The markets gapped higher on news that China would provide a fiscal stimulus package worth $586 billion or 18% of their GDP and that AIG’s government bailout being restructured. However, stocks fell today as concerns regarding the automakers and financial companies overshadowed the positives from China. There is a two year term to the Chinese fiscal package that will target various industries including housing, infrastructure and health care. The new government deal for AIG is that the aid will expand to $150 billion from $123 billion and better loan terms. The changes are meant to give AIG more time to sell assets after losing $24.5 billion in the third quarter. In addition, the revised deal stands to reassure investors that the insurance giant will be able to satisfy its counter party obligations. AIG closed up $0.17 to 2.28.
Another positive story came from McDonalds (MCD) gaining ground from their relatively low price food offerings. MCD said October same store sales increased by 5.4% and global same store sales rose by 8.2%. The US counted for 35% of McDonald’s 2007 revenue. MCD closed up $1.01 to $56.48.
While it wasn’t exactly positive, UPS and FedEx (FDX) gained on news that they will have less competition in the U.S. from DHL U.S. Express starting early next year. DHL said it will discontinue domestic-only air and ground services to only focus on international offerings. DHL is owned by Germany-based Deutsche Post World Net and will cut 9,500 more U.S. jobs, on top of the 5,400 jobs it has already eliminated.
On the negative side, which seems to get a lot more attention, was that Merrill Lynch decided to close its stand alone proprietary trading business. Merrill Lynch dropped 1.24 to $15.51. Goldman Sach’s (GS) had its fourth quarter earnings estimates cut to a loss of $2.50/share from a profit of $2.71/share by Barclays on concerns from dramatic equity market declines. GS dropped $6.57 to 71.21.
General Motors (GM) tumbled to its lowest level in six decades after Deutshe Bank downgraded it to Sell from Hold. In addition, Deutche Bank cut GM’s price target to $0 from $4 stating that GM may not be able to fund its U.S. operations beyond December without government intervention. Ford (F) dropped $0.09 to $1.93.Internals
The NYSE declined 69.93 points to 5,802 on 4.663 billion total shares today. There were 1,155 advances (32%) and 2,372 decliners (66%) as well as 4 new 52-Week Highs and 192 new 52-Week Lows. The NASDAQ Composite (COMP) fell 30.66 to 1,616.74 on 1.7 billion shares. There were 8 new 52-Week Highs and 219 new 52-Week Lows. The COMP had 857 Advancers (29%) and 1,985 Decliners (67%).Economics
There were no economic reports released today and there won’t be any tomorrow due to the Veterans Day. There was talk that the bond market might close tomorrow but the stock markets will be open. This week is a slow economics week because there isn’t anything released until Thursday. The markets are watching the employment reports very carefully for any sign of stabilization. If things go as they have been, the Fed may have to reduce another quarter point. The Michigan Sentiment is expected to decline a little from the last report. However, last week’s Consumer Sentiment numbers came in well below the expectations at 37.The Index Report
As always, we will begin the review with the S&P 500 (SPX). I prefer to analyze the charts on a daily time frame to see the broader picture and then focus in by using the 2 minute charts. Last week I wrote that the SPX had failed to break and close above the 21 day Exponential Moving Average (EMA). However, the SPX trusted upward Tuesday following the Fed’s latest move to improve the countries situation. There is a trade scenario that I have to try that says to fade the reaction move of the markets following a Fed decision. In this case, sell the market at the close. Had it dropped the trade would be to buy the market. As a trader, you should have a number of trade setups in your arsenal to take advantage of consistent market tendencies. But don’t have too many strategies that your funds and attention are diluted and you can’t keep track of what is what. My advice here is to list the strategies and create a menu of sorts. At the beginning of each day, go through your menu to determine what strategy might be available that day and visit the existing strategies to review profit targets and risk management.
As the above chart shows, the SPX dropped below the 21 day EMA on Wednesday and then the 8 day EMA on Thursday. Both the RSI and Slow Stochastics were near overbought territory as of Tuesday’s close. While the RSI hasn’t dip down to oversold territory yet, the Stochastics closed below 20 on Friday and closed up at 24 today. RSI dipping downward while the Stochastics is bouncing upward shows some divergence in the oscillators. The Bollinger bands have narrowed quite a bit from just a few weeks ago. The current spread on my 21 day EMA Bollinger Bands is at 154 points and narrowing. Once the narrowing stops and begins to increase, there is another strategy that suggests trading in the direction of the momentum. With the 8 day still below the 21 day EMA, the trend is still down. The trend signal was close to reversing last Tuesday, but the quick reversal stopped that technical signal from occurring. Our first level of resistance is at 936 (8 day EMA), followed by 952 (today’s high) and then at 958 (21 day EMA). Support is from Thursday’s low at 899.73. There is a low grade uptrend line from the 10/10 low to the 10/28 low that is currently around 880. With so much anticipation for a bounce into the end of the year, I suspect that the smart money may stop that from happening. We’ll have to see.
The ADX in the above chart is suggesting that the previous trend has all but subsided. If the indicator begins to advance, a new trend may be emerging. Also suggesting the decline is over, for now, is the MoneyFlowIndex. A break above 60 would help confirm this assessment. Finally, there is some resistance just above 1000 and then the rapidly dropping 50 day moving average (currently at 1070). As the chart shows, the 68.2% Fibonacci has provided the recent support for today’s bounce from the lows. The SPX had a volatile day again traveling from a high of 951.95 to a low of 907.47 and finally ending the day at 919.21. That is a 44 point range. While pretty wide, it is actually less than the Implied Volatility or $VIX has priced in; which closed up 3.88 today at 59.98.
The NASDAQ 100 or NDX showed some relative weakness today. For instance, the NDX dropped 20.62 points to 1251. The NDX chart below is very reminiscent of the SPX daily chart. Both indices 8 and 21 day EMAs are in a decline. The slope isn’t very steep which signals that the momentum downward is slowing. The near term support on the NDX is at 1235 while the resistance is at the 8 day EMA (1284) and the 21 day EMA (1314). One difference from the NDX and the SPX is that the Slow Stochastics failed to break above or re-emerge from oversold territory. This may end up indicating that there is still more weakness to come for the technology sector. The Bollinger bands are pinching together as each day’s range subsides closer to normality. I believe it will be a while until Volatility is back to normal. So we have to get used to trading within these extremes. Where a $VXN (NASDAQ 100’s CBOE Volatility Index) would have peaked around 40 – 45, that is now the bottom range of volatility in which to sell the market. As with most trades, this may work until the break down. Be careful to not over think the trade. Set stops and stick to them. If you short the NDX on the $VXN’s next test of its low, make sure a stop is in place in case the $VXN dips and closes below support.
The Russell 2000 (RUT) chart is shown below. The main difference in the daily pattern is that the RUT closed lower than Thursday’s low. The RUT opened strong today and moved higher intraday above the 8 day EMA (508). However, the weakness in the smallcap sector over concern for these companies inability to raise operating capital or even revisit previously established credit lines. In my opinion, the broader markets need to see support from the small caps before any sustained move upward can exist. While the Slow Stochastics ticked up a little, it failed to break out of oversold territory (20). The current view of the market is that it may sell off again before Thanksgiving and then run up into the end of the year as all of the money sidelined comes back in to play. However, anything can happen overnight to cause the current picture to change.
Crude oil has been quite volatile over the last few trading sessions. However, for once the charts of the commodity as well as the United States Oil Fund (Symbol: USO) have been showing some signs of support. I mention the USO because it is tradable as a long/short stock play as well as an option play that most accounts should be able to trade. It tracks the commodity closer than the Proshare Ultra Long and Short ETFs, DIG and DUG, respectively. For instance, if you believe that oil will move higher from the low 60’s, then you may want to buy the USO, Buy USO calls or Sell USO puts. With 11 days until expiration, the USO November 45 puts are trading at $1.00 to $1.10. That is some interesting premium. You could be bold and sell the 51 strike for about $3.20/contract. Selling puts, by the way, is an option contract that obligates the seller to purchase the shares of the underlying security at the strike price on or before expiration.
In Play Updates and Reviews
Play Editor's Note: I would be cautious here. A large number of stocks and indices produced bearish engulfing candlesticks after Friday's inside day. The afternoon bounce was encouraging but overall Monday has painted a bearish shadow on the week.
Apollo Group Inc. - APOL - close: 69.76 change: +0.15 stop: 66.45
APOL continues to out perform the broader market. The stock gapped open higher at $70.50 and traded to $71.39 before paring its gains. While closing back under $70.00 may be a disappointment for the bulls APOL still ended the day with a gain. The intraday action continues to look bullish for the stock. Our suggested entry point to buy calls was at $70.55. The play is open. We would still consider new positions on another rise over $70.50.
Our target is $79.90. The stock's chart has resistance in the $80-81 zone. The Point & Figure chart is bullish with an $80 target.
Becton, Dickinson & Co. - BDX - close: 70.77 change: +0.04 stop: 67.45
The pattern in BDX mirrored the action in the S&P 500 but BDX still managed to close with a gain. If you didn't buy the open this morning we got a chance to jump in on a test of $70.00 this afternoon. If you want to see confirmation then wait for a new rise over $71.25 or $71.75 before initiating positions.
Our target is the $74.95-76.00 zone or the simple 50-dma, whichever one BDX hits first.
Bunge Ltd. - BG - close: 44.22 change: +0.00 stop: 40.49
They say that 80% of a stock's movement is directly related to the market's movement. Shares of BG definitely mirrored the market today although the stock managed to close unchanged instead of in the red.
The big news today was BG's announcement that it would drop its merger plans with CPO. Last week CPO's Board of Directors announced their decision to withdraw support for the merger.
We don't see any changes from our previous comments although readers may want to wait for a new move over $48.00 or $48.50 before initiating positions.
We're setting two targets. Our first target is $49.50. Our second target is $54.75. More aggressive traders may want to try for a rise toward $59.
FYI: The latest data listed short interest at 13% of BG's 133.8 million-share float. That is an above average amount of short interest. If BG continues to rally short-covering could give the stock a boost. Plus, it's worth noting that the P&F chart for BG is very bullish with an $86 target.
Compass Minerals Intl. - CMP - close: 57.68 change: -0.51 stop: 52.35
Hmmm... the general trend in CMP is unchanged but Monday's intraday movement is short-term bearish. The stock rallied to its 100-dma early this morning and then gave it all back. We warned readers that the 100-dma might be overhead resistance. At this time we would stop and wait for a dip into the $55.50-54.00 zone before considering new bullish entry points.
We're starting the play with a stop loss 10% under current levels. Our first target is $63.50. Our second target is $69.00.
FYI: The most recent data listed short interest at 7% of the very small 31.7 million-share float. That could be an additional catalyst for sharp moves higher if bears decide to cover. Plus, the P&F chart is bullish with a $93 target.
ITT Educ. Services - ESI - close: 87.14 change: +0.94 stop: 82.85
ESI, like its rival APOL, out performed the broader market today. The stock gapped higher this morning and then retraced the move before settling with a 1% gain. We do not see any changes from our previous comments. However, if you were looking for alternative entry points consider a dip in the $85.50-85.00 zone or a new high over $90.00.
Our target will be $94.50. There is some resistance just above $95 (see chart). FYI: The Point & Figure chart is bullish with a $108 target.
FedEx Corp. - FDX - close: 66.29 change: +1.71 stop: 61.95
Shares of FDX and rival UPS both traded higher on Monday. The gains were fueled by news that their smaller rival DHL was folding up shop. German-owned DHL announced it would close down its U.S. air and ground shipping businesses, lay-off about 9,500 jobs in the U.S. and focus on its international deliveries. News that competition was quitting helped FDX end the day up 2.6%.
We have two targets. Our first target is $68.85. Our second target is 73.00 or its 50-dma, whichever one FDX hits first. FYI: The Point & Figure chart is bullish with a $100 target.
Hess Corp. - HES - close: 62.32 change: +1.09 stop: 56.95
You might say we got a "bad fill" with our play on HES. The stock gapped open much higher at $64.25, hit $64.75, and then gave it all back. The intraday low was $59.64 but HES managed to recover at the end of the day for a 1.7% gain.
Our plan was to buy calls on a breakout over $62.00 with a trigger at $62.25. This morning's gap higher would have triggered the play with a much worse entry point than planned. If you waited and bought the dip or bounce near $60.00 then you're in much better shape.
Crude oil was all over the map today, which is why shares of HES were so volatile. Oil gapped higher as investors reacted to the China stimulus news thinking Chinese demand for oil might go up. The stimulus news faded and oil actually hit a new relative low before rebounding sharply into the green.
If you missed all the excitement today we would still buy calls on HES right here. Our target is the $68.00-70.00 zone.
Volatility Index - VIX - cls: 59.98 chg: + 3.88 stop: n/a
When Monday's early morning rally began to fade the Volatility index quickly began to climb. It was a slow and steady gain that ended with the VIX up 6.9% on the session. Depending on your perspective the recent action is either part of a bull-flag in the VIX, which is bearish for stocks. Or this is part of another failed rally pattern as the VIX failed to clear Friday's high and thus it's bullish for stocks.
We don't see any changes from our weekend comments. If you want to sell calls then consider a stop loss to buy them back over last week's highs.
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.
Overall we are not suggesting readers buy new put positions.
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.
SPDR GOLD Trust - GLD - close: 73.58 change: +1.08 stop: n/a
The GLD gold ETF posted a gain but it remains inside its three-wee consolidation pattern. GLD actually gapped open higher at $74.80 but dipped back to $72.96 giving us a chance to open positions. We would still consider positions in the $74-71 zone although you may want to make slight adjustments to your straddle and pick different strikes. Our preferred entry point would be as close to $72.50 as possible.
We are listing two strangles to take advantage of what appears to be an imminent breakout, up or down, in gold prices.
The first strangle uses November options, which expire in two weeks. Thus it's much more risky. The second strangle uses December options.
What is a strangle?
CBOE Volatility Index - VIX - cls: 59.98 chg: + 3.88 stop: n/a
The VIX climbed steadily higher throughout the session but it failed to break above last week's or even Friday's high. Last week's bearish reversal in the VIX is still intact for now. We do not see any changes from our previous comments.
Don't forget that VIX option expiration is next week.
Please see the CBOE website 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 #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.
Hypothetically we have sold the November 30 calls at $8.60 (credit). We bought the Nov. 50 calls for $1.61 (debit). Based on these numbers we would need the VIX to close under 37.00 for us to be profitable. If it closes higher than 37.00 then the intrinsic value of the Nov. 30 calls will be higher than what we paid for it and we'll have to come up with the difference. Example: if the VIX is at 40.00 another $1.40 will be taken out of our accounts when the VIX options are settled because the Nov. 30 call will be worth $10.00.
Now, if you sold the higher-strike call (Nov.50) when we discussed it a couple of weeks ago you could have gotten $9.00-11.00 for it. Let's say you got $10.00 for it. Now our "credit" to our account is $8.60 for the Nov. 30 calls and $8.39 ($10.00 for selling Nov. 50 call minus the $1.61 we paid for it) for a total income of $16.99. This gives us a much wider margin for error. With this scenario, the VIX would have to close over 47.00 before we lost any money.
Alternatively if you sold the Nov. 50 call around $5.00 then our breakeven point is a VIX settling at 42.00.
In a different format the play is:
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.
Hypothetically we have sold the November 35 calls at $14.00 (credit). We bought the Nov. 60 calls for $3.00 (debit). Based on these numbers we would need the VIX to close under 46.00 for us to be profitable. If it closes higher than 46.00 then the intrinsic value of the Nov. 35 calls will be higher than what we paid for it and we'll have to come up with the difference. Example: if the VIX is at 50.00 at settlement another $6.00 because the Nov. 35 call will be worth $20.00.
Now, if you sold the higher-strike call (Nov.60) when we discussed it a couple of weeks ago you could have gotten $5.50-6.50 for it. Let's say you got $6.00 for it. Now our "credit" to our account is $14.00 for the Nov. 35 calls and $3.00 ($6.00 for selling the Nov. 60 call minus the $3.00 we paid for it) for a total income of $17.00. This gives us a much wider margin for error. With this scenario, the VIX would have to close over 52.00 before we lost any money.
Alternatively if you sold the Nov. 50 call around $3.00 then our breakeven point is a VIX settling at 49.00.
In a different format the play is:
We wanted to SELL the November 50 calls (11/10/08 opening price was $ 6.00) and BUY the November 65 (11/10/08 opening price was $1.75) as a hedge against the VIX remaining elevated. Our account will be credited with the amount for selling the November 50 calls, while the price paid for the 60 calls will be deducted.
In a different format the play is:
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