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Daily Newsletter, Saturday, 11/22/2008

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Table of Contents

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

Market Wrap

Major Inflection Point

We saw a once in a decade event last week when the major indexes fell -15% to -17% at their lows. In most years the market only average an 8% move for the entire year and far less than a 15% move in one week. The markets are at a major inflection point and next week will be critical.

Market Statistics
[Image 1]

There were no material economic reports on Friday. Mass Layoffs for October were reported but this is a lagging indicator. There were 2,140 mass layoffs announced involving 232,468 workers. This was down only fractionally from the 235,681 workers cut in September. Last week we saw another round of major layoffs announced in the banking and semiconductor sectors so the November mass layoff report could show a marked increase.

Next week the key reports will be led by the GDP on Tuesday. Estimates are for a revision into slightly negative territory and anything more than -.25% or -.50% could really shake up the markets. Conversely if we got a positive surprise with a revision that keeps the GDP in positive territory or even produces a slight gain it would be very positive for the markets. Of course there is only a very slim chance for a positive surprise.

Following the GDP is the Chicago PMI and the Richmond and Kansas Fed surveys and a current look at manufacturing in those areas. All will probably show continued decreases and none should shock investors. We are only a week away from the next cycle of economic reports beginning in December. The fist week of December has the national ISM, Fed Beige Book ad Non-Farm Payrolls. Those will pretty much determine the investor mindset for the rest of December.

Economic Calendar
[Image 2]

It was an amazing week in the markets. The Dow was down -1048 points for the week at Friday's low of 7449. Three times the Dow broke under support at 7500 and the third time was the charm. Time was running out on the clock on a double witching option expiration Friday. When the third push below 7500 failed to stick the holders of millions of expiring put options decided it was time to cash out. Coincidently the news broke that New York Fed President Timothy Geithner would be named to replace Hank Paulson as Treasury Secretary. The combination of an expiring market and a news generated rebound launched another bear market short squeeze pushing the Dow to a +500 point gain for the day and cutting the losses for the week in half.

The sell off last week was a perfect example of a bear market correction. Most of the major indexes were down 15-17% with banking and broker sectors down well over -20%. With daily market swings of 5-7% it is nearly impossible to be an investor. It is only slightly less difficult to be a trader in those kinds of swings. What set last week's drop apart from the earlier October crash was the support levels reached. The S&P fell to an 11 year low at 741. The Dow at 7449 came within a handful of points of the prior bear market low from March-2003. This is an extremely critical support level.

The Nasdaq nearly completed a retest of its 2003 lows at 1253 with an intraday dip to 1295. In my book that is close enough given the equal performances by the other indexes. The S&P-500 actually broke through its 2002/2003 lows at 768 to hit 741 intraday on Friday. The gloom on the trading floors was so thick you could have could have cut it with a proverbial knife.

However, early in the day all three indexes seemed to find round number support at 7500, 1300, 750 and repeated attempts to break those levels all failed. This is a critical support level on all indexes. If the market is going to hold at these 5-year lows this is where the goal line stand should appear.

Another key point for me was the apparent capitulation trading on Wed/Thr. The internals were the worst I have seen in years and seemed to indicate investors were flushing stocks because of margin calls, triggered stops or just plain frustration. In reality it was probably some funds liquidating based on rumors we heard on Friday. The rumors were probably started by the news the Treasury Dept was going to help liquidate the Reserve Funds U.S. Government Fund. This is a major money market fund and the company was seeing a run on the fund after a sister fund, the $64 billion Primary Fund became the first ever MM fund to break the buck in September. Fears of a similar problem in the Reserve Fund caused investors to swamp the fund with withdrawal requests. The Treasury said it could have exposure of up to $5.6 billion as a buyer of last resort of the remaining securities owned by the Reserve Fund. The fund had previously already liquidated all but $6.3 billion of its holdings to satisfy investors. Under the liquidation plan the fund has 45 days to do an orderly liquidation where it will sell assets on the open market. If the fund can't get what it considers a fair price the Treasury will backstop the fund. The Reserve Fund claims to have invented the money market fund in 1970. The company has now suspended all of their money market funds and is currently liquidating 15 other money market funds. What an amazing time we live in that these innovators find themselves being liquidated by the government instead of leading the pack in returns.

The money market funds are not the only ones with redemption problems. Global wealth management company Bernstein surveyed their hedge fund clients to see where they stood. Leverage had fallen to 142% of assets compared to 175% in 2007. 63% of the respondents felt the hedge fund deleveraging process was at least halfway over. Redemptions were also felt to be half done with the remainder in Q4 and Q1-2009. About 10% of the funds were stockpiling cash for known or expected redemptions. Cash as a percentage of assets had risen to 31% compared to an average of 7% over the past two years. The Financial Times said over $40 billion has been withdrawn from hedge funds so far in November. The CEO of Fauchier Partners, a London based fund of hedge funds half owned by BNP Paribas said redemptions would be "much more" that $40 billion. There are still a lot of industry analysts that believe we could see several hundred funds close their doors at year-end. Those funds could be liquidating now without an announcement to avoid having traders front run their sales.

Interesting article from Morningstar about the thousands of layoffs in the mutual fund industry and the closing of some funds. http://biz.yahoo.com/ms/081120/265719.html?.v=1

For whatever reason the selling was extreme on Wed/Thr. It could have been fund liquidations or related to option expiration or both. Either way the massive imbalance of the internals coupled with a dead stop on that round number support from five years ago this could be a perfect spot for a bottom to form.

Market Internals Table
[Image 3]

In the internals table above you can see where the A/D ratio was roughly 10:1 in favor of decliners on Wed/Thr. The volume imbalance was even greater. Note also that the volume was very strong on Thursday and again on Friday's rebound. I harbor no illusions that Friday's rebound was anything but option related short covering but the intraday support hold was critical for bullish sentiment. Thursday's view into the pit of hell was quickly erased with Friday's rebound. We may get a flashback next week but I would rather live it one day at a time rather than focus on the potential for a recurring bearish nightmare.

Like Paulson said on Wednesday we are experiencing a once in a lifetime event. Who would have thought back on January 1st that we would see a failure of Lehman, Bear Stearns, Wachovia, Washington Mutual, AIG, Countrywide, IndyMac, Fannie and Freddie all in a space of a few short months? Those companies had over $5 trillion in assets and it did not save them. Mutual funds have lost up to 50% of their value and $85 billion in deposits. The average hedge fund has lost a range of 16-25% and they were supposed to be "hedged" against a bear market. The market giants have been reduced to midcaps or even small caps. The top ten financial stocks have shifted position and players so often you need a scorecard to keep track. In order of market cap you have Berkshire Hathaway at $84 billion, Wells Fargo $75B, JPM $74B, BAC $51B, USB $36B. Citigroup is down at number 10 with only $20 billion in market cap. That is down from $290 billion a year ago. Goldman dropped from $100B to $20B, AXP from $75B to $20B, AIG $190B to $4B and Wachovia $108B to $8B.

After the bell on Friday the Office of Thrift Supervision closed Downey Savings and Loan (DSL) and put the thrift into the FDIC receivership. Downey stock hit 46-cents on Nov-11th as investors fled the stock fearing the worst. The FDIC sold all of Downey's deposits ($9.7 Billion) and nearly all of its assets ($12.8 billion) to U.S. Bank (USB). The FDIC said the loss to the insurance fund would be $1.4 billion. Regulators also shutdown PFF Bank and Trust or Pomona CA and The Community Bank of Loganville GA. PFF was also sold to U.S. Bank, which picked up 213 branch locations in the deal. PFF had $3.7 billion in assets and $2.4 billion in deposits.

So many stocks have declined in market cap that many mutual funds are prohibited by charter from buying them. In October 1987 only 35 of the S&P 500 were trading for less than $10 per share. After 9/11 there were 59. Today there are over 100 trading for less than $10 and one is less than $1. This is the largest number since records began in 1980. The requirements for a listing on the S&P are a market cap over $4 billion and a reasonable share price. That was typically taken to mean $10 or more. 186 S&P companies have fallen below that minimum $4 billion in market cap and 25 are now less than $1 billion in market cap. Many mutual funds are prohibited from buying small cap stocks or penny stocks. Today Etrade (ETFC) is trading under $1 and has a market cap of $484 million. It is the cheapest stock in the S&P and many funds can no longer buy it. 36 of the S&P-500 stocks are now under $5 and many funds can no longer add to their positions in those companies. Those include GNW, F, THC, AIG, ODP, NCC, DYN, S, SOV, MU, AMD, LIZ, CIT, LSI, JDSU, Q, IPG, GM and TER. Obviously this will reverse explosively once a real bull market begins and those stocks start to climb back out of the depths and become eligible for fund buying again. Given the rapid decline in the global economy that may not be next week.

In this once in a lifetime market are there stocks safe to buy? Hardly a day goes by without several readers emailing me about various stocks now in ranges unheard of just months ago. A couple this week wanted to bet on Citigroup. Surely under $5 they must be a screaming bargain. At their closing price of $3.77 on Friday they are worth $5 billion less than the $25 billion the government invested several weeks ago. Their tangible book to equity ratio is more than 50:1. Their massive amount of consumer debt will force them to write down additional billions over coming quarters. Citigroup execs finally panicked last week and said they were considering selling all or part of the company to get out of trouble. The $25 billion price tag would only pay back the government and investors would be left with nothing. With their stock under $4 they can't sell additional equity without massively diluting the remaining equity to near zero. What buyer could come up with $25 billion and be strong enough to absorb all the write-downs coming in 2009? Only one and it is not a company. It is the U.S. Treasury. The Treasury can't let Citigroup file bankruptcy. Next to AIG they probably have more global counterparty exposure than any company on the planet. Not even Citigroup's Saudi billionaire investor is willing to step up to the plate at $4. The only plausible end to this story is a government takeover of Citigroup with shareholders left holding the bag. Treasury can't let Citigroup fail. They are massively bigger than Lehman or Bear Stearns and the repercussions would be earth shaking. Is Citigroup a buy at $3? I seriously doubt it.

There was a strong rumor under the markets on Friday that the Fed/Treasury would have to do something about Citigroup before the open on Monday. Citigroup is in an apparent death spiral despite the Treasury capital infusion and implicit guarantee. Citi reportedly has $250 billion in distressed assets and they are definitely too big to fail. That suggests the only option is some form of government intervention before Monday's open or Friday's market bounce could quickly be erased. If there is no government action analysts are expecting other major bank stocks to accelerate downward even faster. Bank America is threatening to break under $10 and once under that threshold gravity seems to increase exponentially.

How about Etrade at 90-cents? This is a tough one because Etrade has assets other brokers would kill to get. Customer assets at ETFC fell to $119.38 billion at the end of October. That is down -$100 billion from the end of October 2007. Those assets shrank -16% just in October. Customers are fleeing Etrade as the stock heads for zero. Etrade had some subprime exposure but that is supposedly gone now but they still have a $24 billion mortgage portfolio. However, Etrade's banking arm is weighing on the Internet broker's stock price and that is also what could save them. As a bank they have access to capital a normal broker doesn't. Thanks to their active television adds about claiming the addition of 1,000 new accounts per day they actually added 65,538 new accounts in October. How that offset those accounts fleeing to safety is anybody's guess. If ETFC stock would quit hemorrhaging value there would probably be a lot of people take the $1 bet that Etrade will survive. I believe they will survive but probably as part of some other broker like Charles Schwab or Ameritrade. Sometimes when a company weathers a bad storm like this they are never able to shed the stigma and the stock either takes years to recover or they end up a perpetual takeover target. Etrade just announced they were going to retire $450 million in 2018 debt because it was unable to remarket the notes. They are going to be retired in connection with a new issue of 25 million shares. Etrade has applied for $800 million in TARP funding. Is Etrade a buy at 90-cents? They might be worth throwing a $1000 dollars towards the stock but nothing more. There are far too many unknowns to invest the farm. The stock price is under $1 for a reason and any eventual deal could erase it completely if Treasury suddenly decided they were a risk to account holders.

There is no shortage of cheap stocks to play. Just surf that S&P-500 list under $5 I listed earlier and there are quite a few that are not going away. Most will recover. Unfortunately knowing which ones with a great degree of certainty is the problem. Are they value stocks or a value trap? The almost recession we are experiencing has wiped out hundreds of previously profitable companies. I say almost because as long as the GDP for Q3 is positive we are not technically in a recession.

I received a list of retailers this week that are closing their doors or scaling back significantly because of the damage from high oil prices and the recession. We hear every week about a store closing or a chain cutting some stores. The magnitude of the damage is not really seen until you peruse this list. Every location has dozens to hundreds of employees, retail space, warehouses, supply chains, corporate offices, etc. This is a serious recession brought about by high oil prices and financial gridlock and the stock market is reflecting this fact. Fortunately for investors a recession typically brings a major buying opportunity and this is one heck of an opportunity.

Store Closings (unverified)
[Image 4]

The markets rebounded strongly Friday afternoon after Timothy Geithner was named to take over the Treasury leadership from Hank Paulson. There was probably a lot of OpEx involved as well but the market reporters were beating the Geithner news to death. This is a highly positive nomination and could have a positive impact on the markets for the rest of the year. Geithner is the president of the New York Federal Reserve and has been around the block many times. He has a lot of experience in financial events dating back a couple decades. He was involved in the resolution of the Long Term Capital hedge fund problem years ago. He has been heavily involved in the Lehman, Bear Stearns and AIG fiascos. As president of the New York Fed he is involved in the region with the highest concentration of banks and financial companies on the planet. He was actively involved with the actions of the Bernanke Fed and all the recent bailout plans. He is also at the right hand of Paulson and knows and has helped in structuring the current set of bailouts by the Treasury. By all accounts he is the perfect pick to take over from Paulson. The markets should be excited because he will require no training and has in-depth crisis management experience. He gave us early warnings on the subprime crisis, credit default swaps, problems with Fannie and Freddie and dozens of other financial concerns. If the Fed had listened to Geithner years ago we may not be in this situation today.

Timothy Geithner
[Image 5]

The Federal Reserve announced last week they are going to expand their Dec-16th meeting to a two-day event to allow additional time for discussion. They are going to start a day earlier on the 15th and still conclude at the regular time on Tuesday. The Fed is widely expected to cut rates another 50 points to .50% at this meeting and possibly even cut rates again to ZERO at the January 27th meeting.

Late Friday the Obama camp said they were considering Larry Summers as a replacement for Ben Bernanke. This was a very unusual move for Obama since it immediately means Bernanke is a lame duck Fed Head since his term does not expire until 2010. Analysts were very surprised Obama would announce this two years in advance when he really did not have to make a decision for two years. This would appear that Obama is telegraphing to Bernanke he should resign and his replacement is waiting in the wings. This is a very strange development and I am sure we will hear more about this next week. Worries that Obama could ask Bernanke for his resignation while he is right in the middle of the biggest financial crisis in 80 years could weigh on the market on Monday.

Goldman Sachs continued its decline from winner to sinner and there are some who suspect Warren Buffet could be the reason. Warren Buffett has always called derivatives the weapons of mass financial destruction. He is not averse to using them when it fits his needs. Back in 2007 with the Dow at 13,000 he placed a big bet on market direction. Buffett sold $37 billion in naked puts on the Dow and several foreign indexes and received $4.5 billion in premium. Selling a naked put is a bet the markets are going higher. So far that bet is not looking like a winner but he has plenty of time on his side. The puts were written with a 15-year expiration. He sold the puts to an undisclosed group of investors who thought it would be a good way to hedge against a protracted bear market. Goldman was the broker on the deal. Because Berkshire has a platinum credit rating Goldman did not require Berkshire to put up any collateral on the trade and let Berkshire have free use of the premiums received. This was a monster win for Berkshire at the time.

Buffett wrote in his annual report that Berkshire would get to use the $4.5 billion for 15 years and regardless of the outcome of the bet shareholders could make a lot of money off that $4.5 billion in invested cash over the life of the puts. Unfortunately the bet has gone horribly wrong for Berkshire and is significantly underwater. Rumors are flying on Wall Street that the investors are demanding Goldman force Berkshire to put up normal collateral for the trade. Given the amount the trade is underwater it would be a massive amount of money somewhere in the range of $10-$20 billion. Some feel the $5 billion Berkshire investment in Goldman at $125 per share was not really an investment but a creative way to provide Goldman money to use as collateral. Obviously Goldman cannot come up with $20 billion for collateral and Berkshire would do everything possible to avoid having to come up with the money. The foreign investors are concerned with the health of the U.S. financial sector and that Goldman will go under without putting up the collateral for the trade leaving the investors exposed.

If I was an investor holding $37 billion in puts on the global markets I would be hysterical on fears Goldman was about to go under. As part of the deal the puts cannot be exercised until 2022. That means the entire trade could easily reverse and the puts expire worthless but a continued global crash into another great depression would be a major windfall for the investors only as long as there is somebody standing behind the puts in 2022. Buffett has acknowledged in his report that Berkshire will take a write-down of roughly $1 billion a quarter as they amortize the risk on this position. Warren may not even be around to pay up in 2022 and that would be even more reason I would want collateral behind my puts. This collateral shortage is reportedly looming large over Goldman and that is why the stock is tanking. Personally I believe it is simply tanking with the sector since the Banking Index dropped -24% for the week.

Stranger than fiction. The big three automakers were asked by lawmakers last week if they flew to Washington by commercial airlines or private jet. All three flew by private jet. They were soundly criticized for asking for a bailout when they were still living the high life in a private jet. On Friday GM announced they were returning 2 of their corporate jets as part of a cost cutting measure. They denied the announcement had anything to do with the harassment by lawmakers. "It was simply part of a larger plan to cut travel costs." If you believe that then you probably still believe in Santa Claus and the Easter Bunny. Don't you think CEO Rick Wagoner would have taken the opportunity when he was criticized by lawmakers to say they were plans in the work to drop the jets instead of sitting there blank faced and silent? To GM's credit they had 7 leased jets at the beginning of the year and they returned 2 more back in September. On Friday Ford also said they were considering selling some of their jets. Don't you think this is an amazing coincidence? The automakers all said they required their executives to fly on the private jets for security reasons. I did not realize auto execs were in such danger.

Dow Chart - Monthly
[Image 6]
SPX Chart - Monthly
[Image 7]

It is time to wake up now. The last five years have just been a dream and it is time to return to the real world. The S&P is still under 800 and the Dow bounced off 7500 last week. This is exactly where they were five years ago in the 2002-2003 bear market. The entire rise to Dow 14,000 was just a dream. Your home did not double in value and then lose all those gains over the last five years. On the bright side you don't owe any taxes on all those market gains you made before the market imploded. I say all this in jest but I have seen movies with the same story line. Unfortunately the markets did return to their 2003 lows and all the gains are gone. Instead of crying we should be buying. I know that is an old refrain but it is true. We should be sifting through the rubble to find those puddles of melted gold that will remake themselves into the leaders of tomorrow. It could be IBM, HPQ, COP, RIMM or all of the above.

Hundreds of stocks are going to survive this bear market and they are all a lot closer to a bottom today than they have been over the last four years. You should buy when there is blood in the streets and the internals from Wed/Thr showed copious amounts of bleeding. The financial crisis might not be over and the recession may not officially start until the Q4 numbers show up in early 2009 but market rebounds typically begin six months before the end of a recession. Most analysts are predicting Q3-09 or before as the recovery quarter. That suggests we are moving through the worst of it now. Most secular bear markets average 45% to 50% drops and we are there now. I believe we should be taking partial positions now even if it is just with a few ETFs. The majority of trading gains happen in the first couple weeks of a rebound. From that point on it becomes a buy and hold market. Now is the time to nibble so you can capture those gains whether the rebound begins next week, next month or next quarter. The risk reward ratio is extremely high at this level. Risk is minimal and the eventual reward could be great. Next week is black Friday and the biggest shopping day of the year. The market is open, shop for some stocks as well.

Jim Brown


Index Wrap

ANY THANKSGIVING REPRIEVE?

THE BOTTOM LINE:

Contrary to my expectations, sellers not only pulled the major indexes down to new lows for the current move, but they also took the S&P 500 and 100 to below their 2002 lows. This hasn't yet occurred in the Dow, the Nasdaq Composite, Nas 100 and the Russell 2000; time to look at the monthly charts for some long-term perspective.

I don't usually look at the monthly charts, but when I want to take a long look back on relatively small charts that show up on your screen, they are useful. Useful to in terms of seeing just how oversold this market is relative to that prior major market bottom. It may also stand to reason that if this recession is going to be much worst than the last one, can we simply HOLD the last recessionary market lows?

As I pointed out in my Thursday's (11/20) Trader's Corner article and so easy to find now on our new re-designed web site that I will omit the link to it here, we have to go all the way back to the '73-'74 bear market to see a loss comparable to our current situation. In the 70's period, SPX sold off 47 percent from its highs before it reached bottom.

Compared to the Thursday low, the S&P 500 (SPX) was off 52.5 percent relative to its October high of last year. If we compare levels of 'oversold' to the '73-'74 period in terms of the 13-month Relative Strength Index (RSI) which you'll see next, SPX then got to 17.4 on the monthly RSI. Assuming this month's close is at or below this past week's close, the monthly RSI will at least be at 18.7. (Indicator readings are usually AS OF the close of the day, week or month and we got 4 trading days before we see how Nov. winds up.)

You'll see on my first chart the slippage below those prior lows. The 2002 weekly close in SPX however was equal to this past week (800.6 then versus 800.03 on Fri.); the prior low monthly close was 815 and of course we don't yet know where November will close. There is some potential yet for this market to form an approximate double bottom. Traders are now getting VERY bearish, but the charts don't yet confirm that the major indexes will go a lot lower or have a new down leg, especially being that they are so oversold.

[Image 1]

You may recall that I thought we might be in a 800 to 1000 trading range in the lead SPX index. Stay tuned on that! No doubt the recession is getting quite bad, but the hope for some new directions was seen in Friday's rally on the strength of who the new Treasury Secretary will be.

Taking a look at the Dow 30 (INDU) long-term monthly chart for another comparison to the 2002-2003 bottom, INDU is so far holding about its prior lows. We could of course test the 7200-7400 area, even 7000, but I don't see a meltdown below that. It would be contrary to my experience to see a major new down leg given how oversold this market is, as was the case in the analogous 1973-1974 bear market, which was also very severe as noted.

[Image 2]

One more long-term chart look back in the Nasdaq 100 (NDX) monthly chart. Does the 1000 area get tested again, even 800? A possible test of 1000 is not far away. 800? I lean to the view that that there will NOT be a decisive downside penetration of 1000 in NDX in the near to intermediate-term; i.e., the next 2-3 days to 2-3 weeks.

[Image 3]



MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

Use of an internal down trendline (one connecting the most number of lows, the S&P 500 (SPX) is tracking down along that line. This suggests possible near support around 737; next support is at 700.

The chart continues bearish of course. What would turn the chart around a little would a move above 900 resistance. 860 is resistance ahead of 900.

As I noted last week: "Selling rallies is obviously still working..."; I didn't think however that there was huge downside potential left. WRONG! There was enough more to hold on to puts into this past week, especially into Thursday. Does SPX fall to 700 next? Good question but my crystal ball is cloudy on that prospect.

A bullish (chart) pattern possibility is still seen in the falling wedge formation which can suggest potential for an upside breakout move ahead, especially as prices near the apex of that falling wedge-type triangle. I'm not suggesting we would see a major turnaround, just potential ahead for a trading rebound 'signaled' by SPX piercing the upper trendline.

[Image 4]

S&P 100 (OEX) INDEX; DAILY CHART

What keeps me off the short side overly much at this point is suggested by the extreme bearishness suggested by my call/put indicator as seen in conjunction with the S&P 100 (OEX) daily chart below; more on this below the chart.

First, I'd note that the OEX is declining along that same type internal trendline seen with the SPX chart. If OEX will continue to find support near this line, 350 is the next area of technical support. If the external trendline (connecting the lowest lows) comes into play, next potential support is closer to 300 in OEX.

Immediate resistance is at 400, then 420 and next at 440-445, which is the pivotal level to watch in terms of a potential (bullish) upside chart breakout.

[Image 5]

SENTIMENT:

As I noted also in my Thursday Trader's Corner piece, going back to the 2002 bottom in terms of how extreme bearish sentiment got then (not shown on chart), my call to put daily volume ratio (CPRATIO) indicator, on a 5-day moving average basis, got to a low then of .93, versus the close on Friday where it stood at .98.

Bearishness is building up substantially and is now seen even on rally days. Traders in mass have finally gone over to the idea of shorting every rally. Bearish sentiment may get more extreme yet, but my indicator is at least in an area where I'm cautious about over-staying in long puts or being 100% committed to other bearish strategies.



DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Average (INDU) has support around 7500, then at 7400, with major support closer to 7200. I favored covering Dow Index (DJX)puts when DJX got to 80 and made some profit on a call buy there too on the second dip to this area.

I noted last week that I thought that 'major' support was at 75 in terms of DJX and I covered some remaining DJX puts there and again took a small plunge into Dow Index calls on that dip to just under 7500 in INDU; I had an alert set at 7500. Stay tuned on this trade! I wasn't anticipating a major rebound when I did this trade and would be happy to see 8500 again to exit some or all of the aforementioned calls. I'll also exit if the market starts to look ugly again.

Resistance is at 8500-8580, then in the 8900 area, on up to around 9000.

[Image 6]

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite Index (COMP) has potential technical support in the 1300 area, then at 1200.

Resistance is most apparent around 1500, which extends to 1570. Next major resistance is at 1700.

We see a further development of the falling wedge pattern which I talked about recently as one that often sets up ahead of a rebound in a bearish decline. Stay tuned on this!

The history of such patterns in stocks has been for a rise of between 20 and 30 percent once there is a decisive upside penetration of the upper trendline. There should be several alternating 'touches' to each trendline which we have in COMP already; and may see again if there's a move to the 1500 area, followed by another decline back toward 1300 for example.

[Image 7]

NASDAQ 100 (NDX) DAILY CHART:

The bullish falling wedge pattern with its potential for a rally ahead at some point is duplicated in the Nasdaq 100 (NDX) chart. I don't want to read too much into this, but am struck by the pattern. In the past the same pattern has suggested winding up some put positions at a minimum and saved some profits.

Technical resistance is seen at 1180, then around 1240, with fairly major resistance on an approach back to the prior (up) swing high in the 1380 area.

Support/buying interest may develop on any further decline to the low-1000 area; next 'support' looks like it could come in around 960-950, with major support suggested at the 2002 bottom in the low-800 area as seen in the monthly NDX chart shown above.

[Image 8]

I wanted to buy some NDX calls on a decline in the Index to 1000, but my entry price on some at the money calls was too low to get done. I liked the risk to reward; e.g., buy at 1000, exit on a fall below 970, looking for a rebound to 1170. I did cover some remaining shorts in QQQQ however as it got to 25 which triggered a buy at market, also putting me net long a little. Hey, I'm often early to get in and somewhat early to get out!

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Near resistance in QQQQ looks like 28 now, down from the 31 area where I projected it last week. Pivotal resistance now looks to be in the 30 area.

Technical support is apparent once again at the lower trendline, at 25. Next support I've projected for the 23.5 area.

A close above 30, not reversed the next day would be bullish.

[Image 9]

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) remains bearish in its pattern but is kind of an extreme example now of a falling wedge type pattern. Maybe its been 'overdone' on the downside! Do you think?

Resistance is in the 450 area, then at 500.

Support is in the 370 area, then what may be fairly major support comes in around 300.

[Image 10]



GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support/areas of likely buying interest are highlighted with green up arrows. 2. Resistance/areas of likely selling interest: red down arrows. [Gray up/down arrows: support/resistance levels that got pierced]

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (the put/call ratio). In my indicator a LOW reading is bearish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

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

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

I favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.


New Option Plays

Temporarily Exhausted

Play Editor's Note: Friday's rebound in the markets was impressive. Yet it was just another bear market rally fueled by short covering compounded by option expiration. We were way overdue for a bounce and the rebound might actually last a few days. It does have the potential to be a short-term trade-worthy bottom. Unfortunately, one day is not much to build on. The technical damage to the major averages last week was extremely bearish.

We are adding new bullish positions but I consider all of them to be very aggressive, higher-risk trades. I think we've found a few stocks were some of the indicators are suggesting that the selling has, if only temporarily, exhausted itself and that the risks for opening new bearish positions outweigh the risks for betting on a bounce. Readers should continue to trade defensively and use smaller position sizes to limit their risk.

FYI: A few more stocks for your watch list are:
ESRX - Delivered a huge bounce on Friday. I wouldn't be surprised to see it rally back toward resistance in the $58-59 zone.
FAST - Has managed to hold support near $32.00 for weeks now and did not violate that level on Thursday last week. Might be able to run towards $40.00.
IBM - This tech giant bounced from the $70 region. This might be a bullish candidate. I would target a move into the $80-85 zone.
XOM - Volume was pretty strong on Friday's huge rally in XOM. The 100-dma has been resistance the last few days. A breakout at the 100-dma or the $78.00 level might be a bullish entry point.


NEW DIRECTIONAL CALL PLAYS
Axsys Tech. - AXYS - close: 61.83 change: +2.66 stop: 56.95

Why We Like It:
Almost all the short-term technicals have turned bullish for AXYS and the longer-term technicals are definitely improving. You'll notice that AXYS posted a gain on Thursday instead of sinking like most of the market. Plus, you might notice the huge volume. Volume was more than 600 times the norm on Friday. Both events might be due to the news that AXYS has replaced ManTech Intl. in the S&P smallcap 600 index.

Overall the move is bullish and shares look like they could rally towards resistance at the $70.00 level. We are suggesting new bullish positions now or on a dip back toward $60.00. The market remains volatile so we're going to keep a wide stop loss for now. More conservative traders will want to consider a tighter stop loss. Our exit target is $69.50.

Suggested Options:
We are suggesting the December call options for AXYS. However, there appear to be some quote or pricing errors currently and we'll fill in the ask on Monday morning.

BUY CALL DEC 60.00 QHU-LL open interest= 16  current ask $0.00
BUY CALL DEC 65.00 QHU-LM open interest= 62  current ask $0.00
BUY CALL DEC 70.00 QHU-LN open interest= 14  current ask $0.00

Annotated Chart:
AXYS

Picked on November 22 at $ 61.83
Change since picked:      + 0.00
Earnings Date           02/19/09 (unconfirmed)
Average Daily Volume =       195 thousand 


Ball Corp. - BLL - close: 30.18 change: +1.27 stop: 27.99

Why We Like It:
BLL just completed its third test of support in the $28.00-27.50 zone. If BLL can bounce from here it would be a higher low and might suggest the selling pressure in exhausted. If the market is going to rebound further then we could easily see BLL make a run at the $35.00 region or its simple 50-dma, which has been resistance in the past. We're suggesting bullish positions now with a target at $34.00-34.50.

Note: This is just a trade. The long-term trend looks seriously damaged when BLL broke major support at $35.00. Expect that region to be resistance.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 30.00 BLL-LF open interest= 10  current ask $2.80
BUY CALL DEC 35.00 BLL-LG open interest=581  current ask $0.85

Annotated Chart:
BLL

Picked on November 22 at $ 30.18
Change since picked:      + 0.00
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =       1.3 million  


Entergy Corp. - ETR - close: 85.76 change: +8.77 stop: 79.65

Why We Like It:
ETR is an electric utility company who's share price has been consolidating sideways for almost two months. Friday's rally is a bullish breakout out of that consolidation pattern and past technical resistance at its 50-dma. The move helped produce a new bullish P&F chart forecast of $104.00. Volume on Friday's breakout was very strong and the close over short-term resistance at $84.00 is another victory for the bulls.

We're suggesting bullish positions right here but more conservative traders may want to wait for a dip back towards $84.00 again. We're going to try and limit our risk with a stop loss under the late Friday afternoon low at $79.65. We're setting two targets. Our first target to take profits is $92.50. Our secondary target is $97.50. Keep a wary eye on possible resistance at the 100-dma and exponential 200-dma overhead.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 85.00 ETR-LQ open interest= 387 current ask $7.30
BUY CALL DEC 90.00 ETR-LR open interest=1224 current ask $4.90
BUY CALL DEC 95.00 ETR-LS open interest= 768 current ask $3.30

Annotated Chart:
ETR

Picked on November 22 at $ 85.76
Change since picked:      + 0.00
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       2.3 million  


Fluor Corp. - FLR - close: 31.90 change: +2.34 stop: 28.49

Why We Like It:
This is a very aggressive play as we're trying to call a short-term bottom in FLR. The stock bounced near its October lows on Friday and short covering carried it to a 7.9% gain. The trend is still very bearish but it FLR can bounce from here it would be a bullish double bottom pattern. If you don't want to chase it at $31.90 then consider waiting for a dip back towards $30.00. There has been some talk that construction companies like FLR might do well if the Obama presidency includes some infrastructure deals but I think it's a little early to start making bets on that.

We are listing two targets. Our first target is $35.50. Our second target is $39.50. FYI: The P&F chart is still bearish with a $22 target.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 30.00 FEM-LF open interest= 298 current ask $5.00
BUY CALL DEC 35.00 FEM-LG open interest= 554 current ask $2.55
BUY CALL DEC 40.00 FEM-LH open interest=2106 current ask $1.25

Annotated Chart:
FLR

Picked on November 22 at $ 31.90
Change since picked:      + 0.00
Earnings Date           02/26/09 (unconfirmed)
Average Daily Volume =       5.7 million  


Research In Motion - RIMM - close: 44.80 change: +3.28 stop: 41.25

Why We Like It:
RIMM has received a lot of positive press about its latest product launches. Investors might respond to some of the positive press if the stock market can stop falling for a few days. Looking back the stock was just crushed back in September after its last earnings report. Now in the past few weeks RIMM has been trying to build a base at long-term support near $40.00. The mid-November dip in the 38.50-40.00 zone really looks like a possible bottom here and last week's low can be considered a higher low. Some of the short-term momentum indicators are also suggesting RIMM's next move may be higher.

If the market is going to rebound from here then I expect RIMM to out perform. We're suggesting calls with a stop loss under Friday's low. We have two targets. Our first target is $48.00, which should line up with the trend of lower highs (see chart). You'll want to take some money off the table there. Our second target is much more aggressive as we're aiming for the $54.50 mark under the early November peak. Note: We do not want to hold over the mid December earnings report.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 45.00 RFY-LI open interest=5160 current ask $6.00
BUY CALL DEC 50.00 RFY-LJ open interest=7224 current ask $4.00

Annotated Chart:
RIMM

Picked on November 22 at $ 44.80
Change since picked:      + 0.00
Earnings Date           12/18/08 (confirmed)
Average Daily Volume =      35.6 million  


Sears Holding - SHLD - close: 30.44 change: +0.37 stop: 26.75

Why We Like It:
All right, let me stop you before you send me any hate mail for adding SHLD as a bullish play. I fully realize that we are still moving deeper into the recession and that consumer spending is probably going to get a lot worse before it gets better. Unemployment is still rising. Many believe that this will be the worst Christmas shopping season in over 20 years. So why buy calls on SHLD? You might be able to argue that the drop from $108 to $27 in the last ten weeks has already priced in the economic slowdown.

I would like to point out that when the S&P 500 was crashing lower on Wednesday and Thursday last week shares of SHLD were calmly trading sideways in the $27-30 zone. SHLD has found support near $27.00 for almost four days in a row. Volume has been above average those same four days. This really looks a possible short-term bottom for SHLD. Of course it's entirely possible that this is just a speed bump on the way down. Bears have stopped just long enough to fill up the gas tank again. That may be true. SHLD reports earnings in early December and their results could push the stock to new lows. We do not want to hold over that announcement. That's probably the worst part about this play is that we only have five trading days for it to work.

We're suggesting readers buy calls now with a wide (a.k.a. aggressive, high-risk) stop loss at $26.75. We have two targets. Our first target is $34.90. Our second target is $39.50.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 30.00 KTQ-LF open interest= 551 current ask $6.20
BUY CALL DEC 35.00 KTQ-LH open interest=1947 current ask $4.10

Annotated Chart:
SHLD

Picked on November 22 at $ 30.44
Change since picked:      + 0.00
Earnings Date           12/02/08 (confirmed)
Average Daily Volume =       2.2 million  



In Play Updates and Reviews

Exiting Bearish Plays


CALL Play Updates

*Currently we do not have any call play updates*


PUT Play Updates

*Currently we do not have any put play updates*

Almost all of our recent put plays hit our target in just the last couple of days.


Strangle & Spread Play Updates

SPDR GOLD Trust - GLD - close: 78.85 change: +5.40 stop: n/a

Gold was a huge out performer on Friday. The yellow metal surged more than $40 an ounce and the GLD rallied more than 7.3% to breakout from its recent trading range. No one seemed to have any real data on why gold was rising so fast. There was some speculation of a short squeeze in gold while other accounts were suggesting it was safe-haven buying. The safe-haven comments would have made more sense on Thursday when stocks were plunging. The U.S. dollar wasn't crashing so we can't blame the move in gold on the dollar.

Whatever the cause we were happy to see the move. Until Friday our aggressive November strangle was dead. The sudden surge sent the November $75 calls (GVD-KW) to a high of $4.00 and the ask was trading at $4.40. This allowed us to exit with a minor gain. The November strangle involved the Nov.$75 call (GVD-KW) and the Nov. $70 put (GVD-WR) at an estimated cost of $3.10.

We are not suggesting new strangle positions at this time. Our remaining strangle involves December options.

What is a strangle?
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.

-December Strangle-

Summary:
We suggested readers buy the December $75 call (GVD-LW) and the December $70 puts (GVD-XR). Our estimated cost was $6.30. We want to sell if either option hits $12.00.

Annotated Chart:
GLD

Picked on November 09 at $ 72.50
Change since picked:      + 6.35
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  


Ultra S&P500 ProShares - SSO - close: 21.21 change: +2.20 stop: n/a

Short-covering at the end of option expiration week sent the S&P sharply higher on Friday afternoon and the SSO ended the day up 11.5%. The trend is still down but a lot of folks are hoping for a bottom.

We're not suggesting new positions at this time. We warned readers that a snapback rally was going to happen sooner rather than later. The question now is will there be any follow through?

Note: The SSO is an ultra-long ETF that typically moves twice the daily performance of the S&P 500 index.

What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.

-December Strangle Details-
We suggested readers buy the December $30.00 call (SOJ-LD) and the December $20.00 put (SOJ-XT). Our estimated cost is $3.75. We want to sell if either option hits $6.00.

Annotated Chart:
SSO

Picked on November 12 at $ 24.84
Change since picked:      - 3.63
Earnings Date           00/00/00
Average Daily Volume =       126 million  


CLOSED BEARISH PLAYS

Bard CR - BCR - close: 81.01 change: +3.52 stop: 81.51

Target achieved. BCR hit both our adjusted target at $76.55 and our previous target at $75.50 on Friday. The stock sold off to $75.33 before bouncing back and bounce back it did! Shares soared to $81.01 producing a big bullish engulfing candlestick on above average volume. The stock could be poised for a rally back toward $85 or its 50-dma.

Chart:
BCR

Picked on November 15 at $ 82.91 /target hit 76.55
Change since picked:      - 1.90
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       1.0 million  


ConocoPhillips - COP - close: 46.84 chg: +5.04 stop: 50.05

Correction: We added COP as a new put play on Monday night but failed to update it. Shares of COP saw an intraday spike above resistance at $50.00 on Wednesday, Nov. 19th and the stock hit our stop loss at $50.05 closing the play. The move on Wednesday eventually turned south and COP plunged to new multi-year lows of $41.27 on Thursday but we had been aiming for the $41.00 level. Friday's big short-covering bounce is worrisome if you're bearish and I would expect it to bounce back toward the $50.00 level. I might be tempted to enter new bearish plays if COP produced another failed rally at $50.00 but until then I would wait. A breakout over $50.00 would be short-term bullish and the stock could rally toward technical resistance at its 50-dma (currently 57.73).

Chart:
COP

Picked on November 17 at $ 46.76 /stopped out 50.05 on 11/19/08
Change since picked:      + 0.08
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      18.1 million  


Kohl's Corp. - KSS - close: 26.15 change: +1.17 stop: 28.71

We are suggesting that readers exit any bearish positions in KSS. The stock hit our first target at $25.50 on Thursday's decline. Shares slipped to $24.28 on Friday afternoon and bounced back sharply when the market turned around. I suspect that KSS will continue to stage an oversold bounce this week. Watch for resistance near $30.00. Our secondary target we had been aiming for was $22.00.

Chart:
KSS

Picked on November 15 at $ 29.09 /1st target hit 25.50
Change since picked:      - 2.94
Earnings Date           02/26/09 (unconfirmed)
Average Daily Volume =       8.4 million  


DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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