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Daily Newsletter, Saturday, 07/11/2009

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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

Calm Before the Storm

Surprisingly weak consumer sentiment and a warning from Chevron and the IEA overcame a bullish tech call by Goldman to keep stocks negative for the week.

Market Statistics

On Friday a surprise drop in Consumer Sentiment for July caught traders off guard and the Dow lost ground for the fourth consecutive week. Consumer Sentiment for July fell unexpectedly to 64.6 from 70.0 and increased fears of a double dip recession. The July decline was led by a sharp drop in the expectations component from 69.2 to 60.9. The present conditions component fell from 73.2 to 70.4. The drop in the headline number erased gains from the last two months and knocked the index back to levels not seen since late March.

The accelerated drop in non-farm payrolls we saw last week and continued high weekly jobless claims appear to he weighing on consumers. We saw a sharp drop in weekly same store sales and mortgage loan applications are falling. Credit card companies are continuing to lower available credit and raising interest rates and payment terms on existing balances. The stage is set for a double dip recession if something does not happen soon.

Consumer Sentiment Chart

The other two reports on Friday were lagging reports and were ignored. The International Trade deficit narrowed slightly from $26 billion in May from $28.8 billion in April. Import prices rose for the seventh consecutive month in June by +3.2% but the majority of the surge was due to the rise in crude prices.

The economic calendar for next week is very heavy with several critical events. Tuesday will headline with the Producer Price Index (PPI) and will show the impact of inflated prices at the producer level. Prices are actually expected to have declined in June with the exception of crude prices. The excess capacity in the system is preventing anyone from raising prices. Because of the energy impact the headline number should rise about +0.8% but the core rate could be negative.

On Wednesday the Consumer Price Index (CPI) is expected to show an increase in prices of +0.5%, again an increase due to the price of oil. Also on Wednesday are the FOMC minutes from the June 24th meeting. Because of the lengthy post meeting statement I don't expect any material impact from the minutes unless the Fed expresses concern for another drop in economic activity. This was not evident in the post meeting statement but could be discussed in the minutes. They had to talk about the possibility but we don't know that it was enough to include in the minutes.

Thursday is the first of the regional activity reports with the Philly Fed survey. This report is expected to show a drop in activity with a headline number falling to -10.0 from -2.2 in June. If this comes in as expected it will be one more indicator that the economy is losing traction over the summer months.

Economic Calendar

The big key next week will be the earnings cycle with big names in the tech sector and the banking sector that are likely to set the tone for the rest of the earnings period. Reports critical to the tech sector will be Intel (Nasdaq:INTC) on Tuesday, IBM (Nyse:IBM), Nokia (Nyse:NOK) and Google (Nasdaq:GOOG) on Thursday. Intel has already called a bottom in the PC sector and Goldman Sachs also turned bullish on the sector on Friday. Goldman raised Dell (Nasdaq:DELL) from a hold to a strong buy on Friday and placed Dell on their conviction buy list.

The banking sector will be represented by Goldman Sachs (Nyse:GS) on Tuesday with earnings expected to be $3.54 per share. That will be followed up by JP Morgan (Nyse:JPM) on Thursday with expectations for +0.05 in earnings. Friday closes the week with Bank America (Nyse:BAC) (+0.05) and Citigroup (Nyse:C) with a 34-cent loss. The bank earnings and more importantly guidance will be critical for market health.

CSX (Nyse:CSX) reports on Monday and hopefully will give us an update on railcar loadings. Recent reports claim a drop in rail shipments over the last several weeks. If this is true then the outlook for the economy is likely to weaken. American Airlines (Nyse:AMR) reports on Wednesday and will tell us how they see traffic patterns for the quarter and that will give us another look at the consumer mindset. Harley Davidson (Nyse:HOG) reports on Thursday and as a seller of high dollar consumer discretionary products will be another read on consumer spending. Last but not least GE (Nyse:GE) reports on Friday and they will give investors guidance on the health of the manufacturing sector from a different perspective. GE is normally seen as a proxy for the U.S. economy so their outlook will be an outlook for the economy.

While the earnings calendar is light in numbers of reports those key companies I highlighted above will give us a pretty good indication of how the rest of the earnings cycle will go. Even though the pace of earnings will pick up significantly the following week we will already have the outlook that matters from the week ahead. Traders will have already made up their minds and market direction could already be decided.

Earnings Calendar

Chevron (Nyse:CVX) reported earnings estimates on Thursday and with their earnings they warned that the outlook was not good. The impact of the falling dollar had cost them about $400 million for Q2. Earnings were also hurt by declining refining margins. Lower gasoline demand equates to lower crack spreads and for a company like Chevron with lots of overhead they need to push product through the system regardless of the demand.

This weekend is the anniversary of the $147 high in crude prices on July 11th 2008. The oil companies will be faced with an $80 drop in crude prices putting a serious crimp in profits both in Q2 and Q3. Chevron was just the first major to report the bad news and there will be many more to follow.

The current worry over possible rule changes for investing in commodities is keeping pressure on oil prices. Crude has been imploding since July 1st when it hit $71.85. Crude traded as low as $58.72 on Friday and closed at $59.66. That is the lowest close since mid May. Since the $73.90 high in mid June crude has fallen -$14.24 or -19%.

The IEA added to the gloom on Friday by saying the signs of a strong rally in global economic growth this year are fading but there could be a dramatic turnaround in 2010. The IEA fears that the summer driving season in the U.S. is going to be below average and job losses were forcing cutbacks on vacation trips. The IEA says now that when the rebound comes in 2010 is will come from emerging economies not from the US. Summer travel in the USA is down -25% this summer according to a survey out this week. Vacation travel to Mexico for instance has died due to the drug wars and swine flu. Driving vacations in the US are being cut back by rising unemployment, shrinking credit availability and the need to conserve cash.

The IEA said crude demand was now forecast to fall -2.9% in 2009 (-2.5 mbpd) but rise +1.7% in 2010 (+1.4 mbpd). Demand was expected to rise to 86.6 mbpd in 2010. The IEA also reported that compliance with the OPEC production cuts had fallen to 68%.

Crude Oil Chart

JP Morgan (JPM) told the Treasury Dept to take a hike when the Treasury told JPM how much they wanted for their TARP warrants. Under the TARP process the Treasury received warrants when they made a loan to the major banks. JPM has already paid back the TARP loans and has started the process to cancel the warrants. Under this process the bank submits a value they would offer for the warrants and the government submits an offer. If they can't agree then a third party will attempt to settle the dispute. If all else fails the warrants can be auctioned by the Treasury Dept.

Treasury told JPM their warrants were worth $1.2 billion and JPM was thinking more in the $500 million range. After several discussions JPM told the Treasury to start the auction process. These are ten year warrants and JPM either thinks they can get them back at a bargain price through the auction or they don't want to put out the additional cash today. Either way the auction process should start next week. Eleven smaller banks were able to buy back their warrants at 66% of estimates fair market value. Because of the smaller amounts that discount only cost the Treasury $10 million. With JPM that same discount would be around $400 million.

I mentioned earlier that Goldman Sachs had upgraded Dell to a strong buy on Friday. They also upgraded Hewlett Packard (Nyse:HPQ), Seagate Technology (Nyse:STX) and Apple Inc (Nasdaq:AAPL). In the same note they downgraded IBM (Nyse:IBM), Western Digital (Nyse:WDC) and CA (Nyse:CA) to a neutral from buy. Goldman believes the PC sector has bottomed and the Windows 7 upgrade cycle will produce a hardware wave late in 2009 and early 2010. Microsoft is the real buy here given the decline from the highs last week. Because there was no corporate upgrade cycle for Vista there are a lot of company PCs that have reached the end of their life and IT managers will replace them with new Windows 7 PCs. Obviously that assumes the recession will end soon and companies release their grip on their cash hoard.

Government Motors (GMGMQ.PK) exited bankruptcy after only 40 days and the CEO vowed to be leaner and meaner and make waves in the market. The government owns 61% of the new GM so it will be interesting to see how many waves they make. If you are still holding on to your shares of GM your time is running out. The stock will be cancelled any day now and anyone holding stock will be hung out to dry. Ironically the stock rallied 37% on Friday to $1.15 on news GM had exited bankruptcy. Since the stock is no longer tied to GM it is foolish to hold it. Buying GM stock today would be the equivalent of buying a lottery ticket for a lottery held last week. It has no value and we already know the ticket is a loser. Volume was over 70 million shares in GMGMQ on Friday and there is still more than 30,000 open interest in the July $2 puts and 45,000 in the Sept $2 puts.

Government Motors Chart

If it is Friday another bank must have closed. Sure enough when I checked the 53rd bank closure of the year took place in Thermopolis Wyoming to the Bank of Wyoming. It is the first Wyoming bank to fail since 1991. The FDIC estimated it would cost the fund $27 million to close and transfer the banks $67 million in deposits. Sounds like the BoW was in serious trouble and not just mildly overdrawn.

David Darst from Morgan Stanley Smith Barney said on Friday that 86% of the market cap of the Wilshire 5000 was currently in cash on the sidelines. He said normally those cash levels average about 40%. When a real economic rebound occurs he believes that money will be put back to work very quickly and the eventual rally will be huge. The keywords here are "when an economic rebound occurs." However, he did believe that many sectors were within 5% of their bottoms and he believes long-term investors should be getting ready to back up the truck. I don't have the benefit of knowing how correct his 86% in cash estimate it but I do believe the post recession rally has not yet begun. FYI, the total market cap of the index on June 30th was $10.79 trillion. If that only represents 14% invested (86% in cash according to Darst) then I want to be on that train when it leaves the station.

The key to a stock rally has always been increasing earnings and we don't have that yet. Add in the roll over in the economic reports and it appears we may not see those earnings improve much in Q2 or Q3. The percentage of companies that normally beat their earnings estimates is 65%. In Q1 it was only 46.1%. Obviously we don't have a Q2 number yet and it will be weeks before we do. Some analysts are expecting Q2 earnings to be much better than expected. I want some of what they are smoking. I would love to see that happen but I am not counting on it. About the only company I expect to beat strongly is Apple. I think the rest of the corporate world is just happy to get out of Q2 alive.

The banks could do better because interest rates are low and demand for business is high. What loans they are making are very profitable. Plus the mark to market rule is history so those semi-toxic assets they are still holding can be valued higher than they were in Q1 and that improves earnings. The real hindrance on the banks this quarter is the TARP repayment expenses. Most have already disclosed how much of a hit they will take to earnings for the repayment and they are glad to be out of the trap. This is why the bank earnings next week will be so critical. Show us the money or at least show us where it went.

Late Friday the Obama Administration said the might use the $700 billion in TARP funds to help small businesses now that the crisis in the financial sector appears to have passed. This comes after various administration spokesmen floated the idea of a second stimulus package last week. President Obama said at a stop in Africa on Friday that he was confident the new government health plan would be passed before the August recess. We heard this week that various methods had been proposed to pay for it. One trial balloon floated was a 4% tax on everyone who made more than $200,000 per year. The second plan was a graduated tax on the wealthy, described as anyone that makes over $280,000 a year. The new tax on the wealthy was expected to bring in $540 billion to offset the more than $1 trillion cost of the plan. Tax Description

The Dow has now firmly broken below support at 8200 and the bottom of the head and shoulders neckline. On both Wednesday and Friday the Dow found interim support at 8100 but the clear target is still 7750. The problem for the markets is the expectations for earnings and the declining economic indicators. The rally out of the March lows was on expectations for a quick economic recovery. Unfortunately that is either not happening or best case just temporarily stalled.

The market internals are not that bad but the volume is horrible so we really can't make a case for a continued decline based on the internals. Volume across all markets on Friday was only 6.7 billion shares and the lowest volume day for all of 2009. Thursday was barely better at 7.6 billion shares.

We are clearly in a holding pattern until next week's earnings. We have not really seen a flood of sellers but more of a buyer boycott. Advancers and decliners were almost equal on Friday but declining volume was 2:1 over advancing.

The Dow should continue to trade slowly lower without some positive news. The uptrend has been broken and now there needs to be an event to change the direction. Next week's earnings are setting up to be critical and the potential for a negative surprise is rising. If one or more of the Dow components posts a lousy report next week the result could be ugly. Dow components JPM, BAC, INTC, IBM, GE and JNJ all report next week.

Dow Chart

Dow Chart 15 min

The S&P-500 is clinging to a measure of respectability by the slimmest of margins. For the last three days the S&P traded below support at 880 only to recover at the close to that 880 level and on the 200-day average as support. A solid move/close below 880 should be lights out for the index. The S&P will be hostage to any Dow move next week because of the number of Dow components reporting. If we get a triple digit decline in the Dow the S&P is going to follow and confirm the head and shoulders breakdown. Analysts have been talking about a breakdown to 830 but it is possible we could even see 800 if enough of the big earnings reports begin to stink up the place.

S&P-500 Chart

The Nasdaq finally broke below the June lows but remains well above the disaster setups we are seeing in the Dow and S&P charts. The Goldman and JP Morgan upgrades to tech stocks are keeping the damage to the tech indexes to a minimum. This Nasdaq Composite chart has 100 points of buffer before the critical 1660 level comes back into play.

Nasdaq Chart

An even longer-term bearish resistance level on the monthly chart is the 200-month average and the 38% Fib retracement at 1840/1875. If the Nasdaq did manage to rally out of the normal summer slump this is serious resistance it will have to overcome.

Nasdaq Chart - Monthly

By comparison the Nasdaq-100 Ex-Tech Index ($NDXX) has declined slightly lower but remains solidly over support at 750. A breakdown here would be the signal to abandon ship. The next material support would not be until 700 and again at 650.

Nasdaq 100 Chart

The Russell is a carbon copy of the S&P with critical support at 475. It is currently riding support at the 200-day average (blue) lower. Something has to give here soon with either a rebound off 475 or a confirmed break lower. The pressure is building for a breakdown.

Russell 2000 Chart

The Dow transports chart is entirely different than the major equity indexes. The transports are fighting the 200-day as overhead resistance while the equity indexes are using the 200-day as support. The transports also have considerable support at 3000 and as long as CSX does not implode on Monday that support should hold next week. The transports rallied strongly out of the March lows on thoughts that shipments would pickup quickly. Recent reports claim that the increase in rail shipments in May has ended and late June numbers were showing declines in rail loadings. I am hearing the same from the trucking sector. I have heard from friends in the business that truck shippers are cold calling business owners looking for loads because conditions have declined so sharply. I heard one analyst suggesting shorting the transports on a break of 3000 by using the IYT ETF.

Dow Transports Chart

Last but definitely not least is the Dow Total Market Index ($DWC). The DWC is the broadest market index that includes the top 5,000 stocks. The index has strong support at 9000 and that is exactly where it closed on Friday. Like the Russell and S&P it is riding the 200-day average lower. The convergence at the 9000 level is critical. If this level breaks we could be looking at a major technical drop.

Dow Total market Index Chart

This will be a pivotal week in the markets. We will get earnings from the giants in two critical sectors, tech and banking, along with some fillers from manufacturing and consumer discretionary. This is the final exam before the market lets out for the summer break. If stocks fail this exam we could be looking at summer school for traders as we spend the next two months trying to find a bottom. Unfortunately I am not sure that even a passing grade will keep us from that fate.

We are entering the dog days of summer and the economy seems to be worsening again. That is not a good combination. This is also option expiration week and volume is at the lows for the year. This means volatility will either be nonexistent or huge. My best bet is for a continued buyer boycott because there is no overwhelming reason to be long the market until we see the economics begin to turn positive again and corporate earnings begin to rise to something other than "less bad." August and September are historically the two worst months of the year for the market and with economics worsening I am afraid of what may lie ahead. The minor decline last week could have just been the calm before the storm. I would be very cautious about entering new long positions next week. Who knows, if all the earnings are positive surprises maybe the gloom will lift. Until then I would keep my cash in reserve.

Jim Brown


Index Wrap

Continued drift lower

THE BOTTOM LINE:

The current technical/chart patterns primarily suggest prices will continue to drift lower, although the S&P (not the Dow) is hanging in so far at the low end of a well-defined trading range. The S&P indexes are also declining toward an oversold RSI reading, so could rebound. Any such a rally may be limited.

While I've been highlighting a possible Head & Shoulder's Top in the S&P, with support developing so far at the neckline of the H&S formation, this bearish pattern now looks 'activated' in the Dow 30 in that prices have broken under the neckline, as you'll see with that chart further on.

The Nasdaq 100 appears to have some potential support around 1350-1330. The specifics are seen with the charts below.

CHART OF THE WEEK:

A new pattern I'm featuring this week with the Nasdaq is that of the 'classic' down-up-down or a-b-c corrective wave pattern. In this interpretation, the Nasdaq Composite (COMP) and Nas 100 (NDX) are in the second down leg of this formation. Typically, the SECOND down leg will be longer than the first decline.

For example, such a second decline will end up equaling a fibonacci 1.62 times the point distance of the first downswing. This 'measurement' gives an idea of a possible downside target. The actual decline can be more or less than that of course, but it's often at least that amount. The point is that the second decline is longer than the first as more discouragement and less buying by the bulls shows up.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart can be viewed in a neutral to bullish light IF prices continue to hold at the low end of its multimonth trading range. If the low end of this range gets pierced it should however bring in more selling and prices drop.

There is also a more bearish chart interpretation in that the 3-top pattern of a high ('Left Shoulder'), followed by a pullback, another rally making a higher high (the 'Head'), another pullback and yet another rally that tops out (the 'Right Shoulder') around the level of the first high (the Left Shoulder).

Some technical traders will short or buy puts on the THIRD rally failure of the above described pattern when resistance turns prices lower from the same area as the FIRST top (the Left Shoulder). The study of many such patterns in stocks and indexes over many years has suggested this trading trigger.

A 'minimum' downside projection if there is a decisive downside penetration of the neckline OR the low end of the rectangular (trading range) formation at 879 is approximately the same and suggests a decline that carries to the 800 area.

Very near support is seen at recent lows (Wed and Fri) and, on a closing basis, at 879. Next chart support is well under recent support, first at 830, then in the low-800 area.

Near resistance is at 900, then around 930, with fairly major resistance in the 950 area.

I'm also keeping an eye on the 13-day RSI seen above as it gets down toward the oversold reading at 30 or below. As well, bullish sentiment has fallen to the point where another shot down in the market should put my indicator in a 'fully oversold' area that would also be an alert for a good-sized recovery rally within a day or few days of such a 1-day reading in the 1 to 1.1 range; i.e., total CBOE all equities call volume approaches parity with total daily put volume in stocks.

Note on my sentiment indicator: I divide call volume BY put volume instead of the norm in doing the opposite and why you see a fractional number with the put/call ratio. Which also means a high reading is bullish, a low reading bearish, which is opposite of the way most overbought/oversold indicators work.

S&P 100 (OEX) INDEX; DAILY CHART

I've outlined the bearish looking Head & Shoulders Top pattern apparent in the S&P 100 (OEX) Index below. Keep in mind however that only a break of the lower horizontal line (the neckline tends to 'confirm' the likelihood of a next down leg with an objective to around 380, but which is a minimum objective only.

A rebound from Friday's closing level, around the line of prior lows, with follow through buying would keep bullish hopes alive and a close above 420-422 could then lead to a rally back up to re-test the last rally high in the 435 area.

Very near support is around 410-412, with next support at 388, then at 380 even.

Near resistance is at 420, then at 435, extending to 444.

TRADER SENTIMENT:

Looking at bullish sentiment on the OEX chart above suggests the obvious fact that traders are getting more cautious as prices have fallen to within a hair's breath of a break down below the low end of the trading range over the past 2+ months. Such a break would likely bring in a lot more put buying as the bulk of traders tend to be trend followers, which by the way, is not the most consistent way to make money in options trading in my experience. (Others have different experiences, especially if they have 'triggers' that help refine a strictly trend following approach.)

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) met my initial downside objective for a move to the 8200 area and then some. The chart is more bearish in its pattern now that it's broken under 8200, which can be viewed as the 'neckline' of a Head and Shoulder's Top (H&S Top).

I've suggested that such an H&S Top suggests a possible ultimate downside objective to as low as the 7550 area. However, I've also noted chart support at 7800.

A move back above near resistance at 8200 and that lasted for more than a day, would suggest potential for a rebound back up toward 8400 or a bit higher.

INDU is getting down toward a area in the RSI which would be an oversold extreme, but it's not yet to 30 and could get to 25 in the 13-day RSI as seen below.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) chart has been bearish ever since its break of its up trendline in late-June. I highlighted this week on the Nas 100 (NDX) chart what looks to an obvious still-bearish down-up-down or 'a-b-c' corrective pattern and the same is apparent in COMP. The a-b-c pattern simply a correction where the second down leg tends to be LONGER than the first and one rule of thumb is that such a second down leg tends to at least be equal to a fibonacci 1.6 times the first (decline).

The first downswing in COMP was from the 1880 area down to 1770. The second decline as measured from 1870 should be greater than the prior 130 point downswing; e.g., a fall to 1665, which also happens to a next chart support.

Key overhead technical resistance now is down to 1800. Next resistance begins at 1850, extending to 1870-1880.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bearish and the projected a-b-c pattern I discussed in my initial 'bottom line' comments is highlighted on the chart below, with objectives for the 'c' down leg. You'll find notations on the chart. The recent minor rally looks like a bear flag and a further decline is ahead.

Near support is at 1400, then down in the 1350 to 1330 area.

Key near resistance begins around 1430 and extends up to 1470 or a bit higher (to 1480).

I said last week that "... it will be surprising to many if NDX pulls back as far as 1350-1300." A move to 1350 or a bit lower seems quite possible now the prior 1413 low gave way this past week.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) projects down to the 34 area in terms of its current bearish chart and 33.1 as a next target. The Q's look like they're going to see still lower prices. What could suggest a more bullish chart picture would be a sustained rebound back above 35.75-36.

Daily volume and the On Balance Volume (OBV) line turned up with the recent rally but a small bearish 'flag' formed on this last minor rebound and it looks like it's a matter of time, not if, a next decline takes the stock lower.

Near QQQQ resistance: 35.75

Next overhead resistance: 36.5

Near QQQQ support: 34.0

Next support: 33.1

First area of major support: 32.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart pattern tracks the Nasdaq. If RUT could mount a sustained rally from recent lows from near important prior support in the 470 area, bullish potential then would look revived. Absent that, I anticipate another decline that would re-test prior chart support in the 450 area.

Near RUT resistance is down to 500 currently, with the next resistance coming in around 520. A close above 520 that was sustained after that (where support developed on pullbacks to the 520 area) would revive bullish hopes or potential.

GOOD TRADING SUCCESS!



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 tend to 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

Fertilizer and Big Expectations


NEW DIRECTIONAL PUT PLAYS

Mosaic - MOS - close: 41.13 change: -1.63 stop: 45.05

Why We Like It:
The potash/fertilizer/chemical stocks continue to breakdown. On Friday the group displayed volatility over concerns that potash prices might fall overseas. MOS produced a failed rally at the $45.00 level. I'm suggesting put positions now. More conservative trades may want to wait for a new decline under Friday's low of $39.64 to open position. This is an aggressive trade because MOS and the sector can be so volatile. Our first target is $35.50. We do not want to hold over the July 22nd (unconfirmed) earnings report.

Suggested Options:
I am suggesting the August puts.

BUY PUT AUG 40.00 MOS-TH open interest=4327 current ask $3.50
BUY PUT AUG 35.00 MOS-TG open interest=3565 current ask $1.60

Annotated Chart:
MOS

Picked on     July 11 at $ 41.13
Change since picked:      + 0.00
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =       6.8 million  
Listed on  July 11, 2009         


NEW MARKET NEUTRAL STRANGLE PLAYS

Goldman Sachs - GS - close: 141.87 change: -1.34 stop: n/a

Why We Like It:
Goldman Sachs reports earnings this week on Tuesday after the closing bell. There is a HUGE amount of expectation for the company to knock it out of the park. Wall Street's current estimates are at $3.48 a share. Because expectations are so high I think the reaction will be bearish no matter what. However, you never know with GS as the stock can defy gravity at times. Instead of just buying a put on the earnings announcement I'm suggesting a strangle. July options expire this week so it's a chance for us to try a strangle and still keep our costs down. Of course the risk is that GS doesn't move enough and both our options expire worthless.

GS reports on Tuesday after the bell. We will open positions on Tuesday at the close. Right now the plan is to use the July $150 calls and July $130 puts but that might change based on where GS closes on Tuesday. I'll offer alternative strikes on Monday.

Suggested Options:
I'm suggesting the July options. These expire after Friday's close and we're not opening positions until Tuesday afternoon so needless to say we don't have much time, making this a higher-risk trade. We're essentially betting on a big move on Wednesday.

BUY CALL JUL 150 GPY-GJ open interest=21807 current ask $1.63
-and- (remember, prices will change by Tuesday afternoon)
BUY PUT JUL 130 GS-SF open interest=15369 current ask $1.03

Annotated Chart:
GS

Picked on     July xx at $ xx.xx <-- Open the Position on Tuesday!
Change since picked:      + 0.00
Earnings Date           07/14/09 (confirmed)
Average Daily Volume =      10.8 million  
Listed on  July 11, 2009         


In Play Updates and Reviews

Nervous Ahead of Earnings


CALL Play Updates

Euro Currency ETF - FXE - close: 139.45 chg: -0.87 stop: 137.90

Unfortunately the U.S. dollar is churning sideways instead of continuing its decline like we thought. This has left the euro drifting sideways as well. The path of least resistance for the dollar should be down so I remain bullish on the FXE. I would still consider new bullish positions in the $139.00-141.00 zone.

Our first target is $144.50. Our second target is $148.50. The P&F chart is bullish with a $168 target.

Suggested Options:
I would suggest using the August or September calls. Strikes are available at $1.00 increments.

Annotated Chart:
FXE

Picked on     June 23 at $140.76
Change since picked:      - 1.31
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


UltraShort SP& 500 - SDS - cls: 60.25 chg: +0.33 stop: 55.90

It was not a good week for the S&P 500. The index broke critical support at 880, which is the neckline to a bearish head-and-shoulders pattern. Stocks tried to bounce but the rebound was too weak. Instead of buying puts on the SPY I'm suggesting calls on the SDS to maximum any profit potential. That also means we're taking a little more risk because the SDS is twice as volatile.

Due to this inverse ETF's volatility readers may want to trade half or less than their normal position size. Our first target to take profits is the $64.00 level. Our second target is the $67.00 level. My time frame is several weeks (toward August option expiration) but traders might want to buy September calls instead.

Suggested Options:
I'm suggesting the August or September calls. I prefer the $60 or $65 strikes but strikes are available at $1.00 increments.

Annotated Chart:
SDS

Picked on     July 08 at $ 60.50 *triggered     
Change since picked:      - 0.25
Earnings Date           00/00/00
Average Daily Volume =        40 million  
Listed on  July 07, 2009         


Ultra-Short REIT - SRS - close: 22.75 change: +0.07 stop: 19.45

Nothing has changed from my Thursday night comments on the SRS so I'm reposting my play description here:

We've been hearing about how commercial real estate was the next shoe to drop for months. Well it finally looks like the sector is breaking down (along with the rest of the market). One way to play it is the SRS. This is a double-short ETF, which tries to move twice the daily inverse of the DJ U.S. real estate index. This index is full of REITs. The top ten components are: SPG, NLY, PSA, EQR, VNO, PCL, HCP, BXP, AVB, and HCN.

I'm suggesting readers buy calls on the SRS now but if we get the chance a dip in the $21.00-20.00 zone would be more attractive. This ETF can be somewhat volatile so I'm using a wide stop loss at $19.45. I suggest readers only trade half or less than their normal position size. Our first target is $26.00. Our second target is $29.50.

Suggested Options:
I am suggesting the August calls. Strikes are available at $1.00 increments.

BUY CALL AUG 22.00 SAK-HP open interest=1191 current ask $3.10
BUY CALL AUG 25.00 SAK-HE open interest=1444 current ask $1.95
BUY CALL AUG 28.00 SAK-HU open interest=5986 current ask $1.25

Annotated Chart:
SRS

Picked on     July 09 at $ 22.67
Change since picked:      + 0.08
Earnings Date           00/00/00
Average Daily Volume =      27.8 million  
Listed on  July 09, 2009         


PUT Play Updates

Agrium Inc. - AGU - close: 36.28 change: -1.62 stop: 40.05 *new*

The potash-fertilizer stocks were all weaker today over concerns about falling potash prices. AGU sank to new relative lows at $35.50 and closed with a 4.2% loss. Volume was above average on the decline. Please note our new stop at $40.05. I would watch for a failed rally in the $39.00-40.00 zone as a new entry point for puts. Our first target is $35.10. Our second target is $31.00.

FYI: Readers should note that AGU is trying a hostile takeover for CF Industries, which is itself trying a hostile takeover of Terra Industries.

Suggested Options:
If AGU provides a new entry point I would use the August puts. We will plan to exit before the late July earnings report.

Annotated Chart:
AGU

Picked on     July 06 at $ 38.75 *triggered     
Change since picked:      - 2.47
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       4.2 million  
Listed on  June 30, 2009         


Core Labs - CLB - close: 78.99 change: -3.95 stop: 85.25

CLB just collapsed this morning and I didn't see any specific news for the gap down. The stock failed at technical resistance on Thursday and Friday saw CLB break support at $80.00 and its 100-dma.

CLB has already hit our first target at $80.25. Our second target is $76.00.

Suggested Options:
I am not suggesting new positions at this time.

Annotated Chart:
CLB

Picked on     July 01 at $ 83.16 /gap down entry
                              /originally listed at 84.53
Change since picked:      - 4.17
                              /1st target hit @ 80.25 (-3.5%)
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =       232 thousand 
Listed on  July 01, 2009         


Compass Minerals Intl. - CMP - cls: 51.01 change: -1.78 stop: 55.25 *new*

CMP sank to new relative lows and tested support near $50.00. If this stock produces another oversold bounce wait for it to fail in the $52.50-54.00 zone. I am lowering our stop loss to $55.25. More conservative traders may want to lower theirs closer to $ 54.00. Our first target is $47.50. Our second target is $43.00.

Suggested Options:
I'm not suggesting new positions at this time.

Annotated Chart:
CMP

Picked on     July 06 at $ 52.25 *triggered     
Change since picked:      - 1.24
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       792 thousand 
Listed on  June 29, 2009         


Costco - COST - close: 44.97 change: -0.53 stop: 46.10

There is no change from my prior comments on COST. We are still waiting for a breakdown under support at $44.00. Our plan is to buy puts at $43.90. If triggered our target is $40.25.

Suggested Options:
If triggered I would use the August or October puts. I prefer the $45.00 and $42.50 strikes.

Annotated Chart:
COST

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =      4.75 million  
Listed on  July 04, 2009         


ITT Educational - ESI - close: 89.62 change: +0.98 stop: 92.65

After several days of declines ESI managed a little oversold bounce but it stalled under new resistance at $90.00. I would use this move as a new entry point to buy puts. Our first target is $81.00. We do not want to hold over the late July earnings report.

Suggested Options:
I am suggesting the August puts.

BUY PUT AUG 90.00 ENJ-TR open interest= 214 current ask $6.90
BUY PUT AUG 85.00 ENJ-TQ open interest= 328 current ask $4.60
BUY PUT AUG 80.00 ENJ-TP open interest=  64 current ask $2.95

Annotated Chart:
ESI

Picked on     July 09 at $ 88.99 *triggered     
Change since picked:      + 0.63
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       902 thousand 
Listed on  July 08, 2009         


Freeport McMoran - FCX - close: 46.64 change: -0.05 stop: 50.51

Shares of FCX followed the bounce in copper and gold from their midweek lows but the bounce didn't get very far. The trend in FCX is still down. I am suggesting readers look for a failed rally in the $48-50 zone to launch new positions. FCX has already hit our first target at $45.25. Our second target is $41.00.

Suggested Options:
If FCX provides a new entry point I would use the August puts but we plan to exit ahead of the late July earnings report.

Annotated Chart:
FCX

Picked on     July 04 at $ 47.92 /gap down entry
                               /originally listed at $49.72
Change since picked:      - 1.23
                               /1st target hit @ 45.25 (-5.5%)
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =        18 million  
Listed on  July 04, 2009         


L-3 Comm. - LLL - close: 65.13 change: +0.44 stop: 68.55

LLL is still trying to bounce after a four-week plunge. The stock is oversold so a bounce is not surprising. I am inching our stop loss down to $68.15. I'm not suggesting new positions at this time. LLL has already hit our first target at $66.00. Our second target is $61.00.

Suggested Options:
No new plays at this time.

Annotated Chart:
LLL

Picked on     June 16 at $ 71.75
Change since picked:      - 6.62
                               /1st target hit @ 66.00 (-8.0%)
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       976 thousand  
Listed on  June 16, 2009         


MetLife Inc. - MET - close: 27.36 change: -0.27 stop: 30.35

The trend in MET is down but readers may want to wait for a bounce or failed rally near $29.00 before launching new positions. Our first target is $25.25. Our second target is $21.75.

Suggested Options:
If MET provides a new entry point I would use the August puts.

Annotated Chart:
MET

Picked on     July 04 at $ 28.04
Change since picked:      - 0.68
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       7.4 million  
Listed on  July 04, 2009         


NII Holdings - NIHD - close: 18.43 change: -0.44 stop: 20.10

NIHD is consolidating sideways between support at $18.00 and technical resistance at its 200-dma. The trend of lower highs would suggest the next move will be down. More conservative traders might want to lower their stops toward $19.50. I would still consider new positions here or on a breakdown under $18.00. Our first target is $16.15.

Suggested Options:
I am suggesting the August puts but we will exit ahead of the July earnings report.

Annotated Chart:
NIHD

Picked on     July 04 at $ 18.61
Change since picked:      - 0.18
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       2.9 million  
Listed on  July 04, 2009         


Sears Holdings - SHLD - close: 57.35 change: -0.78 stop: 64.25 *new*

SHLD continues to sink. The stock is down seven out of the last eight trading days. The relative weakness is encouraging but SHLD is starting to look a little oversold. The plan was to buy half our put position near $60.00 and the second half on a bounce in the $62.00-64.00 zone. I am lowering our stop loss to $64.25. Our first target is $55.10. Our second target is $50.50.

Suggested Options:
If SHLD provides a new entry point I would use the August or September puts.

Annotated Chart:
SHLD

Picked on     July 07 at $ 59.75
Change since picked:      - 2.40
Earnings Date           08/27/09 (unconfirmed)
Average Daily Volume =       1.2 million  
Listed on  July 07, 2009         


United Parcel Serv. - UPS - close: 48.57 change: +0.55 stop: 51.55

The transports were a bright spot in the market today with a 1% bounce. UPS followed the sector index higher. Technically Friday's move is a bullish engulfing candlestick pattern so we can look for the bounce to continue this week. However, watch for a failed rally near $50.00 and its 200-dma as a new entry point to buy puts.

Our first target to take profits is $45.50. I am setting a secondary target at $43.00. We do not want to hold over the late July earnings report.

Suggested Options:
If UPS provides a new entry point I would use the August puts.

Annotated Chart:
UPS

Picked on     June 26 at $ 49.50 *triggered     
Change since picked:      - 0.93
Earnings Date           07/23/09 (confirmed)
Average Daily Volume =       5.2 million  
Listed on  June 17, 2009         


Weyerhaeuser - WY - close: 27.97 change: +0.09 stop: 31.51

Shares of WY have been trading sideways for three days in a row. This could be a set up for a short-term bounce. Wait for a new failed rally near $30.00 before launching new positions. Our first target is $26.00. Our second target is $23.00. The P&F chart points to a $24 target.

Suggested Options:
If WY provides a new entry point I would use the August puts.

Annotated Chart:
WY

Picked on     July 04 at $ 29.51
Change since picked:      - 1.54
Earnings Date           07/31/09 (unconfirmed)
Average Daily Volume =       2.1 million  
Listed on  July 04, 2009         


Wynn Resorts - WYNN - close: 30.98 change: -0.95 stop: 35.25

The oversold bounce in gambling stocks is already failing and WYNN under performed its peers with a 2.9% decline on Friday. I'm not suggesting new positions at this time. WYNN has already exceeded our first target at $30.25. Our second target is $26.00.

Suggested Options:
I'm not suggesting new positions at this time.

Annotated Chart:
WYNN

Picked on     June 22 at $ 34.28
Change since picked:      - 3.30
                               /1st target hit @ 30.25 (-11.7%)
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       3.4 million  
Listed on  June 22, 2009         


CLOSED BULLISH PLAYS

Express Scripts - ESRX - close: 64.72 change: -0.93 stop: 64.75

The market's weakness this morning was too much for ESRX and shares broke down under the $65.00 level. The stock hit our stop loss at $64.75 closing the play.

Chart:
ESRX

Picked on     June 22 at $ 65.25
Change since picked:      - 0.50<-- stopped @ 64.75 (- <1%)
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       3.7 million  
Listed on  June 18, 2009         


Lorillard Inc. - LO - close: 67.05 change: +0.29 stop: 67.30

I am dropping LO as a bullish candidate for now. The stock is stuck drifting under resistance at $70.00. There might be some support near $66.00 but if I was going to buy a dip I'd rather buy a dip near the longer-term trendline (see chart). Personally I'd move LO to your watch list and wait for a move back toward $70.00. Shares never hit our trigger to buy calls at $70.10.

Chart:
LO

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00 *never opened*
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       1.8 million  
Listed on  July 01, 2009         


U.S. Oil Fund - USO - close: 32.37 change: -0.39 stop: 31.95

Oil has continued to sink with today marking its 8th decline in a row. I thought yesterday's intraday bounce off its lows looked like the beginning of a short-term bottom. The plan was to use a tight stop loss to limit our risk on the aggressive, buy-the-plunge entry point. The USO opened at $32.13 and quickly hit our stop loss at $31.95. Eventually oil will bounce but I'll watch for a more clearly defined reversal.

Chart:
USO

Picked on     July 09 at $ 32.14 /gap down entry 
                               /originally listed at $32.77
Change since picked:      - 0.19<-- stopped out @ 31.95 (- <1%)
Earnings Date           00/00/00
Average Daily Volume =      13.7 million  
Listed on  July 09, 2009         


Visa - V - close: 59.86 change: -0.58 stop: xx.xx

The oversold bounce in Visa is stalling. Investors are uninterested in taking new bullish positions ahead of the second quarter earnings season. I'm dropping Visa from the play list. I'm still keeping it on my watch list but shares may need to spend several days building a new base along support at the $57-58 zone. Our bullish play was never opened because I temporarily eliminated our entry point over concerns that the wider market was falling. I could see a potential entry point on a move over $62.00 but V has short-term resistance at $64.00.

Chart:
V

Picked on     July xx at $ xx.xx <-- *never opened*
Change since picked:      + 0.00
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       7.7 million  
Listed on  July 04, 2009         


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