Option Investor
Newsletter

Daily Newsletter, Saturday, 07/18/2009

Table of Contents

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


Market Wrap

Best Week In Years

by Jim Brown

Click here to email Jim Brown

The +7.44% gain in the Nasdaq represents the strongest week in almost 10 years. The Dow posted its first weekly gain since June 12th.

Market Statistics

Last week was the perfect example of strong bearish sentiment being met with a sudden and unexpected improvement in earnings during an option expiration week. It was the perfect storm for the bears and for those short calls. Just look at some of the percentage gains in the graphic above. The SOX gained +12%, +11% for housing, +9% for oil and commodities plus 7% or better on all the major indexes. It was a banner week and the longest short squeeze I can remember. The good news just kept coming all week and those short options or stock were pushed to the breaking point with the markets closing at the high for the week.

The only economic report of note for Friday was the New Residential Construction for June. Housing starts jumped +3.6% to 582,000 annualized units. This was the fastest pace since November but it is still only about a third of normal before the crisis began. The 582,000 is also a -46% drop from June 2008 levels. For the entire second quarter housing starts increased by an annualized +10%. That is the first quarter-over-quarter gain since mid-2005. Single-family starts were up +14.4% in June. Housing completions declined by 0.4% to 818,000 units. This is due in part to the very low number of units in progress because of low starts over the last six months. You can't complete house you have not started.

The housing sector is doing better but you may remember from earlier in the week that foreclosures were up +15% for the first six months of 2009. There are 340,000 new foreclosures coming on the market each month. This is going to keep a lid on prices for new homes but the number of homes on the market continue to decline ever so slightly as new households, immigrants, etc, slowly chip away at the inventory. Homebuilder stocks were up strongly this week with a +11% gain but you may remember the prior week they were down nearly -10%. This is simply another short covering story where the most hated sector suddenly gets some good news and shorts are forced to run for cover.

To put the +3.6% increase in starts that analysts were calling fantastic into perspective you need only to look at the long-term chart below. The increase is so minor that it is nearly invisible on the bottom right.

Housing Starts Chart

The economic calendar for next week is one of the lightest for the entire year. Were it not for the Humphrey Hawkins testimony by Bernanke there would have been nothing to highlight. The rest of the reports are about as exciting as a dud firecracker. Lots of expectations but no bang.

Economic Calendar

Bernanke testifies this week on both Tuesday and Wednesday and he is expected discuss how the central bank might exit the biggest monetary expansion in history. Lawmakers will want to know how Bernanke plans to drain the liquidity in the system without causing another economic collapse. The Fed is in the sweet spot for inflation today with only a microscopic climb in prices. Once the economic recovery really kicks in that sweet spot could turn into forest fire of inflation very quickly. If they move to fast the sweet spot turns into quicksand and the economic growth continues at a snails pace.

The Fed does not have a good track record of extricating itself from these types of scenarios. They typically weigh too many variables and err on the side of caution and inflation surges. Then they hike rates sharply to catch up and the economy slows too quickly. This produces a roller coaster recovery process instead of the healthy and sustained growth they are seeking. Everyone agrees the Fed should not act yet on removing any liquidity so any conversations need to be cautious and not scare economists into thinking a major change is coming. This testimony is an ideal forum to educate investors well in advance of the change so there is no shock when it happens.

The big calendar for next week is the earnings calendar. More than 25% of the S&P report earnings and there are some heavyweights on the list. Apple Inc (Nasdaq:AAPL) and Yahoo (Nasdaq:YHOO) report on Tuesday. On Wednesday we get EBAY (Nasdaq:EBAY), Etrade (Nasdaq:ETFC)and Wells Fargo (Nyse:WFC). Thursday is the biggest day of the cycle and I could have put a couple hundred symbols in the table on Thursday if I had the room. Amazon (Nasdaq:AMZN), American Express (Nasdaq:AXP) Broadcom (Nasdaq:BRCM), Capital One (Nyse:COF), Juniper (Nasdaq:JNPR), Microsoft (Nasdaq:MSFT) and UPS (Nyse:UPS) to name just a few. The one to watch on Friday is Schlumberger (Nyse:SLB) and the health of the energy sector.

Earnings Calendar

We saw Google (Nasdaq:GOOG) drop -12 (-3%) after beating earnings. There is no guarantee beating estimates will give your stock price a lift. However, we did see the Google earnings give Yahoo a huge bounce because they said advertisers were coming back into the market. Yahoo is expected to reap the benefit of a rebound in advertising. Google said click advertising volume was up +15% but revenue per click was down -13%. Yahoo, as the distant second in the Internet advertising world was expected to benefit from cost conscious buyers looking for a cheaper click rate.

Yahoo (Nasdaq:YHOO) was also benefiting from rumors that the company was very close to finally doing a deal with Microsoft for their search business. The deal is being rumored as a partnership with Microsoft on advertising and search technology. This has been rumored for months since the new Yahoo CEO, Carol Bartz, took over. By selling search to Microsoft, Yahoo would not have to have to compete in the very costly technological arms race against Google. Every day it becomes more costly to compete because Google has billions in the bank and an army of programmers constantly refining the process. Yahoo has mounting debt and Microsoft aggressively nipping at their heels and taking market share with Bing.

Yahoo Chart

Friday was another big earnings day with earnings from Citigroup (Nyse:C), Bank America (Nyse:BAC) and General Electric (Nyse:GE). There was also a reaction from (Nyse:IBM) earnings that kept the Dow in positive territory. There were 13 Dow stocks positive and 17 negative. Points gained by 12 of those Dow stocks totaled +4.12. Total points lost by the 17 losers was -4.38. Basically those 29 stocks were tied for the day and the Dow would have been a couple points negative had it not been for IBM. IBM gained +4.78 for the day and that equates to more than 38 Dow points. The Dow ended the day up +32 points. It was all IBM.

IBM Chart

Citigroup (Nyse:C) reported a surprise profit of $4.3 billion* but there was a asterisk attached to the number. They posted the profit only because they had a one-time gain of $6.7 billion on the partial sale of the Smith Barney unit to Morgan Stanley. Stripping out the one-time gains Citigroup lost $4.2 billion for the quarter. Of that $4.2B Citi lost $1.6 billion because of downgrades to its own debt. This was only part of the $12.4 billion in losses due to credit costs during the quarter. On the bright side Citi said the rate of consumer loan losses was abating.

Citigroup Chart

Bank America (Nyse:BAC) posted a profit of $3.2 billion* but again there was that pesky asterisk. BAC benefited from the one time sale of its stake in China Construction Bank for $5.3 billion. Merrill Lynch added $5 billion in trading revenues for the quarter but credit losses took $2.9 billion off the bottom line. BAC's total credit costs for the quarter were $16.4 billion. That has got to hurt! Ken Lewis told analysts on the conference call that profitability in the second half of 2009 would be a "lot tougher." Hey, if it were easy to overcome $16 billion in added credit costs every quarter everyone would be a millionaire banker.

Bank America Chart

General Electric (Nyse:GE) profits were cut nearly in half due to recession pressures. The earnings from the finance unit were a drag and the industrial goods divisions were struggling from lowered demand. GE earnings officially beat the street but revenue fell short by about $3 billion. Sales fell across all divisions. This is a problem for economists because GE's broad reach across all areas of the economy make it a proxy for the economy. GE lowered guidance for its industrial divisions from optimistic to "hopefully we can break even this year." "Hopefully break even" suggests there is a good chance they will lose money.

GE Capital saw earnings fall -80% from the comparison quarter. However, the real estate unit, which owns office buildings and makes commercial property loans, lost $237 million compared to a profit of $484 million in the year ago quarter. GE said they were still "very cautious" about the real estate outlook. GE officially earned 24 cents compared to analyst estimates for 23 cents. GE cut costs by more than $3 billion to achieve that profit and analysts want profits to come from revenue not cost savings. Overall the GE earnings were not a bright spot for the cycle and produced a cold chill in the analyst community.

GE Chart

CIT Group (Nyse:CIT) was kicked out of the S&P-500 at Friday's close and replaced by Red Hat (Nyse:RHT). CIT was booted from the S&P because its market cap had fallen below that needed to stay in the index. CIT is struggling to avoid bankruptcy after the government agencies dropped it like a hot rock on Thursday. The possibility of another bailout for the 101-year-old finance company evaporated on Thursday and CIT went back to the public market for last ditch financing. CIT supplies financing for nearly one million small to midsized businesses.

Reportedly CIT is in talks with Goldman Sachs (Nyse:GS) and JP Morgan Chase (Nyse:JPM) over a $3 billion debtor in possession loan that will allow them to file bankruptcy and still have a chance of a recovery. CIT has already received $2.3 billion in TARP funds. CIT has $40 billion in long-term debt with $1.1 billion coming due in August and $2.5 billion before year-end. The New York Post speculated that JP Morgan could buy CIT's factoring unit, which finances more than $50 billion of wholesale inventory. That would be a major plus for JPM but a severe blow to CIT, which makes a lot of money off those loans. CIT has more than 50% market share in the retail factoring business. The outlook for CIT does not look promising.

CIT Chart

The earnings scoreboard looks pretty good for this cycle but remember the best earnings are always the early earnings. As the days drag by the quality of earnings will slip. So far there have been 55 S&P-500 companies report. 71% have beaten the lowered estimates, 20% missed and 9% reported inline. This has a surprise factor of 11.5% better than average.

Next week over 150 S&P companies report. The surprise factor is sure to decline as more companies miss their estimates. When GE is going to be happy just to break even for the rest of the year you can imagine what the guidance will be from the bottom 75% of the S&P.

Still, this has been a surprising earnings cycle. Ask anyone who was short. The news is out and with a hundred or so reports under our belt we pretty much know what the rest of the cycle will look like. Most companies will beat their lowered estimates and quite a few will echo the GE/BAC comments that profits in the second half of 2009 will be a lot tougher.

As an investor does that fill you with a strong buying urge? We have seen the various economic reports falter over the last couple of weeks indicating that the recovery is far from assured. The Fed claims the pace of the decline is moderating. That is different than saying the pace of the recovery is improving. It means that the Fed is still seeing a decline in conditions despite all the green shoots in the Intel earnings report.

It does not mean the bottom is not behind us. It does not mean that as investors we can't look six months ahead to 2.1% GDP growth and celebrate. What it means is that a 7% five-day short covering rally into option expiration may have become a tad over extended.

I told everyone last weekend that this was going to be a pivotal week and once past this week the market would likely find a direction. I am not convinced the current direction will hold but I would be thrilled if it did.

The head and shoulders pattern across all the indexes has been broken. A continued move past 946-950 on the S&P would be very bullish. I am only concerned about what will power it. What company next week is likely to announce earnings that are not already priced into the stock? Microsoft could announce better than expected earnings and because of early Windows 7 acceptance they could raise their guidance like Intel. Is that enough to push us another 7% higher? I doubt it. Microsoft stock is already up +10% last week and +65% since the March lows on just that hope.

Is Amazon (Nasdaq:AMZN) going to announce such strong Kindle sales that the stock breaks through resistance at $88? It is possible but they just lowered the price of the Kindle to $299 and claimed they were selling so many the costs came down. If they were selling so well why lower the sales price? It is just my highly skeptical mind that finds it tough to accept things on face value. On the plus side the Amazon video on demand service is far superior to Hulu and I downloaded 3 Harry Potter movies last week from Amazon. I believe their service will add to their profits. But, even if Amazon does blowout earnings is that going to be enough to push the markets another 5% higher? I doubt it. Resistance on Amazon is $88 and it closed Friday at $86.

Amazon Chart

Ebay (Nasdaq:EBAY) reports on Wednesday and they already broke out over resistance at $18 and could run if earnings are good but the stock has been very lethargic for the last three months. Ebay made some cautious comments about traffic a couple months ago suggesting the recession had cut down on the number of buyers. The stock went into hold mode and came very close to a breakdown the prior week. Now that it has rallied +20% in a week can it still move higher on decent earnings? Time will tell. The better question is will it move the market if earnings are good?

Apple (Nasdaq:AAPL) reports on Tuesday and they are widely expected to beat estimates because nobody believes their guidance. According to Gene Muenster at Piper Jaffray, Apple has guided lower in 10 of the last 12 quarters. Dan Niles said on Friday that nobody pays attention to Apple's guidance because it never makes any sense.

However, there is a chink in their armor. Apple buys 20% of all the flash memory produced in the world. That same flash memory has risen in price 40-50% over just the last 90 days according to Dan Niles. Since the iPhone is crammed with flash memory this will crimp Apple's margins going forward. The increase probably will not have hurt them significantly in Q2 since the increase is recent but this could impact their guidance. Every analyst I heard last week said that the Q2 earnings news was already priced into the stock. APPL is up +16 in the last two weeks. It is clearly in breakout mode and strong earnings could push it higher. HOWEVER, with all the bullish news already priced in there could be a disaster if they say something negative.

Apple Chart

UPS (Nyse:UPS) reports on Thursday and their guidance will be crucial to the economic outlook. If they say package traffic is down then the market is liable to follow. Always inquisitive I asked my UPS driver this week why he was running two hours later than normal. He said UPS sent home ten drivers in his terminal last week because there was not enough work. That means he has a bigger area to cover and more packages but it is due to layoffs not increased traffic. I will be watching to see if UPS corporate says anything about the layoffs. Resistance is $56 and UPS closed at $52.

UPS Chart

I think you see what I am thinking about the market's future. Even if earnings continue to surprise to the upside as we get into the weaker performers there may not be enough excitement to push the market higher. The 7% and higher gains from last week produced a market that is suddenly as over extended as it was over sold the prior week.

Oil prices helped push the market higher on Friday with a +1.40 gain to close at $63.57. The gains came on the stronger than expected housing starts plus production concerns in Iran, Iraq and Nigeria. Also a couple tropical storms appeared in the Atlantic in hurricane alley. Neither have enough coordinated movements to be considered threats yet but they are on the radar.

Crude Oil Chart

Ironically crude spiked higher despite a report from the American Petroleum Institute on Friday that demand had fallen off a cliff in the first half of 2009. Demand for low sulfur diesel fell -6.6% and ultra low sulfur demand fell -9.2%. Diesel demand is seen as a direct proxy for the economy since every product moves by truck and train on its way to market. Gasoline demand fell -5.8% and demand for jet fuel fell by -12.8%. Fuel oil demand fell -9.1%. U.S. crude production rose +3.4% to 5.29 mbpd over the same period. Even with the declines in crude inventories in 9 of the last 10 weeks to 344 million barrels, down from 375 mb, this is still well above the 5-year average of 322 mb for this time of year.

The federal minimum wage is going up to $7.25 from the current $6.55 and economists claim that will provide another $5.5 billion in income to people who will continue to spend every dime they make. Workers in this wage bracket are not savers. Every dime they make goes for food, rent and gasoline. Reportedly there are very few workers, less than 3%, who actually make the minimum wage. Those that do are getting nearly a 10% raise next week.

Washington's minimum will rise to $8.55 and California and Massachusetts currently have wages of $8. I can remember working in the 1960s when the minimum wage was $1.25 an hour. Fortunately I did not have a family to support. Economists estimate the current wage is only enough to provide 50% of the needs of a family of four at the poverty level. 130 cities now have "living wage" laws that exceed the federal minimum wage.

Federal Minimum Wage History

On the political front the health care plan is finally running into some stiff opposition and that was actually seen as bullish for the market on Friday. President Obama held a news conference late Friday and was adamant that the plan would be passed soon despite the setbacks. He must not have felt like he got the message across because less than two hours later he scheduled another prime time televised press conference from the White House. This one for Wednesday night at 9:PM ET to talk about the plan. This is his fifth White House press conference since he took office and his fourth in prime time.

I think the timing of the conference was an effort to grab the ratings from "So You Think You Can Dance" on Fox at that time. He has spoken out against Fox several times lately and scheduling a televised conference at the exact same time as their most watched show of the week was a way to get back at them for the unfavorable press coverage Fox provides. To top things off the White House did not announce the conference through regular press channels. They put it on Twitter instead. Can you imagine the confusion in the press trailers when they heard from somebody outside the regular channels that they had been scooped on Twitter?

The total of banks closed in 2009 has risen to 57 after the FDIC closed four banks on Friday. Two banks in California, Vineyard Bank and Temecula Valley Bank failed. Georgia based First Piedmont Bank and Sioux Falls based BankFirst round out the list. The two California banks had a total of $3.2 billion in assets, BankFirst $275 million and First Piedmont $115 million. The cost to the FDIC fund for all four banks will be $1.1 billion. Nearly 300 banks remain on the FDIC problem bank list so there will likely be more failures to come.

40 years ago U.S. astronauts walked on the moon. Video was shot of every moon walk along with thousands of pictures. You would think NASA would have treated those videos like solid gold and preserved them for future generations. Unfortunately those video tapes were erased along with nearly 200,000 others several years later and the tapes were reused to save money. When NASA realized this several years ago there was a mad dash to rescue any copies of the footage from news organizations around the world. First generation copies were then put through a major renovation to eliminate static and noise using today's state of the art techniques. The result is the videos you are seeing in the news program footage this weekend in remembrance of the 40-year anniversary.

On Friday the Dow closed up +32 and the Nasdaq +1.58. The S&P was fractionally negative but it was a positive market, right? You would be wrong if you said yes. I already showed you that IBM accounted for +38 Dow points and the Dow only gained +32. The internals were negative with more decliners than advancers and volume for an option expiration was pathetic at barely over 8 billion shares. You would think that for a +600 point week for the Dow that every day would have been as lopsidedly bullish as Wednesday's 9:1 Intel short squeeze. Unfortunately the internals are painting a far less bullish picture.

Market Internals Table

I am sure a lot of it was simple buyer exhaustion once everyone covered their short option positions and cussed themselves for not having stop losses on their short positions when the week began. Now all of that is behind us. Expiration is gone and earnings are basically a given for the majority of reports to come.

The Dow came ever so close to that monster resistance at 8800 but just could not make it. It is however still in reach should something happen over the weekend to boost the overseas markets. An opening spike to 8800 would be a textbook shorting opportunity even if the index eventually breaks out for a real run later in the week. The +600 point gain last week is just too tempting to not throw a bet on the don't pass line on Monday morning in case the bulls seven out.

Here is the kicker. A failed head and shoulders pattern usually results in a strong bullish move. When the right neckline fails to breakdown and the stock/index rallies back over the right shoulder the potential for a breakout is very strong. The reason for this is the pattern itself. A head and shoulders pattern is one of the easiest patterns to recognize and one of the most dependable. This means nearly every trader with access to charts is all over the falling right shoulder like stink on a skunk. Shorts had backed up the truck and hired extra workers to help load it. Obviously this resulted in the +600 point short squeeze last week. Shorts had loaded up after market technicians had been touting the H&S for over a week in advance. The market exists to fool the maximum number of traders possible whenever it can. Last week was a grand slam.

Now we have the true test of strength. If the Dow can move over 8800 it will confirm the break in the pattern and everyone that is thinking the same as me about shorting 8800 will be forced to cover again. The $64 question remains, "are there enough buyers left who want to buy earnings at this level?" We have seen this earnings story before and we know how it ends. Lowered expectations are beaten through cost cuts and asset sales and guidance is lowered again. Doesn't sound like a runaway bull market to me, but maybe a loco bull instead.

Fortunately the market has given us an extremely clear trade for next week. Over Dow 8800 we go long and we short any failure at Monday's open.

Dow Chart

The S&P-500 is nearly a perfect chart. The Friday close at 940 is almost exactly the resistance high back January and again in June. This is clear resistance and also the top of the H&S pattern that is failing. If the S&P rallies over 950 I think the sprint to 1000 will be very quick. When it eventually rallies over 1000 whether next week, or next quarter, the follow on rally will be huge. That is a clear line in the sand that could be the starting line on a real second half rally.

S&P-500 Chart

The Nasdaq closed at a new 8-month high and almost exactly at the October resistance highs. The Intel news is likely to be followed by strong news from Apple, Microsoft, Amazon and hopefully Ebay and it would be very hard to believe the Nasdaq will not move over 1900. It seems cast in stone but then stone tablets in the wrong hands have been broken. The Nasdaq has only been up for eight consecutive days four times in the last 16 years and that is a streak that is testing its luck.

Nasdaq Chart

The Russell 2000 chart did see the right shoulder high exceeded on Thursday but only by a fraction. The height of the week's gains were much less than the Dow, S&P or Nasdaq. The Russell is still 15 points below the June high at 535. This suggests fund managers did not get caught up in the shorting frenzy and did not need to cover as much as other traders. The Russell remains the fund manager sentiment indicator and it is indicating caution relative to the other indexes.

Russell Chart

I think you understand the game plan for next week. Go long over Dow 8800, S&P 950 and short any failure at Monday's open. The earnings news will keep journalists busy but we already know how the story ends. Try not to get caught up in the hysteria and pick your entry points carefully.

Jim Brown


Index Wrap

Whippy

by Leigh Stevens

Click here to email Leigh Stevens

THE BOTTOM LINE:

The trading range still lives in the S&P and dies in the Nasdaq as the Composite (COMP) and Nas 100 (NDX) broke out above their multimonth price range. The tech-heavy Nasdaq breakout hasn't yet carried a lot higher than its prior highs but there were two consecutive days above its prior top and with Closes at the intraday highs; so far so good for the bulls.

I keep forgetting to clue in newer subscribers to the fact that they are NEVER going to find my equities call TO put daily volume ration ("CPRATIO") on any other web site. This because keep this as a 'custom' indicator, which TradeStation software allows you to do, as long as you're willing to input the daily ratio by hand. I've been doing this for years. The reason being that the way I keep means that a LOW reading is 'oversold' and potentially bullish (like the other overbought/oversold oscillators. I like the consistency and I don't like dealing with fractions.

So, on the CBOE web site and on various data feeds look for the PUT-CALL indicator only. You are never going to find something called "CPRATIO". Sorry, but you can keep the daily number yourself the way I keep it.

You don't have to plot this number, just look for 1-day extremes; i.e., readings near 1 (puts equal call volume that day) OR up around 1.7 to 1.9 or higher, where equities call volume is running 1.7 to 1.9 (or more) times put volume. The COBE and others long ago got wise to keeping their ratio without the somewhat 'distorting' influence of INDEX call and put daily volumes; i.e., because of the portfolio hedging (and arbitrage) that goes on.

I finally have featured my call to put ratio on BOTH the S&P 500 (SPX) chart AND on the Nasdaq Composite daily chart. I want to make it cleared that there is not one 'sentiment' reading for the S&P and another for the Nasdaq. Of course, traders are for the most part more bullish on tech and less so on the S&P stocks, but we can only get an OVERALL read on the market and it should be viewed in that context.

I put a lot more notations (text) ON my charts this week, so if my verbiage/commentaries are a little light, there's a lot more to look at on my charts.

I'm a little bit pressed for time anyway this weekend as I just made a transition from my ocean side home on the Pacific to my main haunts on the rocky mountain shores near my sons in the Denver area. 'Cali' is getting a little depressing anyway as the conservatives and liberals seem determined to blow up government there. The state is the most physically beautiful and depressing politically. So, per Dickens, the best of times, the worst of times!

Last but not least, I find it interesting to keep a tab on long-term multiyear/multidecade charts, weekly and monthly and I feature the Nas 100 monthly chart to start out with.

A bullish week and it should continue but the S&P could still hold back a major new up leg in Nasdaq if it can't break out above ITS prior highs. It's summer and rallies often don't carry the way that fall advances can and do.

CHART OF THE WEEK:

There's not a lot to say about this first chart. The month still has some ways to go so it will be interesting to see how this chart ends up, but the strong advancing trend continues dating from the end of or what looks to be the end of the previous bear market. You see strong trends very simply by the steepness of the up or down trendlines.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

As I said last week, "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.". I didn't know of course how TRUE that would turn out to be, as buying that low end of the SPX range was a dandy do.

So much for the bearish take on the S&P with the 3-pronged high that looked precisely like the 'classic' Head & Shoulder's Top. To make the H&S pattern 'valid' so to speak, the lower neckline has to be broken or pierced and this didn't happen as you can see on the SPX chart below. Moreover, the breakout above the last high (not the all-time high for this move) tends to negate the extreme bearish possibilities on a technical chart basis. Sorry bears!

There is a sort of classic take on the MINIMUM upside move that breaks out above (or below) a well-defined trading range which is to ADD the distance between the price range to the 'breakout' point or the top end of the range. (Of course a break down BELOW the range is SUBTRACTED from the low end of the range.) I've noted a minimum upside target of to around 1020 if SPX sails above 950.

Very near support I did not note on the chart and it's missing a green up arrow at 905/906, which is the top end of the upside chart gap; upside gaps tending to define support/future buying interest on pullbacks to them.

Near resistance is back up in the 950 area, at the top of the rectangle pattern that is simply a way of marking a trading range that has 2-3 or more highs in the same area. Same with the low end of a price range like this. I project next higher resistance up around 978.

TRADER SENTIMENT:

Looking at bullish sentiment on the SPX chart above you'll see that traders got heavily on the call/bull side this past week. I wouldn’t call this a definite 'danger' signal, only a 'warning' that there might not be a big push through the top end of the prior trading range. Hard to tell, but I'm not loading up on S&P calls by any means. IF the Nasdaq is the harbinger of new leg up for the more stodgy S&P, then SPX will finally make its move above 950. It is likely a matter of when rather than IF it will do this.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index is still also confined to it's prior range until/unless OEX can achieve a decisive upside penetration above its prior high around 444. Stay tuned on that. There is strong upside momentum going for the Index. OEX is ALSO getting up toward overbought territory according to the 13-day RSI, so I'm not betting the ranch on a big new up leg straight away.

Very near support is at 435, then down around 425-426, at the gap area and coinciding with the 50-day moving average; main support remains at 410-412.

Very near resistance is around 444 in OEX, then up at 460 according tot the way I project it.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) broke below what looked like a Head & Shoulder's 'neckline' support and looked like it was headed to 8000 and below. But it stopped where it stopped and strong buying returned. There's some life in the old girl! Of course INDU can muster better upside without some of the prior broken stocks like GM and Citi.

Near resistance at the prior 8878 high is now again all important. If INDU closes above it's prior high, don't break out the Champaign until it proves its ability to not fall apart on a second day.

Next key resistance above 8878 to 8900 is up at 9150 in my estimation. Near support is at 8600, then around 8350-8400, with major support in the 8087-8100 area.

The Dow is edging up toward an overbought reading but the Average can stay up in this area for awhile. There is nothing magically about these areas, just a statistical likelihood or historical tendency that warns against expecting a another big move equal to the big rally of this past week.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) now projects up to the 1955 area or so before I would see significant selling coming in again. It looks like the corrective 'a-b-c' decline has run its course with the 'c' leg down ending at the recent 1747 low in COMP.

Good support should be found on pullbacks to the 1800 area. If COMP is going to tack on another move higher, it ought to hold in the 1880 area on balance as prior resistance 'becomes' the new support.

Trader sentiment is recently turned quite bullish but we could see several spikes into the 'overbought'/overly bullish area in my sentiment indicator seen below (CPRATIO), before this market corrects much.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish and the most bullish of the major indexes in fact. Love those big cap tech stocks! I project that resistance/selling interest might not be seen before a move to around 1570 or a bit higher; e.g., around 1600. Near support is in the 1490-1500 area, with key technical support apparent or suggested down in the 1455 area. Major support is at 1400.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) projects higher as well, with a possible next target to around 38.6 or a bit higher.

The On Balance Volume (OBV) indicator turned up on 7/7 and kept moving consistently higher, turning out to be a good clue for the strength of the recent rally in QQQQ.

Near QQQQ resistance: 38.0

Next and key overhead resistance: 38.6

Near QQQQ support: 37.0-36.9

Next support: 36-35.9

First area of major support: 34.0-34.3

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart is showing prices again tracking up toward resistance at the high end of its trading range. RUT will break through the top end of this range (at 530-532) only if the Nasdaq tacks on another strong move in the coming week or two. Next resistance above 532 is not a lot higher by my lights, at 545-550.

Near RUT support is at 500-490, with major support coming in around 470-475. Small cap lives on!

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

Tobacco, Recreational Vehicles, Banks, and more

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Lorillard - LO - close: 69.98 change: +1.55 stop: 67.90

Why We Like It:
We've tried playing LO before. The last time shares had rallied to resistance at $70.00 we waited for a breakout that never showed up. Now the stock is back and knocking on resistance again. If it breaks out the follow through rally could be very sharp. I'm suggesting a trigger to buy calls at $70.50. This will be a brief play. LO is due to report earnings on Monday morning, July 27th. That means to avoid holding over earnings we'll exit on Friday at the close (July 24th) assuming LO doesn't hit our target before then.

The Point & Figure chart is very bullish with a $92.00 target. If we are triggered at $70.50 our first target is $74.50. Our second target is $77.00.

Suggested Options:
If triggered I'm suggesting the August calls.

BUY CALL AUG 70.00 LO-HN open interest=2480 current ask $2.75
BUY CALL AUG 75.00 LO-HO open interest= 315 current ask $1.05

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/27/09 (confirmed)
Average Daily Volume =       1.5 million  
Listed on  July 18, 2009         


Polaris - PII - close: 34.40 change: +2.62 stop: 31.45

Why We Like It:
PII is a stock that is probably confusing investors. The company reported earnings last week. They managed to beat the estimates by a few cents but then issued an earnings warning. Shares sold off on Thursday following the warning. Yet the very next day PII is soaring more than 8% on no news. Given their earnings warning you would think PII would be selling off. High-dollar discretionary items shouldn't do well with the economy in a slump and the consumer cutting back. Why isn't the stock in a tailspin?

Unfortunately, I can't answer that question but I suspect PII's strength may be due to its high amount of short interest. The most recent data listed short interest at 18% of the 29.7 million-share float. That's a relatively small float, which makes it easier to see a short squeeze. The stock looks poised to breakout over resistance at $35.00. I am suggesting that readers buy calls on a dip in the $33.00-32.00 zone. We'll try and limit our risk with a stop loss at $31.45, which is just under Friday's low. More aggressive traders may want to buy calls now or wait for a breakout over $35.00. If we are triggered at $33.00 our first target is $37.25. Our second target is $39.50. Currently the Point & Figure chart is bullish with a $49.00 target.

Suggested Options:
I'm suggesting the August calls.

BUY CALL AUG 30.00 PII-HF open interest= 150 current ask $4.90
BUY CALL AUG 35.00 PII-HG open interest= 473 current ask $1.75
BUY CALL AUG 40.00 PII-HH open interest=  95 current ask .40

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/16/09 (confirmed)
Average Daily Volume =       436 thousand 
Listed on  July 18, 2009         


NEW DIRECTIONAL PUT PLAYS

WestAmerica - WABC - close: 47.07 change: -1.03 stop: 50.05

Why We Like It:
WABC is a regional bank that does business in residential and commercial real estate loans. That's not a great place to be these days. The stock is completely ignoring any strength in the financial sector. The recent oversold bounce failed under the $50.00 level. I'm suggesting readers buy puts now with a stop loss at $50.05. Our first target is $41.50. Our second target is $38.00. The Point & Figure chart is bearish with a $37.00 target.

Suggested Options:
I am suggesting the August or October puts. Readers may want to trade Octobers because WABC doesn't move very fast.

BUY PUT AUG 45.00 WQF-TI open interest= 230 current ask $1.65

BUY PUT OCT 40.00 WQF-VH open interest= 505 current ask $1.65

Annotated Chart:

Picked on     July 18 at $ 47.07
Change since picked:      + 0.00
Earnings Date           07/14/09 (confirmed)
Average Daily Volume =       331 thousand 
Listed on  July 18, 2009         


NEW MARKET NEUTRAL STRANGLE PLAYS

(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.)

McDonald's - MCD - close: 57.84 change: +0.62 stop: n/a

Why We Like It:
It looks like MCD is breaking out higher from its sideways consolidation. The economy is in recession and the consumer is cutting back so stores like MCD with their value meals should be doing pretty well. Plus MCD is doing well overseas. My bias on MCD is bullish. Yet the company is due to report earnings on July 23rd. There's always the chance for a negative surprise. I'm suggesting a neutral strategy like a strangle to capture any post-earnings volatility. Earnings are on Thursday morning. We want to open positions in the 58.50-56.50 zone. The closer to $57.50 the better.

Suggested Options:
I am suggesting the August $60 calls and the $55 puts. Our estimated cost will be around $1.30. We want to sell if either option hits $2.75 or higher.

BUY CALL AUG 60.00 MCD-HL open interest=9024 current ask .70
-and-
BUY PUT AUG 55.00 MCD-TK open interest=2652 current ask .60

Annotated Chart:

Picked on     July 18 at $ 57.84
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         



In Play Updates and Reviews

Triggered on Friday

by James Brown

Click here to email James Brown


CALL Play Updates

AutoZone Inc. - AZO - close: 156.98 change: -0.87 stop: 151.49

The slow-motion whipsaw in AZO continues. After producing a significant bullish breakout on Tuesday last week there was absolutely no follow through higher. The S&P 500 produced a 7% rally and AZO failed to participate the last three days. This should be a warning sign for bullish traders. I am expecting the stock to drift towards previous resistance and what should be new support near its 50-dma and the $155.00 to 154.00 region. More conservative traders might want to up their stop loss toward $154.00 or $155.00 depending on your tolerance for risk. I am not suggesting new bullish positions at this time. Our target is $169.00. FYI: The P&F chart is bullish with a $186 target.

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

Annotated Chart:

Picked on     July 14 at $158.77
Change since picked:      - 1.79
Earnings Date           09/22/09 (unconfirmed)
Average Daily Volume =       1.0 million  
Listed on  July 14, 2009         


Bunge Ltd. - BG - close: 64.95 change: -0.10 stop: 59.35

Caution! We are running out of time with BG and may have to abandon this play early. The company is due to report earnings on Thursday morning and we don't want to hold positions over the announcement. I am raising the stop loss to $59.35 (if triggered).

BG has delivered a massive rally from $54.00 to $65.00 in six days. Obviously the relative strength is bullish but we don't want to chase this move. We want to buy calls on a dip at $61.00. More conservative traders can wait for a dip closer to $60.00. Our first target is $67.40. We don't want to hold over the July 23rd earnings report.

Suggested Options:
Use the August options if triggered.

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on  July 15, 2009         


Euro Currency ETF - FXE - close: 141.01 chg: -0.39 stop: 138.75 *new*

Nothing has really changed for us. The FXE is poised to move higher as the dollar appears ready to breakdown again. I am going to adjust the stop loss to $138.75. If you're looking for an entry point look for a dip near $140. I would use the September calls. 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 use the September calls. Strikes are available at $1.00 increments.

Annotated Chart:

Picked on     June 23 at $140.76
Change since picked:      + 0.25
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Gold Miner ETF - GDX - close: 38.64 change: +0.31 stop: 34.90

A weak dollar should be good news for gold and the gold miners. The GDX rallied toward resistance near $39.00 last week. I'm not suggesting new bullish positions at this time. More conservative traders might want to raise their stops closer to $36.00. Our first target is $39.50. Our second target is $42.40.

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

Annotated Chart:

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 2.15
Earnings Date           00/00/00
Average Daily Volume =       6.8 million  
Listed on  July 13, 2009         


O'Reilly Automotive - ORLY - close: 40.73 change: -0.36 stop: 38.49

ORLY broke out to new all-time highs last week. Buying calls is a bet the relative strength continues. I would consider new positions on dips near $40.00 or the $39.00 level. Our first target is $44.00. We do not want to hold positions over the July 29th earnings report.

Suggested Options:
Use the August calls if ORLY provides a new entry point.

Annotated Chart:

Picked on     July 13 at $ 40.00
Change since picked:      + 0.73
Earnings Date           07/29/09 (confirmed)
Average Daily Volume =       1.9 million  
Listed on  July 13, 2009         


SPX Corp. - SPW - close: 52.27 change: +0.43 stop: 47.75 *new*

The plan is to buy calls on SPW with a dip in the $50.25-48.00 zone. I'm raising the stop loss to $47.75. If we don't see SPW contract soon (Monday or Tuesday) I'll probably drop it as a bullish candidate. We don't want to hold positions over the July 29th earnings report. The stock has resistance near $54.00. Our first target is $53.75. Our second target is $57.00.

Suggested Options:
If SPW hits our trigger I would use the August $50 or $55 calls.

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/29/09 (confirmed)
Average Daily Volume =       777 thousand 
Listed on  July 15, 2009         


PUT Play Updates

Compass Minerals Intl. - CMP - cls: 50.02 change: +0.09 stop: 52.55

Volume was very light on Friday's bounce. We can still expect resistance at the 10-dma and near $52.00. I'm not suggesting new positions at this time. CMP has exceeded our first target at $47.50. Our second target is $43.00. FYI: The P&F chart is bearish with a $35 target.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on     July 06 at $ 52.25 *triggered     
Change since picked:      - 2.23
                               /1st target hit @ 47.50 (-9.0%)
Earnings Date           07/28/09 (confirmed)
Average Daily Volume =       792 thousand 
Listed on  June 29, 2009         


LEAP Wireless - LEAP - close: 26.24 change: -1.00 stop: 29.45

Our new play on LEAP is open. The stock broke down from its sideways consolidation and closed at new relative lows. Our trigger at $26.80 was hit. Volume was above average on the decline for the second day in a row, which is bearish. Our first target is $22.65. Our second target is $20.25. The $22.50 level could be strong support so I suggest readers take off most of their position there. FYI: The P&F chart is bearish with a $19.00 target.

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

BUY PUT AUG 25.00 UAO-TY open interest= 554 current ask $1.40
BUY PUT AUG 22.50 UAO-TX open interest= 585 current ask .65

Annotated Chart:

Picked on     July 17 at $ 26.80 *triggered    
Change since picked:      - 0.56
Earnings Date           08/06/09 (confirmed)
Average Daily Volume =       2.2 million  
Listed on  July 16, 2009         


Sears Holdings - SHLD - close: 62.72 change: -0.53 stop: 65.05

SHLD spiked to $64.21 on Friday morning but saw the rally fail at its 30-dma. This could be the entry point we've been looking for. However, I can understand hesitating with the S&P 500 in rally mode. Consider waiting for a little more confirmation before launching new put positions. A drop under $61.40 or the 50-dma should suffice as a new entry point for puts. Our first target is $55.10. Our second target is $50.50.

Suggested Options:
We want to use the August or September puts. I prefer the $65, 60 or $55 strikes.

Annotated Chart:

Picked on     July 07 at $ 59.75
Change since picked:      + 2.97
Earnings Date           08/27/09 (unconfirmed)
Average Daily Volume =       1.2 million  
Listed on  July 07, 2009         


Weyerhaeuser - WY - close: 30.64 change: +0.10 stop: 31.51

The bounce in WY has stalled at resistance near $31.00. More conservative traders might want to consider a tighter stop closer to $31.00. I would wait for a new drop under $29.50 before launching positions. Our first target is $26.00. Our second target is $23.00. The P&F chart points to a $24 target. We do not want to hold positions over the July 31st earnings report.

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

Annotated Chart:

Picked on     July 04 at $ 29.51
Change since picked:      + 1.13
Earnings Date           07/31/09 (confirmed)
Average Daily Volume =       2.1 million  
Listed on  July 04, 2009         


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