Option Investor
Newsletter

Daily Newsletter, Saturday, 6/20/2009

Table of Contents

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

Market Wrap

The Witch Is Dead

by Jim Brown

Click here to email Jim Brown

Quadruple witching expired on Friday with hardly any volatility and very little movement in the indexes. It appears that all the major positions were closed when the markets tanked on Monday/Tuesday and that left traders standing on the sidelines as the quadruple witching passed uneventfully.

Market Statistics

Options expiration was the focus on Friday but it was like waiting for a bus that never showed up. Traders were waiting for the extreme volatility to appear but it never came. Volume was average for an expiration Friday and prices remained pinned to the most common strikes. There was not enough volume to overcome the market makers as they kept prices in a tight range so the most options would expire worthless. It was a typical summer Friday rather than a high volatility options expiration day. Note that Thursday's volume very low for the day before expiration. The additional volume on Friday was due more to the S&P rebalance then expiration. Of particular interest was the very low volume on Monday when the market tanked hard. It was not that selling was heavy but just one sided. There was no rush to the exits.

Internals Table

Friday was also a void in terms of meaningful economic reports with Regional Employment the only material release. This is a lagging report for May and it showed employment fell in 39 states. This was nothing new and the market ignored it.

Next week is going to be drastically different in terms of meaningful economic releases. Nothing happens on Monday but Tuesday starts a three-day surge. The Richmond Fed Survey has rebounded from -55 in December to +4 in May. This five-month rebound is expected to continue but the bears are circling in hopes of a failure of the economic rebound. The Richmond Fed region has rebounded stronger than the rest of the country and all eyes will be on the Tuesday report. The coverage is for June so it is a current look at the manufacturing conditions in the region. The Philly Fed Survey from last Wednesday is show for comparison. Green shoots?

May Richmond Fed Survey

Philly Fed Survey

Also on the schedule for Tuesday is the Existing Home Sales for May. This is slightly lagging but a continued improvement is expected. The consensus is for a minor rise to 4.81 million annualized units from 4.68 million in April.

Wednesday is the big day with the Fed meeting announcement at 2:15 and $27 billion in 7-year notes up for sale. The FOMC meeting is the major event for the week. Fear of the Fed kept investors on the sidelines all week with daily stock TV discussions questioning when they will begin to raise rates. There are quite a few analysts that believe the Fed will change its statement next week to set the stage for future rate hikes.

The current statement has this sentence: "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Once they take away the "extended period" language the investing public will begin to speculate on when they will actually change rates. Most analysts believe it is at least three meetings away. The first change, which many believe will be next week, is to remove the extended period language.

The second change at the August meeting would be to add language warning that the Fed's bias was moving towards tightening. The third change would be an actual rate hike that could come as quickly as the September 22nd meeting. If this process does not move as fast as described above the next and most likely date for a rate hike is the November 4th meeting. The Fed Funds Futures were pricing in a 50-point rate hike by January just over a week ago. Regardless of the future timetable the confusion over when the rate hike process will start has got analysts running in circles trying to out speculate each other and institutional investors may be holding off on further investment until after Wednesday's meeting.

The ideal scenario would be for the Fed to acknowledge the confusion but again say rates will stay low for an extended period. That would tell investors that the Fed is not ready to reverse their bias and the outlook is for continued cheap money for several more months.

There is another storm brewing on the horizon. Fed Chairman Bernanke, with economic degrees from Harvard and a doctorate in economics from MIT, was kept on the job by President Obama rather than add to the economic confusion during the president's transition into office. Rumors are growing that Bernanke is about to be replaced by Larry Summers. Summers is respected in the market place but not as much as uncle Ben. Bernanke's life focus has been the great depression and how to avoid a reoccurrence. His thesis was on this topic at MIT and he is acknowledged as an expert on the subject. He was a professor at Princeton and chairman of the economics dept. Do we really want to kick Bernanke out of the position before the current crisis has gone away? Do we want Summers moving into the position and then trying to prove he is worthy of respect by suddenly changing the Fed's direction? This is not an event anybody wants to see until well into 2010 but rumors are heating up. In economic circles Bernanke is recognized as one of the smartest economic guys on the planet and a leading expert on monetary theory. Let's hope he keeps his job until the economy is rolling smoothly again.

Bernanke's problem now is the rising mortgage rates. If he continues to support the equity market with a free money program then mortgage rates are going to climb back towards 7%. If he puts the screws to the equity market and forces mortgage rates back down to 4% then the equity markets are going to tank. It is impossible for the Fed to provide support to the bond market and equity market at the same time. Add in the inflation problem created by free money and the Fed has a big challenge ahead and I hope the president is not going to try and change drivers in the middle of the race.

Next up on Wednesday is the $27 billion auction of seven-year notes. Every auction of late has been a bump in the road as investors wait to see if there will be enough bidders to take down the full amount and at what price. The 10-year and 30-year notes are more critical but there are none this week. There are $104 billion of treasuries up for auction with $40 billion two-year, $37B five-year and $27B seven-year. Sure hope there are still buyers overseas who want our debt or this recovery will come to an immediate halt.

If we can somehow dodge the economic guillotine on Wednesday the Thursday economics will be anticlimactic. The next revision of the Q1 GDP is still expected to show -5.7% growth. No news there. The Kansas City Fed Manufacturing Survey is expected to move into positive territory after nine months in the red. The Kansas survey is not seen to be as critical as the Richmond survey on Tuesday. The low in the Kansas numbers came in January at -25 and that had recovered to -3 in May.

Friday rounds out the week with Consumer Sentiment and Personal Income. If we dodged the bigger bullets on Wed/Thr the Friday reports will be ignored.

Economic Calendar

Actual market news next week will be controlled by the pace of earnings warnings. If we are going to see an uptick in warnings the last week of the month is where they should appear. The first Dow component to report Q2 earnings will be Alcoa on July 7th. That is only two weeks from now and there is a lot of water to go under the bridge in terms of earnings guidance before Alcoa starts the earnings cycle.

We have seen some late cycle companies reporting earnings over the last couple weeks and a large majority reported weaker guidance and weaker consumer sales. We are definitely not out of the woods yet and any further warnings should give us a view of what to expect in Q2 earnings. Thomson Financial S&P-500 earnings estimates for Q2 2009 have improved to a drop of -34.4% from Q2-2008. Earnings for the entire S&P 500 are now expected to be $14.31 compared to $26.73 in Q2-2008. Most of the improvement is due to one stock. GM was dropped from the S&P and the elimination of their monster loss took the consumer discretionary sector of the S&P from expectations of a -40.3% loss to a gain of +36.64%. Still that was not enough to rescue the total S&P from a -34% decline. Also helping was the financial sector estimates with a +309% (not a typo) increase in earnings for Q2. If you have a 70% swing in consumer discretionary and a +309% gain in financials and the S&P earnings are still down -34% that tells you how bad the rest of the sectors are performing.

Health care stocks rallied on Friday because it appears the President's $1 trillion dollar healthcare reform program may not happen in 2009. The number commonly quoted is 46.5 million Americans are uncovered by health insurance. Of that number 5.6 million are illegal aliens. 12 million are already covered or are eligible for the SCHIP program for children. 20.1 million make more than twice the poverty level in wages and choose not to buy health insurance. That leaves only 8.8 million truly uncovered and adding them for $1 trillion is considered too costly by most lawmakers. This has caused the stocks of many healthcare companies to rally on expectations that the reform will become bogged down in the process until next year and by them President Obama may not have enough political capital left to get it passed before the 2010 elections.

China's $200 billion sovereign wealth fund China Investment Corp said it was going to invest $500 million in hedge funds run by Blackrock Group. This is the first deposit in what CIC said would be a $1.6 billion investment in the Blackrock funds and $6 billion in U.S. hedge funds in general. This is a 180-degree about face after CIC Chairman Lou Jiwei said in December he did not dare invest in financial institutions after losing money in Blackstone and Morgan Stanley. CIC invested an additional $1.2 billion in shares of Morgan Stanley earlier this month so that concern over the financial sector has evaporated. Analysts feel that the $6 billion commitment by CIC in the U.S. markets is a strong endorsement and confirmation the worst is behind us.

Sir Allen Stanford won't be making any new investments any time soon. Federal prosecutors filed criminal charges on him and several others in the firm for taking part in a $7 billion ponzi scheme. Stanford turned himself over to the FBI and will remain confined as a flight risk until over $1 billion in missing money that was under his control is found. If convicted Stanford could face up to 250 years in prison. Sure hope he enjoyed spending that money while he was riding high.

Three more banks failed and were closed on Friday bringing the total to 40 for 2009. Southern Community in Fayetteville GA, Cooperative Bank in Wilmington NC and First National Bank of Anthony KS were closed. $1.47 billion in combined assets were sold to other banks that took over the deposits of the failed institutions. The FDIC said the cost to the fund would be $363 million. The FDIC has closed more banks so far in 2009 than any year since 1993 and there is still half a year to go. RBC Capital estimated over 1,000 banks could be closed in the next three years. The FDIC reported 305 banks as problem banks at the end of Q1. That is a 24% increase since Q4 and also a high since 1993. The FDIC fund has fallen to $13 billion and the lowest level since 1993. Obviously the early 1990s was a challenge for the financial community and one the FDIC would like to prevent in 2009-2010. The FDIC insures 8,246 banks with $13.5 trillion in assets.

As if the markets don't have enough to worry about the axis of evil is heating up this weekend. Iran's contested election results are producing some serious problems and they won't go away. It appears evident to everyone now that the election results were really rigged and the supreme leader Ali Khamenei has given up trying to pacify the people. He is now threatening them if they continue to protest. Analysts expect this to produce a showdown on Saturday that could be similar to China's Tiananmen Square massacre where more than 2600 people were killed. The Sea of Green protest march, which was planned for Saturday at 4:PM was expected to be the biggest yet. Riot police reportedly tried to breakup the protests but news out of Iran on Saturday afternoon is very sparse. Outside communications on Twitter, Facebook, YouTube, cell phones etc are being turned off and reporters have been asked to leave the country. Sporadic communications from hospitals report dozens to hundreds of gunshot wounds. Bodies were seized by the army and loaded on army trucks and taken away so there would be no evidence.

Secondly North Korea is reportedly going to launch a missile towards Hawaii on July 4th. They tried this once before several years ago but the missile aborted several second after takeoff. The U.S. military has activated a missile defense screen around Hawaii for next weekend and a launch is sure to escalate the current hostility towards North Korea. They are not trying to hit Hawaii but simply prove they can if they want to. If events transpire as expected there is sure to be an international incident and the North Korean reaction to that incident will not be rational. The UN is also tracking a NK ship suspected of carrying weapons for delivery to another country in violation of the recent UN weapons ban on North Korea.

Since NK is a flea compared to the U.S. the markets will probably show only a token response to any showdown. Iran is a different problem. If their army escalates the shooting of their own people the markets could react negatively on Monday since Iran is a much bigger problem.

Oil prices crashed after 12:00 on Friday. At noon the futures were trading just a couple cents under $72 when the selling began. For the rest of the day it was seller panic and crude traded as low as $68.90 before closing at $69.92. The problem for crude prices is the expiration of July futures on Monday afternoon. The expiration of futures forces the leveraged ETFs to roll contracts forward to the next expiration period. The USO ETF controls over 20% of the open interest in crude futures. When they roll out of contracts it always causes a blip. The DXO only holds July contracts so they have to roll all their positions before the June 22 expiration. Obviously managers of these ETFs are not going to wait until 12:30 on Monday to launch a sell program. I firmly believe Friday's selling was due to crude expiration pressures and not external events. The drop in crude carried over into gasoline as well.

Crude Oil Chart

Gasoline Futures Chart

Late Friday the Wall Street Journal reported that Steve Jobs had a liver transplant earlier this spring and was recovering from the operation. The WSJ said Jobs is still expected to return to work by month end. The transplant occurred in late March or early April and was not disclosed by the Apple board. (Nasdaq:AAPL)

I heard two reports on Friday about option open interest falling sharply after Monday. I believe this was a result of stops getting hit when the Russell deleted stock list was pounded by the funds and shorts on Monday morning. The sharp drop in open interest early in the week produced a calm close for the week.

The S&P rebalance was completed at the close on Friday so that is no longer a factor in the market. The Russell rebalance is alive and well but most positions gaming the rebalance should already be in place. The next time we are likely to see an impact from the Russell rebalance is from next Friday afternoon through month end.

We should also see the normal quarter end window dressing the last three days of the month and that should help buoy the markets until then. Funds that did invest in equities over the last three months will want to keep those positions in the green at least until month end.

All the indexes with the with the exception of the Dow are holding over their 200-day averages. I view this as bullish support. However, the market is more than likely going to trade on news next week rather than technicals. Nearly every technician in the press and on stock TV appears to be turning bearish. This is a bullish event for contrarians. When everyone was bullish over the last six weeks the market struggled to move higher. Now that the bulls are throwing in the towel and turning bearish I believe the markets have a chance of moving higher.

In Robert's Contrarian update on Thursday he showed that all three indicators, the VIX, put-call ratios and the Investors Intelligence numbers had all turned negative for sentiment. This is rare that all three indicators are showing the same signal. It also suggests even more so that we should apply contrarian logic to the signals.

When I look at the Dow chart I see two major down days in Mon/Tue (Russell shorting) but I also see three tests of support at 8500 and all three held. This could just be a plateau before the next leg down or it could be the pause that refreshes the bulls. There were a tremendous number of extraneous events last week that pressured the market and the bears could only force a -3% drop. That is pocket change compared to the three-month rally.

However, if this is just a staging point while we await the Fed decision then we could be vulnerable to something in the 8200-8300 range. I personally don't think it will happen without some further external pressure like negative Fed language, earnings warnings, international incident, etc. I continue to favor buying the dip from 8800 but at the same time realizing that dip could continue to 8200.

However, fund managers don't make money in a declining market. In order to draw cash in from the sidelines the market needs to maintain a positive trend. Managers have been waiting for a decent pullback to buy and this is it. Now, as it usually happens, they are probably second guessing themselves and wondering if they can buy it a little lower. The greed gene is potentially fatal. It kept them from getting in the first time when the markets rebounded in March. "Surely it will come back and I can buy it cheaper." Instead of biting the bullet a week into the rally many managers remained under invested while the markets rallied +35%. The $64 question is will they make the same mistake twice? If you just look at the Dow chart it is saying sell but this is not the first time the indicators have pointed down in this rally and then failed to follow through on their indications.

Dow Chart

The S&P-500 rebounded off the support of the 200-day average for the last three days and stubbornly refused to give up its prior gains. A -2.6% retracement, -25 points, was nothing compared to the +280 points gained in the rally. Even with the expiration pressures the S&P did not even come close to the 900 level and appeared pinned to 920 by the market makers. With expiration and rebalance pressures behind us the S&P will be free to mount another attack on the 950 level.

The last three days showed progressively higher highs/lows after the Mon/Tue beating. Like the Dow the RSI and MACD are suggesting sell but there are minor reversal indications showing as well. I don't want to be using a magnifying glass to search out a positive turn on the indicators so holding above the 200-day is where I will hang my hope. If that support fails I believe we could see a continued decline to as low as 880 if news events control our fate.

S&P Chart

The Nasdaq remains much more bullish than the other indexes. It is well over the 200-day average and continues to respect the 30-day average as support. The dip last week bounced exactly on support at a hair under 1800 and while it is not enough to proclaim a rebound it was still a bounce. The Apple trend is turning positive again and the $4 decline in RIMM on Friday could not keep the Nasdaq from posting a 20-point gain. Even Google appears to be trying to build a consolidation base. Bing has not harmed its support at the 30-day average. If a real correction appeared the Nasdaq has risk to 1675 but it would take a real bout of selling and some seriously negative news to hit that support.

Nasdaq Chart

The Russell 2000 is not confirming anything but it did hold at support at 500. Until the rebalance is over on July 1st we can't rely on the Russell indexes for any market direction.

The transports have declined from their 3400 resistance from the prior week to rest at 3200. Rail car traffic is apparently improving in June after 22 months of declines. The rails need to hold up because the truckers are heading to the bottom of the barrel. The combination of higher fuel costs and continued slower retail sales is a problem. Container traffic is down -22% from the same period in 2008 but rose +2% in April. If there are green shoots in the shipping sector they are very fragile. If the transports start to move higher over 3200 then equities should follow.

Dow Transports Chart

The Wilshire 5000 Total Market Index set a new 8-month high in early June and only gave back a small portion of its gains. The Dow has been unable to move over 9000, which would be the equivalent level. The Dow is handicapped by the individual stocks in the 30 stock index and we saw two of them kicked out last month. The Wilshire is more representative of the overall market health. Over the last six weeks we saw two consolidation periods and last week's decline was minimal. Strong resistance at 9750 would be the key to knowing when the next market move higher had traction. This index eliminates single stock impact like Google, RIMM or IBM. This is the market. If it moves over 9750 it is a confirmed rally but 10,000 will be the next challenge.

Wilshire 5000 Total Market Index Chart

I would continue to buy the dip but be aware that there may be a larger dip in our future. Summer is typically weak for the markets and Q2 earnings may not be exciting. The biggest event next week is the FOMC announcement on Wednesday so be prepared.

Jim Brown


Index Wrap

Losing Momentum

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The S&P and Dow finally broke out of their relatively narrow trading range to the downside. I had been leaning bullishly still (looking for more upside) and still am on a longer-term basis, but corrections after a lengthily rebound in what had been a bear market are also to be expected.

Meanwhile, the pullback in the Nasdaq indices have been WITHIN its uptrend channel and presents a still bullish chart picture. However, I don’t believe that tech will resume a strong advance if the S&P falls further which it looks like it may.

Impatience, as reflected in recent polls, as to why the economy is not suddenly flourishing is unrealistic. At least it's contrary to every past recession where the first signal of a turnaround is when things stop getting worse; except for unemployment unfortunately, which is a lagging indicator.

There can be a tendency for an initial push over the 200-day moving average that is followed by a slip back below this widely followed benchmark in the weaker market, as is seen with the Dow.

Long-term charts remain bullish in their patterns; at least pullbacks are mild to date relative to the weekly/monthly charts. The longer-term 8-week RSI is however pulling back from an overbought extreme as you'll see on my 'chart of the week' selection, suggesting further weakness. The same pattern is more extreme in the Nasdaq 100 (NDX), which is not shown; in the NDX the 8-week RSI hit 75 in early-June.

CHART OF THE WEEK: S&P 500 (SPX) WEEKLY

The S&P 500 (SPX) is still a good gauge of the overall market because it reflects the overall consumer economy.

I'm featuring the weekly SPX chart this week. The multimonth rally hasn't been able yet to achieve a decisive upside penetration of the prior weekly high seen at 944. Given the 'overbought' extreme seen in the 8-week RSI, it would have been unusual for a breakout to new highs WITHOUT the typical pullback that commonly throws off an overbought extreme. SPX doesn't have to fall a lot to do that: sideways to slightly lower over several weeks will do.

I suggest keeping an eye on the SPX weekly down trendline that I've highlighted. A pullback to this line, previously representing resistance, should now act as support in the 857 area. It 'should' that is if SPX is in fact in the longer-term recovery mode I think it's in.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

I'd rate the S&P 500 (SPX) chart as overall bullish as long as it doesn't pierce its prior (down) swing low at 879. Moreover, so far at least the Index has rebounded from support implied by the 200 day moving average. There is some key near-term overhead resistance at the 'line' of recent lows however as noted at my first (red) down arrow; i.e., support once penetrated, 'becomes' resistance later on.

Bottom line here is to not rule out a retest of prior lows around 880. If those prior lows are pierced on a closing basis however and for more than a day, it would suggest a deeper correction is underway than I'm currently anticipating. Initial support however should be noted as in the 900 area.

Resistance is apparent around 925-926, then at 950. A close over 950 that is maintained beyond that day would show renewed upside momentum. Major resistance begins in the 990 to 1000 price zone.

The 13-day RSI has fallen off, moving toward at least a more neutral reading, although not yet to an 'oversold' reading. Bullish sentiment dipped sharply by Thursday, which is positive for a recovery rally further on.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index pattern looks a bit different than that of SPX in that there was a well-defined up trendline that has now been pierced. The relative importance of this line will be seen if OEX can't rebound back above it. If so, look for further weakness, such as back to 420 or lower, or toward a retest of prior lows around 412. Major support begins at 400.

I didn't note on my chart, but a next resistance zone is in the 440-445 area of recent highs; next resistance is at the prior 448 high from early this year. Major resistance begins in the low 460's.

TRADER SENTIMENT:

Bullish sentiment had at least a 1-day sharp dip this past week, indicating that traders were buying put protection in individual stocks. If bullish sentiment continues to fall, which it should on further weakness in stocks or just an inability for the market to make upside progress, then this indicator should be its typical harbinger for another rally attempt.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) looks like it will continue its recent correction and head lower, such as back to a retest of support around 8400-8370 or down to prior lows around 8215.

Resistance is at 8635 currently, then at 8838. A close above 8838 is needed and for more than a day, to suggest that upside momentum was resuming.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) chart remains bullish and within its bullish uptrend channel so far. If you start to see closes under 1800 then look for further weakness, such as for a retest of support implied by the 50-day average, currently intersecting at 1740.

The key chart support in terms of a trend reversal is at prior lows in the 1660 to 1677 area. As long as COMP doesn't close below this zone or at 1660 specifically, the uptrend is intact.

On the upside, key resistance is seen around 1870, at the line of prior highs. Next resistance comes in the 1900 to 1907 area in my estimation. Major resistance begins at 2000.

The RSI has recently at least fallen to a 'neutral' reading near 50. An oversold reading may not happen but I'd buy a pullback into technical/chart support more readily if it did.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart remains bullish as is especially seen in the rebound from the top end of its late-May upside price gap (the gap was 'filled in' and buyers came in: bullish) AND by the rebound seen from the low end of its uptrend channel. Key tech stocks are so far holding where I would expect in terms of support.

If 1435 is pierced then I'd look for further weakness, such as for a pullback to support at 1400 or perhaps even to the 1350 area. I'm not anticipating this deep of a dip but perhaps 1370 might be seen. Key big cap tech stocks are perceived as having value in this market and dips in them should continue to find buyers, absent some unexpected bearish news. Well that's always the case with 'unexpected' news! Stay tuned.

Resistance is quite apparent at 1515, then not so apparent at 1550. Major resistance begins above 1600.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) remains overall bullish in its pattern like the underlying NDX index of course, as long as the Q's up trendline is also not pierced on a closing basis.

Volume patterns and the On Balance Volume (OBV) indicator is neutral and in a sideways trend.

Near QQQQ resistance: 37.2

Key next overhead resistance: 38.0

Projected major resistance: 40

Near QQQQ support: 35.8

Next support: 34.3

First area of major support: 33.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT), like the Nasdaq which it most closely tracks, remains bullish provided that the Index doesn't start closing below 505-500. Next key support is suggested at 480, at the moving average. The critical chart point to suggest a downside reversal of at least the intermediate trend is at the prior 470 downswing low.

Key technical resistance is in the 532-535 area, then at 550. A close above the line of prior (532-535) highs would suggest renewed upside momentum.

GOOD TRADING SUCCESS!

Leigh Stevens



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

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 (i.e., the put/call ratio). In my indicator a LOW reading is bullish 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

Consumer Electronics and Heavy Duty Vehicles

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Apple Inc. - AAPL - close: 139.48 change: +3.60 stop: 134.45

Why We Like It:
Normally on a big event like a new product launch the trade is to sell the news. However, AAPL's new 3GS iPhone isn't necessarily a new product just an improvement. Furthermore the stock has been sinking for two weeks. Well, maybe not two weeks. This past week was more of a sideways consolidation near $135.00. Friday's bounce looks like a new bullish entry point. With just a few days left before the end of the quarter AAPL could be a target for window dressing by fund managers. The stock is up huge in the second quarter. What manager doesn't want to put a winner like this in their portfolio?

I'm suggesting bullish positions now. Some readers may want to wait for another dip back toward $137-136. Others may want to wait for a new rise over possible resistance at $140. Our primary target is $149.00. I'm setting a secondary target at $157.50. More aggressive traders could aim higher. We plan to exit ahead of the July 21st earnings report. FYI: The Point & Figure chart is forecasting a $231 target.

Suggested Options:
July options expire after July 17th. Readers may want to consider buying October strikes for the extra two days. I'm suggesting Julys. It is always up to the individual trader to decide which month and which strike price best suits your trading style and risk profile.

BUY CALL JUL 135 APV-GG open interest=16693 current ask $8.35 
BUY CALL JUL 140 APV-GH open interest=25276 current ask $5.45
BUY CALL JUL 145 APV-GI open interest=21145 current ask $3.35
BUY CALL JUL 150 APV-GJ open interest=27005 current ask $1.90

Annotated Chart:

Picked on     June 20 at $139.48
Change since picked:      + 0.00
Earnings Date           07/21/09 (unconfirmed)
Average Daily Volume =        20 million  
Listed on  June 20, 2009         


Navistar Intl. - NAV - close: 45.16 change: +0.44 stop: 42.40

Why We Like It:
Shares of NAV look great for a company that makes trucks, busses, engines and military vehicles. Given all the Chrysler and GM press you could have thought all vehicle manufacturers were crashing. NAV stock looks pretty bullish right here. Traders just bought the dip near $42.50. I'm suggesting short-term call positions now but we want to use a relatively tight stop loss because NAV still has potential resistance in the $46-47 zone dating back to 2007 and early 2008 lows. Our first target is $49.85. Our second target is $54.00. Currently the Point & Figure chart is bullish with a $64 target.

Suggested Options:
Earnings are not until September so I'm suggesting the October or the July calls.

BUY CALL JUL 45.00 NAV-GI open interest= 7111 current ask $3.90
BUY CALL JUL 50.00 NAV-GJ open interest=18430 current ask $1.95

BUY CALL OCT 50.00 NAV-JJ open interest= 144  current ask $4.50
BUY CALL OCT 55.00 NAV-JK open interest=  65  current ask $2.85

Annotated Chart:

Picked on     June 20 at $ 45.16
Change since picked:      + 0.00
Earnings Date           09/03/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on  June 20, 2009         



In Play Updates and Reviews

Ready for the Window Dressing

by James Brown

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CALL Play Updates

Amazon.com - AMZN - close: 82.96 change: +1.36 stop: 79.75

AMZN just spent a week consolidation at the bottom of its bullish channel. Bulls have been buying dips near $81.00. I'm suggesting readers use the bounce on Friday as another entry point to buy calls.

Our first target is $89.00. Our second target is $97.50. The P&F chart has produced a new buy signal with a $101 target.

Suggested Options:
I am suggesting the July or October calls but we plan to exit ahead of the late July earnings report.

Annotated Chart:

Picked on     June 12 at $ 82.50 *triggered     
Change since picked:      + 0.46
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       6.9 million  
Listed on  June 01, 2009         


Apollo Group - APOL - close: 66.19 change: -0.75 stop: 62.24

We have six days left for our APOL call play. The stock broke out over resistance last week. The pull back toward this resistance near $66.00 on Friday is another entry point to buy calls. Keep in mind that this is somewhat of an aggressive trade with overhead resistance in the form of its 100-dma and 200-dma near $68.75.

Our first target to take profits is $69.95. Our second target is $74.00. The Point & Figure chart is forecasting an $82 target. We do not want to hold over the June 29 earnings report. We will plan to exit on Friday, June 26th or Monday, June 29th.

Suggested Options:
I would use the July calls.

Annotated Chart:

Picked on     June 17 at $ 66.10 *triggered  
Change since picked:      + 0.09
Earnings Date           06/29/09 (unconfirmed)
Average Daily Volume =       3.4 million  
Listed on  June 08, 2009         


Becton Dickinson - BDX - close: 69.15 change: -0.16 stop: 67.75

Our call play on BDX was almost triggered on Friday. The stock broke through resistance at $70.00 and its 200-ema Friday morning but the high was only $70.31. Our trigger to buy calls is at $70.51. The rally failed and BDX slipped back toward resistance near $69.00 (easily seen on an intraday chart). I'm sticking with our $70.51 entry point.

If triggered our first target to take profits is $74.90. Our second target is $79.00. Currently the Point & Figure chart is bullish and forecasts an $86 target. We don't want to hold over the late July earnings report. Note: I'll admit that our second target at $79 is a little aggressive considering our time frame. Be sure to take some money off the table at $74.90.

Suggested Options:
I'm suggesting the July or September calls.

Annotated Chart:

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       1.8 million  
Listed on  June 18, 2009         


Express Scripts - ESRX - close: 66.39 change: +0.29 stop: 59.99

ESRX is a new play from Thursday night and the pop toward $68 on Friday doesn't change anything. I suspect that the stock will contract and retest the $65.00 level so I'm suggesting readers use a trigger to buy calls at $65.25. If triggered our first target is $69.90. Our second target is $74.75. FYI: The P&F chart is bullish with a $77 target.

Suggested Options:
I am suggesting the August calls. We do not want to hold over the very late July earnings report.

BUY CALL AUG 65.00 XTQ-HM open interest=2075 current ask $5.10
BUY CALL AUG 70.00 XTQ-HN open interest=5865 current ask $2.70
BUY CALL AUG 75.00 XTQ-HO open interest=1676 current ask $1.20

Annotated Chart:

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       3.7 million  
Listed on  June 18, 2009         


Intl.Bus.Mach. - IBM - close: 105.89 change: -0.44 stop: 104.90

Shares of IBM are down six days in a row. The stock is testing very short-term support at $105.50. Oddly enough volume was pretty strong at 13.6 million shares on Friday. You could argue that IBM is now (very) short-term oversold and due for a bounce. The larger trend is still up. I would buy this dip or buy a bounce from here. More aggressive traders may want to lower their stop to under the 50-dma (104.08). Our stop is at $104.90 to close the play if IBM breaks the $105 level. Our first target is $113.50. Our second target is $118.50.

Suggested Options:
I would use the July calls. Preferably the $105 or $110 strikes.

Annotated Chart:

Picked on     June 03 at $106.25 *triggered     
Change since picked:      - 0.36
Earnings Date           07/16/09 (unconfirmed)
Average Daily Volume =       7.3 million  
Listed on  June 01, 2009         


Mastercard - MA - close: 161.35 change: -2.04 stop: 158.90

We have been talking about a dip toward $160 in MA for weeks now. Shares continue to bounce from the 200-dma. Unfortunately the 200-dma is falling. Traders did buy the dip near $160 and shares are still inside their very, wide bullish up trend but without a doubt the action these last few weeks has been bearish. MA has suffered lower highs and lower lows and the P&F chart eventually turned bearish and now points to a $148 target.

If the economy is going to improve then MA will recover but we could be stopped out before that recovery appears. I labeled this an aggressive play due to MA's volatility when we launched it. If you were going to consider a bullish trade in MA then this is a good spot. We've got a stop loss at $158.90 so our risk on a new trade would be minimal. As a matter of fact I'm listing a new trade right here with a different set of targets.

Our May 4th entry point has two targets. We want to take some money off the table at $198.50 since the $200.00 mark could be round-number resistance. Our second target is $218.50.

Our new June 20th entry point also has two targets. We want to take profits at $174.00 and at $184.00.

FYI: If MA hits our stop loss readers may want to consider bearish strategies (like the July puts).

Suggested Options:
MA's next earnings report is July 30th (unconfirmed) and July options expire after the 17th. I'm suggesting the October calls for any new positions.

BUY CALL OCT 160 MAL-JL open interest= 222 current ask $15.40
BUY CALL OCT 170 MAL-JN open interest=2986 current ask $10.90
BUY CALL OCT 180 MAL-JP open interest=1580 current ask $ 7.40

Annotated Chart:

-- New Trade @ 161.35 --
Picked on     June 20 at $161.35 
Change since picked:      + 0.00
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       4.0 million  
Listed on  June 20, 2009

-- Original Trade --
Picked on      May 04 at $176.07 *gap down entry
                               /originally listed at $178.99
Change since picked:      -14.72
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       4.0 million  
Listed on   May 04, 2009         


Teva Pharma. - TEVA - close: 47.27 change: -0.32 stop: 45.40

TEVA is starting to see a correction after its late May early June rally. Shares failed near $48.00 and its 10-dma on Friday. I'm expecting a dip back toward $46.00. Readers can open new call positions on a dip in the $46.50-46.00 zone. Our exit target is $49.85. My time frame is very late July.

Suggested Options:
I don't see any August $45 or $50 calls so I'm suggesting the September strikes.

Annotated Chart:

Picked on     June 03 at $ 46.49
Change since picked:      + 0.78
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       5.0 million  
Listed on  June 03, 2009         


PUT Play Updates

L-3 Comm. - LLL - close: 71.70 change: -0.39 stop: 75.55

LLL is still slipping lower. The stock spiked toward $73.00 on Friday morning but immediately failed. I am still suggesting bearish put positions at current levels or on a bounce in the $73-74 zone. More conservative traders might be able to get away with a stop near $74.50 instead of ours at $75.55. We should expect some sort of bounce at $70.00. Our first target is $66.00. Our second target is $61.00.

FYI: The DFI defense index still has a bullish trend. The DFX defense index has turned sideways. LLL is under performing both of them but if these indices turn higher bears could face trouble in LLL.

Suggested Options:
I am suggesting the July puts.

Annotated Chart:

Picked on     June 16 at $ 71.75
Change since picked:      - 0.05
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       976 thousand  
Listed on  June 16, 2009         


MDC Holdings - MDC - close: 29.01 change: +0.37 stop: 31.05

The homebuilders managed a bounce on Friday but the trend in the DJUSHB home construction index is still bearish with a pattern of lower highs. MDC has a similar pattern but the stock is oversold enough that last week's rebound has caused a bullish up turn for some of the short-term technicals.

More conservative traders may want to lower their stop toward $30.50 or just start taking profits now. I'm not suggesting new positions. Our first target is $27.75. Our second target is $25.15.

Suggested Options:
No new plays at this time.

Annotated Chart:

Picked on      May 20 at $ 32.31 /gap down entry
                               /originally listed at $32.87
Change since picked:      - 3.30
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on   May 20, 2009         


Symantec - SYMC - close: 15.88 change: +0.19 stop: 16.85

Nothing has really changed for us with SYMC. The mid June failed rally near $16.75 was a bearish reversal and the stock has been slowly sinking since. Technicals are bearish and the MACD is about to produce a new sell signal. Currently shares are testing technical support at the exponential 200-dma. I am still suggesting new bearish put positions here. Our first exit target is $14.10.

Suggested Options:
I would use the July puts.

Annotated Chart:

Picked on     June 16 at $ 15.73
Change since picked:      + 0.15
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =      16.8 million  
Listed on  June 16, 2009         


Toll Brothers - TOL - close: 16.62 change: +0.18 stop: 18.26

TOL is sinking to new three-month lows. Shares are within striking distance of our exit target at $16.25. More conservative traders may want to go ahead and start taking profits right now. I'm not suggesting new positions.

Suggested Options:
No new plays at this time.

Annotated Chart:

Picked on      May 20 at $ 18.98
Change since picked:      - 2.36
Earnings Date           06/03/09 (unconfirmed)
Average Daily Volume =       4.7 million  
Listed on   May 20, 2009         


United Parcel Serv. - UPS - close: 48.14 change: -0.16 stop: 52.51

Thus far UPS is not cooperating. Both UPS and FDX have issued bearish comments after the most recent earnings reports. For FDX that report was last week. Both companies can be viewed as sort of a thermostat for business conditions in the country and if business is bad investors may want to be cautious. UPS has sunk to new relative lows and broke down under the 100-dma.

Our plan is to buy puts on a bounce back into the $49.50-50.00 zone. You could make that the $49.50-52.00 zone since UPS has resistance at $50.00 and near $52.00. If triggered our first target to take profits is $45.50. We do not want to hold over the late July earnings report.

Suggested Options:
We want to use the July or October puts. I prefer the Julys.

Annotated Chart:

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       5.2 million  
Listed on  June 17, 2009         


Strangle & Spread Play Updates

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

Walgreen - WAG - close: 31.43 change: -0.29 stop: n/a

WAG is a new strangle from Thursday night. Friday was our chance to open positions ahead of Monday's earnings report. After weeks of consolidating sideways WAG could see a big move on its earnings numbers and guidance. Wall Street is looking for a profit of 56 cents a share. I am not suggesting new positions at this time.

The options I suggested were the July $35 calls (WAG-GG) and the July $27.50 puts (WAG-SY). Our estimated cost was .50. We want to sell if either option hits $1.25 or higher.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on     June 18 at $ 31.72 
Change since picked:      - 0.29  
Earnings Date           06/22/09 (confirmed)
Average Daily Volume =       6.3 million  
Listed on  June 18, 2009         


CLOSED STRANGLE & SPREAD PLAYS

Gold ETF - GLD - close: 91.90 change: +0.29 stop: n/a

The U.S. dollar spiked higher on Monday and then faded lower the rest of the week. Unfortunately the dollar weakness wasn't enough to overcome weakness in gold. Our GLD gold ETF strangle has expired. The play was looking pretty good in early June with GLD over $96.00 but gold and the rest of the commodities suffered some profit taking.

The options we suggested were the June $95 calls (GLD-FQ) and the June $80.00 puts (GLD-RB). Our estimated cost was $1.95.

Chart:

Picked on    April 30 at $ 87.27
Change since picked:      + 4.63
Earnings Date           00/00/00 
Average Daily Volume =        13 million  
Listed on April 30, 2009