market. We don't yet know of course if any retracement of the last major downswing will exceed 38, or 50, percent of the prior move. So far, rallies have seemed to have hit resistance implied by the 21-day moving averages.

Three charts will illustrate certain of these points.

In the S&P 500 (SPX) daily chart, you'll see that the 13-day RSI hit an oversold extreme at the first low seen just under 850 (point 1). Bearishness was extreme as will be seen on my next chart (point 2) but shifted to fairly bullish VERY quickly. We don't know the extent of this retracement yet (point 3), but SPX has to rally to 1017 to reach even a 'minimal' 38% retracement.

There was a bullish price/RSI divergence as the second low in the 850 area was on higher relative strength or the RSI (point 4). You'll note that so far on this rally both yesterday and today's highs have stopped right at resistance implied by the 21-day moving average. Stay tuned on how much difficulty SPX has in both exceeding the average and then holding above it.

[Image 1]

In the S&P 100 (OEX) chart below, there was a major retest to date anyway, of prior major support in the 400 area; although in 2002-2003, this area was hit several times and there were two dips below this level but only briefly in each instance. Stay tuned on this, but its the type of chart development that suggests that a major bottom could be in place.

A key technical point as to how transient this recent bottom might be relates to how rapidly my sentiment ('CPRATIO') indictor shifted on yesterday's rally and actually touched the first level of 'overbought-high bullishness' reading at 1.7. This relates to point 2 of signs of an interim bottom only, versus a major bear market bottom where sentiment shifts tend to be slow.

The cluster (3 days) of 'oversold-extreme bearishness' readings was VERY significant in terms of 'signaling' a tradable bottom ahead, but if recent lows were a major bottom, I wouldn't expect to see such a jump of equities call activity so quickly.

[Image 2]

The chart of the Nasdaq Composite (COMP) doesn't add anything fundamentally different to the points made already on my first two S&P charts, but does make for a comparison to Nasdaq. COMP is also approaching a key test of near resistance, both implied by its 21-day moving average AND by the cluster of its prior highs in the 1775 area.

After these two key technical 'tests' will be to see if COMP can climb back to, or beyond, 1866, representing a fibonacci 38% 'minimal' retracement of its last major downswing. A weak bear-market only rally will tend not to go much beyond a minimal such retracement.

[Image 3]


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@optioninvestor.com with 'Leigh Stevens' in the Subject line.

In Play Updates and Reviews

Bullish Entry Point!

Play Editor's Note: There was no follow through on the Wednesday afternoon sell-off. Stocks were acting pretty bullish today. It could just be end-of-year window dressing from some large mutual funds but we're not going to argue with the relative strength. Instead of adding new plays we adjusted our entry points on several bullish candidates in tonight's newsletter.

______________ CALL Play Updates ______________

Burlington Northern - BNI - cls: 86.59 chg: +1.54 stop: 82.45*new*

Lack of any real sell-off following yesterday's late day reversal could empower the bulls tomorrow. We're going to suggest some short-term bullish call positions on BNI right here or on a dip in the $85-84 zone. We'll use a stop loss at $82.45. There is short-term resistance at $90.00 but we're aiming for $94.00. The 100-dma and 200-dma look like big resistance near $95.00. More conservative traders may want to use a slightly tighter stop loss.


Picked on October 30 at $ 86.59
Change since picked: + 0.00
Earnings Date 10/23/08 (confirmed)
Average Daily Volume = 5.1 million


CSX Corp. - CSX - close: 45.05 chg: +1.71 stop: 41.75 *new*

The relative strength displayed in CSX today looks convincing. I would suggest new positions right here. We're upping our stop loss to $41.75. More conservative traders, especially if you're jumping in right now, may want to use a stop loss closer to $44.00 or $43.50. Our target remains $49.90.


Picked on October 23 at $ 40.41 /gap down entry
Change since picked: + 4.64 /originally listed at $43.74
Earnings Date 10/14/08 (confirmed)
Average Daily Volume = 6.5 million


Freeport McMoran - FCX - close: 30.02 change: +1.78 stop: 27.45*new*

We're going to alter our strategy on FCX too. Instead of waiting for a dip toward $21.00 the market is telling us that the stock wants to move higher from here. We're going to suggest bullish call positions now with a stop loss under today's low (which was 27.52). We're listing two new targets. Our first target is $34.50. Our second target is just under the top of the October 15th gap down at $38.00.


Picked on October 30 at $ 30.02
Change since picked: + 0.00
Earnings Date 10/21/08 (confirmed)
Average Daily Volume = 20 million


Hansen Natural - HANS - close: 25.45 change: +1.54 stop: 23.45*new*

HANS turned in a very nice day with a 6.4% gain. The MACD on the daily chart appears to have delivered a new buy signal. Please note that we are changing our exit strategy. Our new first target is here, right now! HANS is up more than 18% from our entry point. We want to take some money off the table immediately. We're adjusting our secondary, more aggressive target from $30.00 to $28.00. We're changing the stop loss to $23.45. If you are looking for a new entry point then wait for a dip or a bounce in the $24.50-24.00 zone.


Picked on October 23 at $ 21.47 /gap down entry/1st Exit 25.45
Change since picked: + 3.98 /originally listed at 22.88
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 10.6 million


MasterCard - MA - close: 140.06 chg: + 4.33 stop: 129.90*new*

Shares of MA also showed some intraday strength. I'd be tempted to buy calls again if the newsletter was not already long. If you do decide to buy calls here I'd use a relatively tight stop even on a volatile stock like MA. We're upping our stop loss to $129.90 (new positions probably need a tighter stop). Currently we have two targets. Our first target is $158.00. Our second target is $169.50.

Picked on October 23 at $131.00 *triggered 10/23
Change since picked: + 9.06
Earnings Date 11/03/08 (confirmed)
Average Daily Volume = 3.8 million


Energy SPDR - XLE - close: 50.35 chg: +2.22 stop: 44.75 *new*

Yesterday I didn't want to give up on buying a dip near $40. Looks like the market and XLE are not going to cooperate so we have to trade what the market provides and not what we want to happen. I'm going to list a bullish entry point right here at $50.35 but if you're patient you might get a better entry point somewhere in the $47.50-46.50 zone. We're adjusting the stop loss to $44.75. Our new target is $56.50.


Picked on October 30 at $ 50.35
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 47.7 million


______________ PUT Play Updates ______________

Volatility Index - VIX - cls: 62.90 chg: - 7.06 stop: n/a

The VIX appears to be in full retreat now.

We're not suggesting readers buy puts at this time. With the VIX this high if you want to bet on its going lower the better bet would be to sell calls instead.

If the VIX is under your call's strike price at expiration (11/19/08) they'll expire at zero ($0.00) and you keep all the premium you sold it for.

Note: The VIX options, which are European style options, have a unique expiration date. November VIX options expire on November 19th, 2008. The last day of trading for these options is the Tuesday before expiration. For more information check this link:

Our September 16th put position (suggested entry at 30.30) has a 25.50 target. In all honesty this position may be dead. We still have plenty of time with these next two. The September 29th position (suggested entry at 46.72) has two targets at 36.00 and 31.00. Our October 8th position (entry 57.53) has two targets at 40.00 and 35.00.

Picked on September 16 at = 30.30 first position
Change since picked: +32.60
Picked again Sept. 29 at = 46.72 second position
Changed since picked: +16.18
Picked again Octo. 08 at = 57.53 third position
Changed since picked: + 5.37
Earnings Date 00/00/00
Average Daily Volume = --- million


__________ Strangle & Spread Play Updates __________

CBOE Volatility Index - VIX - cls: 62.90 chg: - 7.06 stop: n/a

The recent action in the VIX is suggesting the top is finally in place. The index acted weak with a failed rally and a close at its lows. Readers may want to consider new positions now but I'd probably sell the November 40s or 45s and buy the 65s or 70s.

We don't see any changes from our prior comments on the VIX spread plays listed below.


Please see the CBOE website or our Sunday, October 12th play description for details on margin requirements for selling VIX options. Link:

Note: VIX options are European style options that settle for cash at expiration. Furthermore VIX options have unique expiration dates. November options expire on Wednesday, November 19, 2008 and will stop trading on Tuesday, November 18th.

VIX spread #1 has been completed.

VIX spread #2 with November options (date Oct. 12th):

We wanted to SELL the November 30 calls (opening price 10/13/08 was $ 8.60) and BUY the November 50 (opening price was $1.61) as a hedge against the VIX remaining elevated.

In a different format the play is:

Monday 10/13/08 open 8.60, high 9.80, closed 8.40
Update 10/15/08 open 10.00, high 13.00, closed 13.00
Update 10/16/08 open 13.70, high 16.20, closed 13.25
Update 10/17/08 open 15.55, high 17.70, closed 17.50bid
Update 10/20/08 open 16.30, high 17.20, closed 15.00bid
Update 10/21/08 open -----, high 15.50, closed 14.40bid
Update 10/22/08 open 16.40, high 19.20, closed 18.10bid
Update 10/23/08 open 17.50, high 21.40, closed 20.30bid
Update 10/24/08 open 25.00, high 26.50, closed 25.80bid
Update 10/27/08 open 26.32, high 26.45, closed 29.30bid
Update 10/28/08 open 29.00, high 29.00, closed 23.70bid
Update 10/29/08 open 25.60, high 25.60, closed 26.20bid
Update 10/30/08 open 24.06, high 27.32, closed 25.20bid

Monday 10/13/08 open 1.61, high 2.10, closed 1.50
Update 10/15/08 open 2.00, high 3.60, closed 3.60
Update 10/16/08 open 3.70, high 5.50, closed 3.65
Update 10/17/08 open 4.50, high 5.30, closed 5.50ask
Update 10/20/08 open 3.90, high 5.30, closed 4.40ask
Update 10/21/08 open ----, high 4.70, closed 3.80ask
Update 10/22/08 open 4.30, high 6.60, closed 6.40ask
Update 10/23/08 open 5.70, high 7.70, closed 7.30ask
Update 10/24/08 open 10.10, high 11.00, closed 11.00ask
Update 10/27/08 open 11.43, high 13.80, closed 14.20ask
Update 10/28/08 open 11.00, high 13.30, closed 9.40ask
Update 10/29/08 open 9.23, high 10.70, closed 11.00ask
Update 10/30/08 open 8.69, high 10.90, closed 10.00ask

Picked on October 12 at $ 69.95
Change since picked: - 7.05


VIX spread #3 with November options (published 10/22/08):

We wanted to SELL the November 35 calls (10/23/08 opening price was $ 14.00) and BUY the November 60 (10/23/08 opening price was $3.00) as a hedge against the VIX remaining elevated. We'll fill in the prices Thursday morning. Our account will be credited with the amount for selling the November 35 calls, while it the price paid for the 60 calls will be deducted.

In a different format the play is:

Wednesday 10/22/08 closed at 14.00 bid
Update 10/23/08 open 14.00, high 17.00, closed 15.30bid
Update 10/24/08 open 19.40, high 21.50, closed 20.60bid
Update 10/27/08 open 23.00, high 23.00, closed 23.90bid
Update 10/28/08 open 22.93, high 24.70, closed 18.60bid
Update 10/29/08 open 19.59, high 21.13, closed 20.90bid
Update 10/30/08 open 18.50, high 22.00, closed 20.30bid

Wednesday 10/22/08 closed at 3.70 ask
Update 10/23/08 open 3.00, high 4.50, closed 4.10ask
Update 10/24/08 open 7.00, high 7.00, closed 6.90ask
Update 10/27/08 open 6.91, high 8.80, closed 9.00ask
Update 10/28/08 open 7.60, high 8.60, closed 5.50ask
Update 10/29/08 open 5.40, high 6.30, closed 6.50ask
Update 10/30/08 open 4.90, high 6.20, closed 5.80ask

Picked on October 12 at $ 69.65
Change since picked: - 6.75


______________ CLOSED PLAYS ______________

iShares Russell 2000 - IWM - close: 51.43 chg: +2.73 stop: 50.75

There was no follow through on yesterday's late day reversal lower. Quite the opposite. The IWM actually gapped open higher at $50.41 and quickly hit our stop loss at $50.75 ending the play in moments. The IWM's performance looks pretty bullish and the MACD on the daily chart has now produced a new buy signal.


Picked on October 29 at $ 50.41 *gap open entry/stopped 50.75
Change since picked: + 1.02 /originally listed at 48.70
Earnings Date 00/00/00
Average Daily Volume = 6.1 million


Lockheed Martin - LMT - close: 82.18 change: +3.57 stop: 82.55

Shares of LMT also gapped open higher. The stock did trade back toward $78.81 before bouncing back into a gain. Our first opportunity to open positions was at $80.71 and LMT hit our stop loss at $82.55.


Picked on October 29 at $ 80.71 *gap open entry/stopped 82.55
Change since picked: + 1.47 /originally listed at $78.61
Earnings Date 10/21/08 (confirmed)
Average Daily Volume = 3.8 million


PetroChina - PTR - close: 75.90 change: +8.05 stop: 71.25

Our bearish failed-rally play in PTR was over before it even started. Oil was trading above $68.00 a barrel this morning and last night we said not to open bearish positions on PTR if oil was above $67.00/bbl. Shares of PTR reacted sharply as the stock gapped open higher at $74.95, well above our stop loss at $71.25. Effectively the play never opened. Now that PTR is above resistance near $70.00 a dip or a bounce near $70.00 might be a new bullish entry point.


Picked on October 29 at $ xx.xx <-- never opened!
Change since picked: + 0.00 /originally listed at $67.85
Earnings Date 03/06/09 (unconfirmed)
Average Daily Volume = 1.0 million



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