Option Investor
Newsletter

Daily Newsletter, Saturday, 08/01/2009

Table of Contents

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


Market Wrap

Struggling To Stay Afloat

by Jim Brown

Click here to email Jim Brown

The major indexes managed to close the week with a gain but were it not for Thursday's short squeeze it could have been a much different story.

Market Statistics

The markets shook off a GDP number on Friday that was better than the consensus but far below the whispers circulating on Wall Street. The first look at the GDP for Q2 showed a headline number of -1.02%. This was much better than the -6.43% in Q1 and better than the -1.6% consensus estimate. You would think the markets would have celebrated. Instead the markets dipped at the open because the GDP was much lower than the +1.0% to +1.5% whisper numbers making the rounds. Also, the report also showed a revision to the Q1 number from -5.49% to -6.43% and nearly a full point worse than originally thought.

Investors wanted a positive GDP number to validate their hopes for a rebounding economy. Yes, I know an improvement from -6.4% to -1.02% is a significant improvement but it still indicates an economy in decline. Investors wanted to see a growing economy not one that was still declining although at a slower pace. This is one report where "less bad" was still bad.

I am not going to bore you with all the internal components. I will point out that there was a major decline in inventories by -$141.1 billion. That stretched the inventory decline to -$359.2 billion over the last five quarters. Analysts point to this as evidence the economy has to get better soon because of the restocking cycle that needs to occur because inventories are so low. Consumer spending fell in Q2 but fears appear to be subsiding. Also bullish for GDP the housing market appears to have bottomed with some minor gains in several areas. The automotive sector should add significantly to Q3 GDP because they were almost out of business in Q2.

The risk to economic growth for the rest of 2009 remains the housing foreclosure problem and risks to financials from defaults in commercial real estate. There is more than $2.2 trillion in commercial real estate loans at risk for default. Over $1.3 trillion are already underwater in value to mortgage balances. Major buildings are going into default every day. A 47-story 1.8 million square foot Manhattan tower, Worldwide Plaza, was foreclosed by Deutsche Bank and sold to three private investment groups. There were 700,000 vacant square feet.

In San Francisco a 43-story building owned by high profile groups Hines Interests and Sterling American Properties is being surrendered to the lenders in lieu of foreclosure. The building was purchased for $281 million in 2007. These stories are being repeated daily around the country and this is making lenders very hesitant to loan money on any commercial property. Commercial properties are normally leveraged at 70-80%. Few lenders today are willing to loan more than 50% of the properties distressed value. That is a major haircut requiring massive amounts of private capital to complete any deal. With lenders seeing more and more properties go into default the odds are good that their appetite for lending will drop even further.

Of the $6.7 trillion in commercial real estate loans in the U.S. nearly 50% will come due during the next three years according to First American Core Logic. Nearly $165 billion in loans mature in the second half of 2009 and will have to be paid, sold or refinanced. This commercial real estate cloud will continue to weigh on the financial sector and the economy well into 2010 and that suggests the GDP growth will continue to be slow.

GDP Chart

Friday also had a couple of regional reports ahead of Monday's National ISM report. The New York Purchasing Manager (NAPM) report showed a slight decline in July to 358.2 from 359.0. That was far from earth shaking and the real news was that this was the second month of decline after the May uptick to 361.6. This is really just splitting hairs over the monthly changes. The bottom line is a rebound in the New York area has not appeared.

NAPM Chart

Meanwhile a rebound in the Chicago area appears to firmly underway. The Chicago ISM rose to 43.4 for July, up from 39.9 in June. The headline number is now +12 points above its low of 31.4 in March. Production jumped +4 points, unemployment +7 and new orders +7 to 48 and the highest level since September. However, order backlogs fell from 37.6 to 32.1. That was offset by a drop in inventories from 34.2 to 25.4. The bounce in the Chicago ISM was due primarily to the automakers restarting production and putting people back to work. This industry specific rebound will not be replicated in the other geographic regions.

Chicago ISM (formerly PMI)

The economic schedule for next week has some key reports. The national ISM on Monday is expected to show a rise to 46.8 but that is still in contraction territory. Anything under 50 represents a continued decline. Wednesday has Factory Orders and ISM services. Factory orders are actually expected to decline to a three month low of 0.2% and barely in positive territory. This would seem to be in disagreement with the analyst comments about an inventory rebuild cycle but this is a lagging report for June.

Friday is the big day with the Non-Farm Payrolls for July. Expectations are for a loss of -305,000 jobs compared to a loss of -467,000 in June. You may remember the consensus expectations for June were for a loss of -355,000 and the market did not react well when the -467K number was released. The July losses are expected to be lower because the automakers went back to work. That means parts suppliers also went back to work as well as everyone else in the supply chain. Will the losses drop back to -305K is the $64 question. A better than expected number would be very market friendly. The unemployment rate is expected to have increased again on its way to double digits in early 2010. The unemployment rate is calculated from a different report where households are surveyed instead of employers.

Economic Calendar

The rebound in the auto sector was about to accelerate strongly due to the Cash for Clunkers program but that rebound was in doubt Friday morning. The official name of the program is Car Allowance Rebate System or CARS. The week old program had already blown through the $1 billion in money allocated to purchase and scrap the clunkers. President Obama said he was working with lawmakers to provide additional funding. The House quickly passed a three-page bill to provide another $2 billion for the program. Finally a stimulus program that actually helped people and it was the smallest program in the batch. With programs for hundreds of billions no longer being mentioned in the news this is the little stimulus program that succeeded. When you consider the triple advantage of this program it should have been authorized for $20 billion. Each billion buys about 250,000 clunkers in exchange for purchasing 250,000 new cars.

Crushing low mile per gallon cars is a positive for the environment. Selling an equal number of high miles per gallon cars is a plus for the automakers as they try to extract themselves from the quicksand of bankruptcy, shuttered plants, laid off workers and no demand. In a survey of dealers they reported one additional car sold in addition to every cash for clunker deal. Seems shoppers that did not qualify for the deal were opting to buy cars anyway and the increased chatter about the clunker program was raising the interest level for cars in general. Some dealers were actually worried they would run out of inventory of new cars because the pace of sales was so brisk. This win-win stimulus program was probably the best one enacted and definitely needs to be refunded.

There is another view of the Cash for Clunkers program. Foes claim this only rewards those people living on the economic edge and driving crap cars because they can't afford anything better. The middle class and above don't own $2000 gas guzzling clunkers and now they are going to be taxed to pay for new cars for John & Susie Sixpack who could not come up with a down payment on their own if their life depended on it. By giving the underclass new cars they become further wards of the state and become democratic voters for life. Some foes are predicting another round of credit problems when these cars are repossessed 6-12 months from now. However, this was debunked by the Autonation CEO saying the credit scores of the CFC buyers was higher than their normal shoppers.

Quite a few message boards are full of comments about the clunker program being social engineering, the advance of socialism in the U.S. and blaming President Obama for the grand scheme of taking over GM in advance of the big auto giveaway. Personally I think they are giving the president too much credit. If it was a scheme the program would have started out at $20 billion. More likely the whiners on the Internet are just angry they don't qualify for the program because they already own a high end yuppie SUV or they are the blue collar workers who would not be caught dead in a low powered EconoBox on wheels. Opinions are like noses, everybody has one. Click on the email link at the top of this article and give me your opinion.

In stock news Las Vegas Sands (Nyse:LVS) fell -16% after the company posted a loss of $222.2 million compared to a loss of -$8.8 million in the comparison quarter. Earnings were hurt by legal settlements, lowered values on properties sold and weak consumer traffic. Moody's placed LVS on review for a possible downgrade. Moody's said it was concerned about the company's ability to maintain adequate liquidity and stay in compliance with financial covenants.

Genzyme (Nasdaq:GENZ) dropped -8% after it said the FDA was going to re-inspect a Boston facility to determine whether manufacturing issues discovered in February had been fixed. A virus had been found in bioreactors in the facility. The company had already reported in May that the problems had been fixed and the plant re-inspected so this was a surprise for investors.

Citigroup (Nyse:C) traded 1.11 billion shares on Friday with 300-400 million shares traded at the close. Citi recently exchanged a record number of common shares for preferred shares owned by private investors and the government to reduce its capital requirements and eliminate the preferred dividends. Citigroup's outstanding shares went from 5.51 billion the end of June to 21 billion. The government still owns $20 billon in preferred shares with an 8% dividend.

There were so many shares exchanged that the major index managers had to rebalance their indexes to account for the change. The Russell indexes rebalanced to the new Citi share count at the close on Friday. This means index managers for the Russell 1000 had to buy large quantities of Citi at the close and sell minor amounts of every other stock in the index. The S&P is going to do the same thing next week. Did you know that Citigroup is seeking approval to issue another 60 billion shares in the future? How will a company with 81 billion shares outstanding ever raise its stock price? Can you say, "Reverse stock split?" I would not buy Citigroup stock with your money much less mine.

Russell 1000 Chart

Citigroup Chart

AutoNation (Nyse:AN) reported earnings that fell by 29% to 29-cents per share on a -29% drop in revenue. Yep, a lot of 29s. The earnings were 4-cents over analyst estimates. AutoNation is the largest U.S. dealer with 264 dealerships. The CEO said showroom traffic had jumped +36% over the last week since the Cash for Clunkers program was started. AutoNation also increased its orders for new vehicles by +45% in Q2 to prepare for the anticipated recovery. That is some pretty strong faith in the auto sector recovery. The CEO said the credit scores for CFC buyers were higher than that of normal shoppers. That debunked the claims that many of these buyers would never make a payment or have the car repossessed 6-9 months from now. The rumors of the CFC program cancellation on Thursday night crushed the stock of AN on Friday morning but the quick action by the House saved the day. The Senate is expected to act next week to extend the program.

AutoNation Chart

While the economic calendar has some big events next week the focus until Friday will still be on earnings. The chance for the biggest market impact might come from Cisco (Nasdaq:CSCO) on Wednesday after the close. After Intel started the tech rally a couple weeks ago we have had some disappointments randomly appear in the tech earnings schedule. Amazon and Microsoft to name a couple. Strong earnings from Cisco could reassure the market and reinforce the tech rally. Remember the Nasdaq only gained +12 points for the entire week so help is definitely needed.

I could have built the entire earnings graphic with energy stocks but the only two that really matter next week are CHK and RIG. Chesapeake (Nyse:CHK) will tell us all we need to know about the state of natural gas drilling and reserves. Transocean (Nyse:RIG) will tell us how the deepwater sector is doing. Since deepwater rigs are contracted well in advance and for years at a time Transocean should have been impacted less than the rest but I am sure they will report some new delays and cancellations. Canceling a yearlong contract for a drillship at $75,000 a day does have its ramifications but normally there is someone else with a project on the schedule that can pick up some of the slack. How well RIG managed these scheduling blips should be a key point in their earnings. If RIG says business is picking up again then the entire sector of energy stocks should benefit.

There are probably a lot of stocks in the list you have never heard of and that is a factor of diminishing quality of earnings. The smaller companies bring up the rear in the earnings parade and hopefully there will be plenty of workers with wheelbarrows and shovels to clean up behind them. This is the last major week for earnings and we already know how the story ends. Most beat on earnings but missed on revenues and guidance was mostly soft.

Earnings Calendar

Five more banks were closed on Friday in five different states. Keeping the FDIC busy were the First State Bank of Altus OK, Integrity Bank in Jupiter FL, Peoples Community in West Chester OH, First BankAmericano in Elizabeth NJ and Mutual Bank in Harvey IL. Mutual was the largest at $1.6 billion and 12 branches. Total assets of all the banks was $2.69 billion and will cost the FDIC $911.7 million. This brings the total banks closed this year to 69 and nearly three times the 25 closed in 2008. The FDIC has 305 banks on the problem bank list and it insures 8,246 U.S. banks.

Crude oil went for a wild ride last week. After opening the week at $68.75 the Wednesday crash on worries over China knocked it back to $62.70. The rebound on Thursday/Friday pushed it back to close at $69.50 and a gain for the week. That was a monster bout of volatility but the uptrend support was never in danger. Part of the Wednesday decline was due to a spike of 5.2 million barrels in U.S. oil inventories just as worries over China's rebound were hitting the news. Analysts were all over the airwaves saying sell oil.

Those worries eased about the same time the dollar started imploding on Thursday. The dollar index closed at 78.34 on Friday and a new 8-month low. Oil and other commodities rallied as a dollar hedge. Finding out that traffic in U.S. auto showrooms increase 36% because of the Clunker program did not hurt. If a storm had appeared on Friday it would have punctuated the short squeeze and could have pushed the price well over $70. Fortunately for the people on the coast there are still no storms in sight.

Crude Oil Chart

US Dollar Index Chart

July was a solid for the markets with the Dow up +9% and the best July since 1989. The S&P was up +7.7%. The Nasdaq is up +44% over the last four months and had its best July since 1997. The indexes are back up to levels from before the Lehman crash. This is very difficult ground and given the decline in earnings interest it could be a tough week next week.

However, historically whenever the markets gain over 5% in July they continue to add another +2.4% in August and are up +4.6% for the rest of the year. First, this is not a normal year so historical norms are not relative. Second, even if we did follow the historical patterns the +4.6% for the rest of the year would only be half the gains made in July. How excited would we be about another +350 Dow points by year-end? I seriously doubt anyone would be selling their scrap gold to rush into stocks for that kind of return.

Another problem is the July month end markups. Other than the Thursday short squeeze at the open the markets went nowhere for the entire week. If mutual funds were painting the tape they were using crayons instead of buy orders. I did not see any markups and that worries me.

If you look at the price action on the Dow there was a monster short squeeze on the 23rd that took the Dow over 9000. Those gains held for five days but there was no follow through. The Dow was setup for a support failure at Wednesday's close. Shorts waited patiently for two days after getting blown out on the 23rd. The Tuesday high was sold and we got a solid pattern of lower highs right into Wednesday's close. They had plenty of time to load the boat again with shorts in expectation of a support failure. Instead they were blown out again on Thursday. Again there was no follow through and the Dow closed well off its highs on Thursday.

Dow Chart 30 Min

If you watch any stock TV you probably heard all week about the "golden cross." This refers to the 100-day average crossing back over the 200-day average. This is supposed to be the Holy Grail for fund managers. The Dow has not yet crossed but is very close. In the chart below you would have missed out on a 40% rebound in the Dow. The resistance I am watching is the uptrend resistance for 2009 at 9200. (blue line) The July rally came to a dead stop when it hit that resistance. Support is 9000.

Dow Chart - Daily

The S&P-500 has completed the golden cross after the 200-day acted as support for all of June and July. As a fund manager you would have given up a fortune waiting for the cross to take a position. However, there are a lot of conservative portfolio managers that use strict rule based trading and this is a very old rule. I am sure there were many managers happily adding to positions last week.

The S&P stopped dead at the 2009 uptrend resistance and it still has very strong resistance at the psychological 1000 mark. For August after a 40% rebound off the March lows it would not be a stretch of the imagination to visualize a failure at those levels.

There is no real reason for the rally to continue. Almost every major gain over the last several months has been a short squeeze. You can bet that the shorts were loading up again on Friday after Thursday's big drop from the highs. Is this another squeeze in the making? If so then the Cisco earnings could be the spark. However, if Cisco does a face plant like Microsoft then that would be a serious opportunity for a decline.

I would watch the 1000-1010 level carefully and I would be a reluctant buyer on any breakout but I would be a buyer.

S&P-500 Chart

The Nasdaq has its own set of problems. After gaining 7.7% in July the last week has been tough. On Thursday the Nasdaq stalled when it hit downtrend resistance dating back to Oct-2007. I don't know how well this will be respected but next week the odds are good we are going to find out. After a +44% rally off the March lows the Nasdaq is extremely extended and August/September are not normally kind to tech stocks. However, as I have said before this is not a normal year. Anything is possible once there are clear signs of economic growth. I fear the "expectations for growth" are already priced in and it will take some clear signs of actual growth to produce a continued rally. Support is 1950 and resistance 2000.

Nasdaq Chart - Weekly

The Russell 2000 spiked over resistance from November at 550 but immediately stalled. The moving average cross happened back on July 23rd and there was no follow through for four days until the short squeeze last week. The Russell is simply not acting like fund managers are putting money to work. It looks tired and I am worried about managers taking profits to insure gains for the full year. Support is 550 and anything over 560 should be a breakout so the opportunity is there if managers want to pursue it.

Russell Chart - Daily

Russell Chart - 30 Min

These are the factors I am considering for next week. We have the psychological resistance at 1000 for the S&P. The Nasdaq has downtrend resistance from Oct 2007. All the indexes struggled last week with the exception of the short squeeze and there was an afternoon sell off of that squeeze. Earnings are winding down and those that do report late are typically under achievers with a few exceptions like Cisco. I expect John Chambers to try and say something bullish even if Cisco's earnings are weak. Unfortunately the market will be expecting it.

The ISM on Monday should not disappoint but even if it does there may not be a major reaction. The economy is still weak and we have to expect some disappointing reports but that does not mean the recovery is over. The Non-Farm payrolls on Friday could be a challenge. Without earnings surprises to keep the market moving higher the payrolls will be even more important. There is also a Fed meeting two days later. The combination of the two events could put a damper on the market UNLESS payrolls are much better than expected. There has been a lot of talk about removing the rate stimulus despite Bernanke's strong comments to the contrary two weeks ago. It is that time in the cycle where the pressure is beginning to build. This can be a cloud over the market in the coming months.

My best guess for next week is flat to slightly down unless something unexpected happens to squeeze the shorts again. As the first week in the month we can expect some retirement funds to be put to work early in the week. Whether it will be enough to offset the growing lethargy is unknown.

Market sentiment has returned to extremely bullish at 61% and that is normally a bad sign but not always lethal. I believe that nearly everyone on the planet other than Nouriel Roubini fully expects the economy to be in full recovery mode by Q4. I heard several people on Friday saying 3% positive GDP in Q4. If investors believe we will have a strongly positive GDP in Q4 then the dips should continue to be bought. The market supposedly rallies six months before the economy. The current rally began in March on expectations for that six-month rebound. Many say the recovery is already priced into the market. I disagree.

The market was priced for another Great Depression in March and it did not happen. This period may always be known as the Great Recession but we have clear evidence it is already coming to an end. How much did the market rally from the Great Depression? Art Cashin said on Friday if the rally continues through next Friday it will equal the duration of the 1929-30 bounce. That bounce recovered 48% of the drop. The Dow is up 44% as of Friday. Obviously comparing economies and markets from 80 years ago may be interesting but it is not relative to our current situation. What happens next week will depend on what happens in earnings, economics and sentiment. As long as fund manager sentiment is an expectation for much better things six months from now the dips will be bought.

Website Changes

Back in April the Option Investor website was moved from one ISP to another and we have been working on improving numerous areas ever since. As part of the conversion we turned off the passwords for the website to avoid having any readers unable to access the content while we worked out the bugs from the move. Next week we are going to turn those passwords back on. The first conversion was the Market Monitor last week. We found that many readers had forgotten their passwords over the last three months of open access. If you have problems next week in accessing the website you can go to the "Manage Your Subscription" page and have your password emailed or change it to something of your choice. Click here to Manage Subscription As always you can contact "Support" by using the links on the website and they will be happy to help with any problems.

Jim Brown


Index Wrap

Correction odds increase

by Leigh Stevens

Click here to email Leigh Stevens

THE BOTTOM LINE:

July was a powerful month, not quite as much as April when the Nasdaq Composite was up 12% versus an 8% gain for July; the S&P 500 (SPX) was up 9% in April, versus 7% in the month just ended.

If the indices start trending sideways or only slightly lower ahead, as is suggested by the high/overbought readings in the RSI and on my sentiment indicator, call premiums are going to cave also. If you're short calls, a sideways to lower move will of course be in your favor.

The 'perfect' conditions for a continued bull run that I talked about last week, whereby prices were going up and bullish sentiment was moderating or declining, changed this past week. Given that many if not most options traders are TREND FOLLOWERS, it takes a continued price move to get them on board with the dominant trend as far as call or put activity.

I could advise ANTICIPATING the next trend or move, especially crucial when trading index options, forever and a day and this psychological aspect will ALWAYS be the same. This is a good thing, as it can lead you to profitable trading opportunities, especially as long as you trader very selectively!

If you are in any index puts, there is still a risk of a run to new highs, such as to the 1010-1020 area in the S&P 500 (SPX) or to the 1650-1660 area in the Nasdaq 100 (NDX). However, the risk of a correction ahead or after a next upswing, has grown.

Prices may drop enough, even in the summer doldrums ahead, so as to make puts, especially taken out around recent highs, reasonably profitable. The second alternative to very much of pullback is that that of more of a 'time correction' or a mostly sideways drift. Time going sideways will moderate an overheated market also.

Usually there's enough of a correction from the aforementioned overbought extremes to make a profit on the short side; e.g., by purchase or owning the August SPX 880 or 885 puts. Certainly, protect profits garnered on this run up by unwinding some or most of such profitable option positions.

Beside the overbought condition there is slowing upside momentum. When you see this in the leading sectors or the leading market (i.e., the Nasdaq currently), this is a warning.

Fundamentally, the lack of signs of a consumer spending rebound is an economic worry. Not that I 'worry' about this too much as the market anticipates a few months ahead. But, in every 'overbought' situation there is a point where bullish traders, even investor types, REACT to bearish news rather than slough it off, mainly due to their wish to protect unrealized profits.

CHART OF THE WEEK:

You can see in the weekly SPX chart the bullish and not so bullish aspects here. Bullish, as SPX stays above the prior breakout point (at 944), but in the third week of a rally phase, prices are not making the same headway which is suggesting slowing (upside) momentum.

The other thing to note is that, on a longer-term weekly chart basis, SPX and the other indices are now ALSO into overbought territory. You can see per past behavior on the chart below that after overbought 8-week RSI extremes, prices went sideways for a few weeks in one instance and fell 87 points over 4 weeks (from peak to trough) in the last prior instance. There's the well known saying about past performance being no guarantee of a similar future occurrence, but the aforementioned pattern is fairly consistent as you can see for yourself.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P remains bullish in its pattern and is rising along an extension of its previously 'broken' up trendline which suggests an area of some overhead 'resistance'. While this chart pattern, PLUS the overbought extreme seen on the RSI indicator AND in bullish sentiment, suggests that it's unlikely that there will be a dramatic further rise, it doesn't mean that prices won't continue in the present modestly rising trend. What we can predict is there is an increasing likelihood of a pullback correction. The 'minimum' upside objective to the 1020 area I suggested as based on the upside breakout of the 'rectangle' formation should be tempered with the fact that there is a significant hurtle, or significant resistance, in the 1000 area in SPX.

I've pegged near support at 950, with fairly major support down in the 910 area, which extends to 900.

Near resistance is at 1000, extending up to around 1020 in my estimation.

TRADER SENTIMENT:

As discussed in my initial 'bottom line' comments, there was a spike up to the 'overbought-extreme bullishness' area on my equities Call to Put ratio (CPRATIO) which I keep such (dividing total daily equities call volume BY total daily equities put volume) that a HIGH reading is 'overbought' just like the RSI or other type PRICE oscillators.

I have found over many years that a SINGLE day reading, or a cluster of such single day readings, most often precedes a trading correction. On the upside, such (overbought) readings can go on for some time however. A 5-day moving average that registers a similar high extreme, as seen on the Nas Composite CPRATIO graph further along, correlates even more to substantial risk of a correction within 1 to 5 trading days.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart is bullish and is also of course in new up leg in the big cap S&P group. I've noted next 'resistance' (in quotes)at 470. Resistance suggested by the rising trendline seen on my OEX daily chart, is not on a equal footing with a prior high that I could point to.

Moreover, prices can just keep rising along but under the line of (trendline) resistance. The trendline VISUAL does point out that prices are no longer in the same upward trajectory as before. They slipped to a lower rate of upside price change or upside momentum. This suggests somewhat greater potential for a pullback or decline.

Support points or area are at 450, then around 440 and the last of what I've noted with green up arrows is at 425. The prior double bottom low in the 412 area is likely major support and this extends to 400.

As with all the other indexes, OEX is at an overbought extreme in terms of the 13-day RSI.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I won't keep repeating all details of the chart pattern; it is as noted above with the S&P indexes as far offering a still bullish chart. However, it appears to me that the Dow 30 (INDU) is going to run into increasing selling pressure ahead.

INDU found some resistance around 9100, but could reach 9300 before this current move is through. I'm not betting on another substantial upside spurt, unlike what was to be expected when the Average pierced its prior cluster of highs in the 8850 area.

I've calculated near resistance next at 9300; above this is pretty much the type of guesswork I won't take on. The 9650-9750 to 10000 area looks like the major resistance zone ahead based on a study of long-term charts. I'd rate it highly unlikely that there's a sizable new upside acceleration that is going to take the Dow back to those heights anytime soon or least until after a pullback first.

Near support is at 8990-9000, then down in the 8850-8900 area, plus I assume support in the area of the 21-day moving average at 8688 currently.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP), while bullish in its pattern has substantial resistance around 2000. COMP was slipping from these heights by the end of this past week. The index might manage another run up toward 2050, but I'd rate the odds better that we'll see 1950 first. There's technical support at the 1880 'breakout' point. Fairly major support begins in the 1800 area.

Bullish sentiment and the RSI got to overbought highs in this past week. As soon as that Thursday reading occurred, sure enough the next day saw a bout of profit taking selling. Is this the start of something more substantial than a pause before another move higher?

Projecting future price swings is no exact science needless to say but rather a projection of the probabilities (based on historical cyclical tendencies) or likelihood of a continuation of the present trend versus time for a pause in that trend. I'm looking for a pause and correction ahead but won't be shocked, I say shocked, at the market taking the more unlikely course. Flip a coin long enough and you'll get a big run of heads; or tails.

I noted earlier the bearish rise in my CPRATIO line which is now also seen on a 5-day moving average basis. This suggests greater potential for a correction than we've seen since just prior the May price dip.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish but I'd also note that NDX has reached my 1600 upside objective. The index could retest its high to date and extend gains to 1650-1660, but NDX is also starting to see an initial 'failure' of relative strength as the 13-day RSI is not 'confirming' recent new highs.

Near support now is at 1580, then in the 1515-1500 area, with fairly major support back down in the 1450 area, extending to 1400.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) hit my long-standing major objective of 40. As I noted last time, "I'd be surprised to see the stock moving much higher than that without a pause or pullback first". My point of view is unchanged. Moreover, recent volume trends are not 'confirming' the recent continued move higher as noted on the chart below with the On Balance Volume (OBV) indicator and the most recent trend in terms of the daily volume trend per the daily volume bars.

Near QQQQ resistance: 40.0

Next overhead resistance: 40.5

Near QQQQ support: 38.75

Next support: 37.2

First area of major support: 36.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart has had a pretty good run and was showing decent buying the stocks even at the end of the week. Near resistance is in the 550-560 area, then at 580, extending to 600. If the Nasdaq continues to falter, RUT is not going to go it alone on a further bull move.

Near RUT support is at 540, then at prior highs around 530-532 and next in the area of the moving average currently intersecting at 511 as noted on the chart.

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

Ready For Action

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

J.C.Penney - JCP - close: 30.15 change: +0.69 stop: 28.40

Why We Like It:
Retail stocks have been surprisingly strong as investors completely ignore signs that consumers are saving more and spending less. The GDP report on Friday showed a 1.2% drop in consumer spending. You'd think investors would be worried about the back-to-school shopping season. Yet shares of JCP have broken out from a pennant formation and look poised to rally higher.

I want to see a little more confirmation so I'm suggesting a trigger to buy calls at $30.51. If triggered our first target is $32.75. Our second target is $34.90. I would be tempted to aim higher but JCP is due to report earnings on August 14th and we do not want to hold positions over the announcement. Traders should consider this a more aggressive bullish play with the market overbought. I would trade half your normal position size.

Suggested Options:
I'm suggesting the August calls. Strikes are available almost every $1.00.

BUY CALL AUG 30.00 HZP-HF open interest=6028 current ask $1.50
BUY CALL AUG 32.50 HZP-HD open interest=4418 current ask .55

Annotated Chart:

Picked on   August xx at $ xx.xx <-- see TRIGGER @ 30.51
Change since picked:      + 0.00
Earnings Date           08/14/09 (confirmed)
Average Daily Volume =       5.5 million  
Listed on August 01, 2009         


Lorillard Inc. - LO - close: 73.72 change: +0.64 stop: 69.45

Why We Like It:
We played LO as a call candidate in July but closed the play to avoid holding over earnings. Earnings were released on July 27th and the company beat estimates by 28 cents with a profit of $1.71 per share. Revenues just blew past the estimates with a 42% surge to $1.52 billion for the quarter. Management also announced a $750 million stock buy back program. Now that earnings are out of the way we want to jump back on board. Broken resistance near $70.00 should be support.

Buy calls on a dip in the $70.50-70.00 zone. Our first target is $74.50. Our second target is $77.00.

Suggested Options:
I am suggesting the September calls.

BUY CALL SEP 70.00 LO-IN open interest=7415 current ask $4.90
BUY CALL SEP 75.00 LO-IO open interest=8580 current ask $2.00

Annotated Chart:

Picked on   August 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 August 01, 2009         


NEW DIRECTIONAL PUT PLAYS

Genzyme - GENZ - close: 51.89 change: -4.36 stop: 52.55

Why We Like It:
If at first you don't succeed, try, try again. We tried playing GENZ as a bearish candidate in July but the market's recent rally was just too strong and shares rallied past resistance. It looks like the tone has changed again with Friday's decline wiping out several days worth of gains.

The drop was fueled by news that the FDA is going to re-inspect a GENZ factory in Boston to make sure any issues regarding a viral contamination have been addressed and corrected. Technically GENZ looks bearish with a head-and-shoulders pattern. This time we're going to wait for the breakdown. The plan is to buy puts at $49.90. If triggered our first target to take profits is $45.25. Our second target is $41.00. The P&F chart is bearish with a $40 target.

Suggested Options:
I am suggesting August or September puts. Just remember that August options expire in three weeks.

BUY PUT AUG 50.00 GZQ-TJ open interest=5388 current ask $1.10
BUY PUT AUG 47.50 GZQ-TW open interest=1035 current ask .55

BUY PUT SEP 50.00 GZQ-UJ open interest= 196 current ask $1.90
BUY PUT SEP 47.50 GZQ-UW open interest= 642 current ask $1.15
BUY PUT SEP 45.00 GZQ-UI open interest= 104 current ask .65

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 49.90
Change since picked:      + 0.00
Earnings Date           10/22/09 (unconfirmed)
Average Daily Volume =       3.9 million  
Listed on August 01, 2009         


VistaPrint - VPRT - close: 41.25 change: -1.89 stop: 42.05

Why We Like It:
The rally in VPRT is running out of gas. The company just reported earnings last week. The headline number was better than expected but management lowered their forecasts. Shares have short-term support near $39.00. I'm suggesting a trigger to buy puts at $38.80. If triggered our first target is $35.20. Our second target is $31.50.

Suggested Options:
I am suggesting August or September puts. Just remember that August options expire in three weeks.

BUY PUT AUG 40.00 QPY-TH open interest=6578 current ask $1.25
BUY PUT AUG 35.00 QPY-TG open interest=1114 current ask .25

BUY PUT SEP 40.00 QPY-UH open interest= 525 current ask $2.30
BUY PUT SEP 35.00 QPY-UG open interest= 972 current ask .80

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 38.80
Change since picked:      + 0.00
Earnings Date           07/30/09 (confirmed)
Average Daily Volume =       1.3 million  
Listed on August 01, 2009         



In Play Updates and Reviews

Mixed GDP fails to spark profit taking

by James Brown

Click here to email James Brown


CALL Play Updates

Fluor Corp. - FLR - close: 52.80 change: +0.24 stop: 47.45

I was hoping the GDP report would help spark some profit taking but unfortunately that didn't happen. FLR merely churned sideways. Earnings are coming up on August 10th and that doesn't give us much time. If we don't see a correction in FLR on Monday or Tuesday I'll have to drop it as a candidate until after its earnings report. More aggressive traders might want to consider buying calls on a dip or a bounce near $50.00 (with a tighter stop). Right now I'm suggesting readers wait for a dip to $48.50.

If triggered our first target is $54.80.

Suggested Options:
If FLR hits our trigger at $48.50 I would buy the August calls.

Annotated Chart:

Picked on     July xx at $ xx.xx <-- TRIGGER @ 48.50
Change since picked:      + 0.00
Earnings Date           08/10/09 (confirmed)
Average Daily Volume =       2.4 million  
Listed on  July 25, 2009         


Euro Currency ETF - FXE - close: 142.47 chg: +1.87 stop: 139.95 *new*

The U.S. dollar was crushed today with the dollar falling to new 2009 lows. This lifted the FXE to a 1.3% gain. The euro ETF is now testing resistance near $143. I am raising our stop loss to $139.95. 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 am not suggesting new positions at this time.

Annotated Chart:

Picked on     June 23 at $140.76
Change since picked:      + 1.71
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Gold Miner ETF - GDX - close: 39.76 change: +1.60 stop: 36.90 *new*

If the dollar continues to fall it will be a bullish boost for gold futures and that should help the miners. The GDX filled the gap from July 28th and is testing round-number resistance near $40.00. If you look at the last six weeks the GDX appears to have built an inverse head-and-shoulders pattern. A breakout over $41.00 can be used as a new bullish entry point although you'll probably want a higher stop (above our new stop).

I am raising our stop loss to $36.90. GDX has already exceeded our first target. I am raising our second target to $44.00.

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

Annotated Chart:

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 3.27
            gap higher exit   /1st target hit @ 39.95 (+9.4%)
Earnings Date           00/00/00
Average Daily Volume =       6.8 million  
Listed on  July 13, 2009         


IDEXX Labs - IDXX - close: 49.82 change: -0.47 stop: 44.95

The rally in IDXX ran out of steam today. Unfortunately we are still waiting for a correction toward support.

The plan is to buy calls on a dip at $47.50. If triggered our first target is $52.00. Our second target is $54.90. Our time frame is four to eight weeks.

Suggested Options:
if IDXX hits our trigger I would buy the September or October calls. I prefer the $45, 50 or $55 strikes.

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/24/09 (confirmed)
Average Daily Volume =       383 thousand 
Listed on  July 25, 2009         


Legg Mason - LM - close: 28.14 change: -0.61 stop: 23.99 *new*

Shares of LM were downgraded twice this morning, once to a "sell" and yet the worst the bears could do was a 2.1% drop. We are waiting for LM to correct back toward support near $25.00. Please note that I'm upping our trigger to buy calls from $25.25 to $25.55. We're changing the stop loss to $23.99. If triggered our first target is $29.75. Our second target is $33.40. My time frame is four to eight weeks.

Suggested Options:
If LM hits our trigger at $25.75 we want to buy the September calls. I suggest the $25, 27, or $30 strikes. Strikes are available at $1.00 increments.

Annotated Chart:

Picked on     July xx at $ xx.xx <-- TRIGGER 25.55
Change since picked:      + 0.00
Earnings Date           07/20/09 (confirmed)
Average Daily Volume =       3.4 million  
Listed on  July 25, 2009         


S&P 100 index - OEX - close: 460.26 change: +0.20 stop: 451.90

Stocks may have closed higher but not by much. I hesitate to launch new positions here but another dip and bounce in the $452-458 zone can be used as a new entry point to buy calls here.

Our target to exit is 469.00. More aggressive traders may want to aim for the 480 region.

Suggested Options:
If the OEX provides a new entry point I'd buy the August calls.

Annotated Chart:

Picked on     July 30 at $458.10 *triggered              
Change since picked:      + 2.16
Earnings Date           00/00/00 
Average Daily Volume =        xx 
Listed on  July 28, 2009         


Polaris - PII - close: 37.87 change: -0.63 stop: 31.95 *new*

I am upping our trigger point to buy calls from $33.00 to $34.15. We'll raise the stop loss to $31.95. Our first target is $37.50. Our second target is $39.90. FYI: The Point & Figure chart is bullish with a $43.50 target.

Suggested Options:
If PII hits our new trigger to buy calls at $34.15 we want to use the September calls.

Annotated Chart:

Picked on     July xx at $ xx.xx <-- TRIGGER @ 34.15
Change since picked:      + 0.00
Earnings Date           07/16/09 (confirmed)
Average Daily Volume =       436 thousand 
Listed on  July 18, 2009         


PUT Play Updates

Alliant Techsystems - ATK - close: 78.72 change: -0.68 stop: 81.15

ATK continues to look bearish. The stock has produced a failed rally near $80.00 and under its 30-dma. I would still buy puts right here. I'm leaving the stop at $81.15 but more conservative traders may want to consider a stop near $80.50 instead.

Our first target is $75.25. Our second target is $72.00 but we may not have time for ATK to reach $72.00. Earnings are due out on August 6th and we don't want to hold over the announcement. I'm suggesting a stop loss at $81.15. FYI: The Point & Figure chart is bearish with a $62 target.

Suggested Options:
Earnings are coming up soon so we want to use the August puts. The plan is to exit before the earnings report.

Annotated Chart:

Picked on     July 27 at $ 78.88
Change since picked:      - 0.16
Earnings Date           08/06/09 (confirmed)
Average Daily Volume =       443 thousand 
Listed on  July 27, 2009         


Biotech Ishares - IBB - close: 78.75 change: -0.69 stop: 80.75

The biotech sector did not show any strength on Friday. This group continues to look extremely overbought and poised for more profit taking. I would still consider buying puts on the IBB here. Our target on the IBB is $75.50.

FYI: Keep an eye on the BTK biotech index, which is fading under resistance near the 900 level and its August 2008 highs.

Suggested Options:
I am suggesting the August $80 or $75 puts.

Annotated Chart:

Picked on     July 30 at $ 79.44
Change since picked:      - 0.69
Earnings Date           00/00/00
Average Daily Volume =       892 thousand 
Listed on  July 30, 2009         


LEAP Wireless - LEAP - close: 23.95 change: +0.42 stop: 27.55

LEAP dialed up an oversold bounce and gained 1.7% on Friday. The larger trend is still very bearish but I'm not suggesting new positions at this time.

Our first target for LEAP 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'm not suggesting new positions at this time.

Annotated Chart:

Picked on     July 17 at $ 26.80 *triggered    
Change since picked:      - 2.85
Earnings Date           08/06/09 (confirmed)
Average Daily Volume =       2.2 million  
Listed on  July 16, 2009         


QQQ ProShares - QLD - close: 44.58 change: -0.31 stop: 46.55

I want to remind readers that this is a very aggressive, higher-risk put play. The market's trend is still up. There was no profit taking on the GDP report. The next event traders will key in on is the August 7th jobs report. Can the rally make it to Friday? I don't know. I'd still speculate on a correction but you'll want to use very small position sizes. Our target is $40.50.

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

Annotated Chart:

Picked on     July 30 at $ 44.89 
Change since picked:      - 0.31
Earnings Date           00/00/00 
Average Daily Volume =      13.5 million  
Listed on  July 30, 2009         


United Technologies - UTX - close: 54.47 change: +0.24 stop: 55.05

The fact that UTX did not breakout over resistance near $55.00 is good news but short-term it looks like the bulls are in control. This is probably a low-risk entry point given our stop at $55.05 but if there is any market strength on Monday we'll probably get stopped out. Our first target to take profits is at $50.15.

Suggested Options:
This should be a fast play so I'm suggesting the August puts.

Annotated Chart:

Picked on     July 22 at $ 53.12
Change since picked:      + 1.11
Earnings Date           07/21/09 (confirmed)
Average Daily Volume =       5.9 million  
Listed on  July 22, 2009         


Strangle & Spread Play Updates

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

McDonald's - MCD - close: 55.06 change: -0.53 stop: n/a

MCD was the worst performing stock in the Dow Industrials for the month of July. Yesterday's failed rally has turned into a new eight-week low on above average volume. Nimble traders might want to consider directional put plays. We're not suggesting new strangle positions at this time.

I suggested the August $60 calls (MCD-HL) and the August $55 puts (MCD-TK). Our estimated cost is $1.25 (0.70 + 0.55). We want to sell if either option hits $2.75 or higher. This may take a few weeks to succeed.

Suggested Options:
No new strangle plays at this time.

Annotated Chart:

Picked on     July 18 at $ 57.84
Change since picked:      - 2.78
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


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

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