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Daily Newsletter, Saturday, 8/15/2009

Table of Contents

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

Market Wrap

No Harm Done, Yet

by Jim Brown

Click here to email Jim Brown

The markets may have posted their first weekly loss in five weeks but there was no damage. The decline on Friday was minimal and exactly to uptrend support.

Market Statistics

There were three economic reports on Friday and investors had several different views of the recovery. Catching the most headlines was the first Consumer Sentiment Survey reading for August. The first reading on August sentiment came in at 63.2 and a significant drop from the July reading of 66.0 and consensus estimates for a rise to 68.5. The sharp decline was a serious surprise for analysts. At 63.2 the index is at five month lows. The big drop came from a sharp decline in the current conditions component from 70.5 to 64.9. The expectations component was relatively unchanged with only a -1.1 point drop to 62.1.

The drop in the current conditions component was blamed on rising gasoline prices, high unemployment and falling home prices. I disagree with these claims. Gasoline has barely moved in the last four weeks. The jobs report the prior Friday showed that jobs losses and unemployment had actually improved. Home prices actually ticked higher in some regions while others declined only slightly. New home sales were up as were pending home sales. This data conflicts with the "official" assumptions made by analysts.

What has really changed in the country in the last four weeks? Lawmakers recessed for the summer and began holding their normal August town hall meetings around the country. While the meetings were held like normal the attendance and emotion was far from normal. Instead of having 20-30 concerned senior citizens showing up for the normal lecture and glad handing with the politicians we saw hundreds of voters, sometimes thousands, show up in full attack mode. Signs and banners were in abundance as attendees fought to get to a microphone to complain about the proposed health care plan. Those that could not get to a microphone simply yelled their opposition. News cameras captured the events and the videos were run repeatedly on the various local news programs. Most lawmakers have now cancelled remaining meetings in fear of the growing resistance while others changed the format to a group conference call where the politician answered prepared questions rather than be accosted by the voters. I hope voters remember this in the next election.

The only thing that has changed for consumers over the last four weeks has been the sudden exposure on their local news to the rising hostility over the proposed health care plan. Most consumers turn a deaf ear to events transpiring in Washington but pay close attention to a near riot at the local fire station or VFW where a town hall meeting is held. That news lingers for days while a harsh speech by a critic on the House floor in Washington is never heard by 99.99% of consumers.

Consumers have heard, right or wrong, that they will lose their current insurance, their taxes will go up, the government will decide if they can get life prolonging treatments and like other countries with government health care they may have to wait 6-9 months for a doctors appointment. President Obama's approval rating has fallen to only 47% and a new low as the health care fight becomes mainstream. A Rasmussen poll on Thursday showed 52% of voters now disapprove of President Obama's performance with 38% of those strongly disapproving while 47% somewhat approve. That approval rating has fallen from its high of 65% after he took office. If appears that the "change we can believe in" has turned into "change consumers don't want" and that change in sentiment showed up in the current survey for August.

The talking heads on TV kept saying all day long on Friday that the drop in consumer sentiment caused the drop in the markets. I think that was the easy answer but not the accurate answer. More on my reasoning later.

Consumer Sentiment Chart

The second report making news was the Consumer Price Index or CPI. The CPI was unchanged in July after a +0.7% monthly increase in June. The stabilization was credited to the slight decline in gasoline prices after their sharp rise in June. Obviously those analysts are not talking to the analysts on the sentiment survey. The core CPI rose only +0.1%. The year over year decline in the headline number was -2.1% and that is the lowest in 59 years.

There is obviously no inflation present and with the declining core CPI numbers there is actually a small worry about deflation. The Fed was right to keep their rates flat and should be able to do so for months to come. The lack of demand in the economy is pressuring prices and making it practically impossible for anyone to raise prices. The only real price increase in 2009 has come from the energy sector where crude prices have rallied from under $40 to over $70.

Actually the cash for clunkers program, effectively a government subsidy on new cars, will push the CPI lower in the coming months as the actual price paid for a new car declines. With official unemployment over 9% many economists fear prices could continue falling on all items. However, it is not the 9% of the workforce that controls prices but the 91% still employed and bringing home a paycheck.

CPI Chart

The last report was the Industrial Production for July, which came in with a gain of +0.5%. This is the first reading in positive territory and was led by a +1% jump in manufacturing. Compared to the -22% drop in Q1 that is a monster improvement. This was led by a 20.1% jump in automobile manufacturing as plants were restarted. As autos begin to consume the backlog of parts we will see further gains as parts manufacturers begin to restart their facilities. However, the capacity utilization rate rose to only 68.5% from 68.1% and remains at multi decade lows.

Historically recessions end three months before any gains in industrial production. The positive gains in July confirm the conventional wisdom that the recession ended in late Q1, early Q2.

Industrial Production Chart

Next week has a full economic calendar but only a couple of reports that will have any impact on the market. The Producer Price Index (PPI) is expected to show the same lackluster gains as the CPI last week. The Philly Fed Manufacturing Survey will be the most watched report. As the first regional manufacturing report in the August/September cycle analysts will start forming opinions on the continued rebound. It is expected to show a decline of only -3.5% compared to the cycle low of -41.3% in February. A positive number here would be very market friendly.

Economic Calendar

If it is Friday it means another bank was closed. Colonial BancGroup (Nyse:CNB) with 346 branches in Florida, Alabama, Georgia, Nevada and Texas was closed by regulators. The government said $22 billion of the banks assets and branches would be bought by BB&T Bank (Nyse:BBT). The balance of the assets will be controlled by the FDIC. BB&T has 1,500 branches across the Southeast. The failure of Colonial is the largest bank to be closed this year and the sixth largest in U.S. history. The FDIC has closed 77 banks so far in 2009. Dwelling House Savings and Loan of Pittsburg was also closed on Friday and will be assumed by PNC Bank (Nyse:PNC). The FDIC also closed Community Bank of AZ, Community Bank of NV and Union Bank of AZ.

The FDIC said the closing of Colonial will cost the FDIC $2.8 billion. The 300+ banks still on the problem bank list have combined assets of $220 billion and far more than the $13 billion left in the FDIC fund. The FDIC does have a $30 billion line of credit in case another major bank or banks fail. The FDIC charges banks a percentage of deposits to produce revenue and rebuild the fund. Because of the dramatic increase in closures the FDIC issued a special assessment to member banks earlier this summer that is expected to raise $5.6 billion when paid in September. That will reduce the amount of money banks have to lend to customers. Colonial had applied for TARP funds but was told by regulators they had to raise $300 million in private capital first and they could not raise the money.

Colonial had been hit with a restraining order on Thursday that prevented them from liquidating or transferring assets worth $1 billion. The suit was filed by Bank America against Colonial to recover assets. Colonial acted as a mortgage broker and had 6,000 mortgages belonging to Bank America and held in trust by Colonial.

While on the subject of banks there is a story making the rounds on the Internet about a pending Roosevelt-style "bank holiday" in August or September. Harry Schultz started the rumor and it has been getting a lot of news coverage. The theory is the government needs to close the banks temporarily in order to sort out the various asset problems that still exist. The closing could result in "wide spread nationalization" and new banking rules according to Schultz. He claims it could also lead to a formal U.S. dollar devaluation.

Schultz claims U.S. embassies are being told to purchase massive amounts of local currencies, enough to last them a year, and they are being sent large amounts of U.S. currency to make these purchases. There are some anecdotal reports from others that this part of the story could be true. I have had several readers email me asking if this bank holiday rumor was a real threat. After researching it in depth I believe this is just a newsletter writer spreading a rumor to self promote his newsletter. I have seen nothing that leads me to believe that this is a real threat or has any shred of credibility except maybe to Schultz. Why embassies are being told to purchase currencies is unknown. However, I am not sure the embassies would actually be sent pallets of U.S. currency to do this even if the administration wanted it done. I think there are easier ways to accomplish the task. That leads me to believe that this part of the story is also untrue even though it is being reported from multiple sources.

The administration has problems. The FDIC has problems. However, none of those problems appear severe enough to warrant the massive disruption of the banking system, the civilian population and the world economy by closing the U.S. banks for several weeks. In Roosevelt's time it could be done. Today, with our massive global interdependencies I think it would be a disaster. What kind of confidence would other countries have in buying our debt if our banks were closed? There is $1.5 trillion in debt coming up for sale over the next 12 months. Without that sale the U.S. could not function. I believe any administration would do anything necessary to avoid a show of weakness with a forced bank holiday. If someone mentions this rumor to you, do yourself a favor and kill it.

Oil prices posted the biggest declines on Friday with a -4.8% loss for the week to close at $67.43, down -3.09 on Friday alone. The reason given was again the falling consumer sentiment. I don't believe the sentiment had that much to do with it and a quick check shows that the dollar rallied again, which is negative for oil prices. Oil had been on a four week rally to just over $72 after trading under $60 in mid July. I believe this was just profit taking aggravated by the rebound in the dollar. The current crude futures contract expires next Thursday and surely that had nothing to do with the volatility in prices (grin). We also learned on Friday that China may be considering removing some of the stimulus because the economy is heating up. Any slowing of the rebound would delay demand.

Next week should see a bounce in oil prices because there is not one but two tropical storms headed for the gulf. Tropical storm Two was officially named Ana and is being followed by a newly formed tropical storm Three. Ana has sustained winds of 40 mph and increasing. Tropical storm three has already reached that level and is expected to become a named storm soon. Ana is on track to go north of Cuba and impact the tip of Florida while storm Three is tracking south of Ana's path for a more direct hit on Puerto Rico and Cuba and possibly into the gulf. These two storms should provide a lift for oil prices next week.

Storms

Storm Track for Ana

Also impacting the oil sector late Friday was earnings from oil giant Petrobras (Nyse:PBR). Earnings fell -20% due to the lower price of oil compared to the same period in 2008. No surprise there. Production was up +6%. The surprise came from the monster spending program to extract oil from the Tupi field. Investments for the first six months were $32 billion. That will increase to $174 billion through 2013 as the exploration of the Santos Basin continues and the infrastructure is built. The first oil was pumped from the Tupi field in May in a scheduled 15-month test to produce between 15,000-30,000 bpd. However the test was suspended in July due to equipment failure.

The Tupi oil is going to be very hard to produce because it lies deep under water and under a deep layer of unstable salt. Well depths are 20,000 to 25,000 feet to the oil in 7,000 to 9,000 feet of water. The oil temperature in the reservoir is thought to be 100 degrees celsius (210 F) and the water temperature on the ocean bottom is only 4 degrees C (39 F). This causes significant problems when the hot oil hits the cold pipes. Petrobras is experimenting with new technology necessary to extract oil from these depths. Methods being tested include using titanium pipes with heaters to slowly decrease the oil's temperature on its trip to the surface. Imagine the cost of this development for the initial 150-180 wells being planned. Eventually they will figure out how to do it but this oil will not be cheap. Initial wells cost $240 million each but that price has fallen to $60 million on the 15 exploration wells already drilled. Only 8 of those found oil. The massive expenditures Petrobras is making to find and produce this oil is very beneficial to the entire oil services sector. Billions in contracts to every offshore operator will keep producing profits for the service sector.

Tupi well depth (1 meter = 3.3 feet)

Pimco's CEO, Mohamed El-Erian, in an interview on Friday said that the market was on the equivalent of a sugar high. El-Erian said investors are overly optimistic and current market valuations are not warranted by the economic outlook for 2010. He is a very respected money manager with $756 billion under management and I am sure many people listened to him. He said people were not confident enough to start spending again either nationally or globally. Until that occurs the economy is not going to produce decent growth.

Meanwhile JP Morgan believes we are going to see a normal "V" bottom recovery. JPM economist James Glassman, former Fed Governor Laurence Meyer and Stephen Stanley from RBS all believe that the worst recession since the 1930s has created a reservoir of demand that will quickly boost the economy and avoid the slow growth many are predicting. Meyer is expecting a +3.6% GDP in 2010 and +3.9% in 2011.

The key to the economic recovery is a rebound in spending by both businesses and consumers. You may have noticed on Thursday the retail sales for July declined by -0.1% when analysts were expecting a gain of +0.7%. Core sales (ex-auto, ex-gas) fell for the fifth straight month and at -0.4% was the biggest decline since March. General merchandise stores fell -0.8% and have been averaging a -0.7% drop for the last five months.

JC Penny (Nyse:JCP) reported earnings on Friday that were a breakeven and raised its guidance for the year to 75-90 cents per share. However, it lowered guidance for Q3 saying it could lose up to a nickel a share citing a tough environment today. Kohls (Nyse:KSS) also said on Thursday that the second half of 2009 would be worse than previously expected. Guidance was below Wall Street estimates. Kohls CEO warned that the coming holiday season could be ugly.

Wal-Mart (Nyse:WMT) reported on Wednesday that same store sales fell -1.5% in Q2. They had previously forecast flat to +3%. The quarterly decline was the first ever for Wal-Mart. Wal-Mart said consumers were buying less expensive store brand products and buying smaller sizes. They were also paying cash instead of credit. Neither Wal-Mart or Kohl's sees a consumer rebound in our immediate future.

So, it seems there is some confusion among analysts and retailers on how the recovery is going to be powered. The consumer has no credit. Thanks to the new credit card laws the lenders have cancelled billions in open credit lines rather than risk lending to consumers who may not pay on time now that they can't bump their rates or charge late fees like they did before. Millions of others have had their interest rates jacked higher from the 7% to 8% intro, good customer rates to across the board 22% to 24% because the banks only have ten months under the law to make changes before they can no longer change rates and fees on classes of borrowers. Now everyone is paying higher rates rather than just those who abuse their credit. This is your government at work. I am sure some of the rules needed to be changed to protect the downtrodden but now those of us who pay our bills have to help pay the bills of everyone else through higher rates.

I got sidetracked in that last paragraph but you get the point. Home equities are no longer available like ATMs for spending money and handling family expenses. The average family has lost more than 25% of their credit card limits, some more than 50%. We may not be losing jobs at the record rates but we are still not creating jobs. The housing sector is improving but rates are rising and that will slow down purchases. 500,000 families with clunker cars have taken advantage of the cash for clunker program to put themselves into debt for a $40,000 auto on average. That means they have roughly $600 a month less to spend after factoring in payments and insurance. You don't need expensive insurance on a clunker but lenders demand full coverage on new cars. That is $600 less for Wal-Mart, Kohl's and JC Penny.

Based on all the above I am having a hard time visualizing a robust "V" bottom recovery. However, I am still a believer that a recovery will occur. I actually believe it will begin in earnest this year when the holiday season begins. As each day passes and John Consumer hears more of the "recession over" conversation in the news he will start to breathe easier and relax his hold on his wallet. Remember, only 9% of the workforce is unemployed. 15% if you count those unfortunates who the government ignores because they have been unemployed for more than 27 weeks. That leaves 85% of American workers continuing to earn a paycheck and pay their bills like normal. Everything they need to buy is going down in price nearly every day. I believe they will come out of their bunker mentality and start to open the wallet by year-end as long as we don't have any new surprises in the financial system.

I guess I am just not a V bottom visionary today. I was telling a reader on Friday that I thought the recovery would be long and steady and so would the market rebound. There are enough people who still think we are going back to the lows to keep others with cash on the sidelines. Comments like we got from El-Erian on Friday help keep quite a few people in cash or bonds.

The continued tightness in the financial system will keep corporations from expanding too quickly. Getting loans is still a challenge for most companies. Without loans for expansion the job market will be hindered by plans that are delayed until conditions improve. This is a long-term trend and it could take 2-3 years before the smoke clears and business is back to normal. During that period we will see corporations post ever increasing profits because expenses have been cut to the bone. Since they will be limited expansion capability they won't be able to add those expenses back on in a rush to build capacity.

This should lead to a period of long, steady, relatively slow growth. This is the perfect situation for the stock market. Increasing profits without increasing expenses. Profit comparisons starting in Q4 will be easy. With comps of a breakeven or even a loss the majority of companies will be able to beat the street with ease once we get into Q4 and beyond.

For buy and hold investors this is Nirvana. The downside should be minimal and the market path should be steadily higher but at a restrained pace. Volatility should ease and the phrase "long term hold" should be longer than the expiration on your milk carton.

The flaw in this scenario is the global recovery. Most other nations do not have the strength of the U.S. or China. They may rebound slower than hoped for and drag out the recovery. Offsetting those slow growers will be the BRIC nations. China is ramping up so quickly that there is a fear they will cancel or withdraw some of their stimulus. The Chinese markets fell -5% on Friday on this worry. All of this will work out eventually and the world will expand once again.

The next crisis for U.S. investors is probably going to be created by the government. We saw the markets rally when it appeared the healthcare juggernaut had run off the rails. The same fears of government intervention still hold true in the financial sector as well as others. Gordon Gekko (Michael Douglas) said for lack of a better term, "greed is good." Think you know what he said? You may be surprised with the last sentence.

Without monetary reward for expanding and taking risks there will be no economic rebound.

The current administration has embarked on class warfare and is trying to make profits illegal. The administration has said they are going to raise taxes on corporations and high-income individuals to pay for all the social programs. If it happens those same taxpayers are going to scale back and not take on the risky projects or burn the midnight oil working 60-80 hours a week. This is a historical lesson that we have learned many times over the last 80 years. It always happens this way and it will slow the recovery if it comes to pass.

The big news on Friday was the "Pay Czar" and his review of the top 100 employees at the seven largest companies still stuck in the TARP trap. The top 25 at each company will be reviewed individually and the next 75 will be put through a pay formula to see if their pay is excessive. Nobody knows how this will turn out but the government intervention in the pay process is just another example of the growing control problem. I am not saying there does not need to be something done about executive pay because I have a hard time understanding what a person does that makes a million dollars a week. I just believe it should be up to the shareholders to force that review.

While I am on the czar topic that is another pet peeve of mine this week. In the past various presidents have named a czar for special projects or to oversee a commission or process. These czars are not an official post and are not vetted or approved by Congress. These are personal appointments that operate outside regular government channels. They have the power of the presidency but none of the oversight and control of a cabinet level position. For instance there is currently a car czar, TARP czar, drug czar, border czar, urban czar, regulatory czar, stimulus accountability czar, health czar, Iran czar, Middle East czar, Af-Pak czar (Afganistan-Pakistan), Sudan czar, climate czar, technology czar, copyright czar, green jobs czar, science czar, security czar, cyber czar, Guantanamo closure czar, etc. All of these are personal presidential appointments.


Normally presidents are way out on the edge if they have 2 or 3 czars. Some had none. So far president Obama has named 44 czars. This is more czars than Russia had during its entire imperial history. Basically he has his own shadow government running outside the formal government. Actually this has its advantages. Each person is given their direct orders for their area and that is the only thing they deal with. Unlike a government position which may have dozens of areas of responsibility. It also allows the administration to be insulated from the problem area yet retain operational control. If there is good news you are able to take credit but if bad news you can dodge the bullet. But, come on, 44 czars? Of course appointing a czar does make voters think you are serious about handling the problem.

Did you know that the czar position was first formally recommended in 1982 by a senator who said the war on drugs would not succeed without the appointment of a cabinet level drug czar? Still that czar was not officially appointed until 1988 when William Bennett took the position. That 1982 senator making the czar comment was Joe Biden. He did not realize that Nixon had appointed Jerome Jaffe as drug czar back in 1971.

I would say we are on the verge of a recovery. How fast or how far that recovery goes is up to many factors and none of which we control as individuals. Determining where the stock market will go as we progress through this recovery is a difficult task.

I believe it will continue to go up but only after we shake off the 50% rebound since March. For small caps that rebound was 67% from the 343 close on the Russell-2000 on March 9th to the 575 close on Thursday. That was a gain of +232 points or 67.6%. All of that came without a 10% correction along the way. CNBC was running a list of stocks on Friday that were up over 1000% since the market lows. Not 100% but 1000%. If the recovery was on fire and we expected +3% GDP in Q3 then maybe that would be justified. Unfortunately we are going to be lucky to get 1% GDP in Q3.

If you go back in history and chart recoveries out of recessions you will not find a +50% rebound off a recession low in only five months except for the bear market rally in 1930, which was eventually erased with an further 82% drop in 1932. Since 1950 the average length of time to achieve a 50% rebound is 18 months. Over that period we normally get real GDP growth of +4.5% from the bottom, not just a dead cat bounce. On average 850,000 jobs have been added to the economy. The national ISM is 56.2 or higher and expanding. Corporate profits have increased by more than 12% and bank lending has increased by more than 5%. None of those events has occurred in this rebound.

Unlike El-Erian I am not bearish on stocks. As a reader reminded me on Friday, "It is not our duty as speculators to be on the bull side or the bear side, but upon the winning side." (Quote by Jesse Livermore) Determining that winning side today is a tough job.

We saw the "sharp pullback" as reported by the talking heads and the "first weekly decline in five weeks" as though we were staring into an abyss ready to gobble up our profits. This is absurd and or course it was a slow news Friday. The decline was simply typical of recent down days and was bought just like every decline before it.

I believe the decline was caused mostly by option expiration and the Wed/Thr failure to move over 1012 on the S&P. You may remember the last Friday before expiration. That was July 10th and the head and shoulders pattern on the major indexes was one tick away from breaking down at the close. Most market analysts predicted massive selling once that neckline broke. Instead there was a massive short squeeze on Monday and the July rally was born.

The prior Friday before expiration was June 12th. The S&P closed at a six-month high of 946. Over the next two days the index lost 43 points. On the prior Friday before expiration, May 8th, the S&P closed at a new five-month high of 929. Over the next four days the index lost -48 points. I could go on but you get the picture. In recent months the Friday before expiration and the days immediately following have seen increased volatility. The talking heads on TV were blaming the Consumer Sentiment report but I believe it was more likely option expiration pressures.

There was no sell off despite the Dow being off -161 at its lowest point of 9232. Volume was horrible at only 8.5 billion shares. (Somebody asked me this week where I get these numbers. It is the total number of shares traded on the NYSE, Nasdaq, AMEX and electronic exchanges. It is reported daily in the Momentum section of Investertech.com. You can check the volume by market for any day since 2001. Subscription required) Friday was the lightest day of the week for volume and the average for the week was just under 9 billion shares. That is decent volume for a summer Friday but not a representative market. As I stated last week this was still a buyer boycott not a sell off.

We would have probably seen this boycott on Thursday as well except that banks rallied after news broke that John Paulson's hedge fund had made some massive buys of bank stocks. Paulson bought 168 million shares of Bank America and 35 million shares of Regions Financial among others. Paulson's funds have been doing extremely well since a 600% gain in 2007 betting against subprime. In 2008 his flagship fund was up +37% compared to an average loss of 19% for the hedge fund community. If Paulson thinks banks are a buy then the rest of the fund community tags along. The report was credited with rescuing the indexes from an opening drop on Thursday with the major banks jumping +4% to +6% on the news. Basically the historical "day after the FOMC" market decline was postponed for a day due to the bank rally.

The volume was light despite the fact the S&P failed again over 1010. You would think a repeated failure on a Friday after a 50% rebound would have attracted more sellers. It appears the shorts are losing conviction. If you look at a chart of the S&P or Dow you will see a textbook test of uptrend support. For nearly a month now this support has played a pivotal part in the market movement. Not only do you have horizontal support at 995 but uptrend support from July.

SPX Chart - 15 min

On the resistance side of the equation there is an even more ominous set of converging resistance levels. The 200-month moving average is 1016. The 38% Fib retracement is 1014 and the 50% rebound level from the March 667 low is 1000. All of these factors make it a real challenge to move higher from here. It does not make it impossible but it does make it difficult.

SPX Chart - Monthly

The Dow was handicapped on Friday by news that Boeing had told its supplier in Italy to stop making the bodies for the 787 because Boeing had found flaws in 29 they had already received. Boeing lost -1.75. MMM gave up -1.28, CAT -1.17 and IBM -1.01. These were responsible for about 50 of the Dow points loss.

Buyers hit the tape again at the close to cut the losses in half and push the Dow back over 9300. Like the S&P the Dow is facing serious overhead resistance. Unlike the S&P the Dow is already over the 200-month average and the 50% rebound level is 9705. That leaves the Fib retracement at 9422 as the defining factor. Since the Dow only has 30 stocks it is at the mercy of one or two losers whereas the S&P is a real index that fund managers follow and a single stock can't move the index. That makes the converging resistance levels on the S&P more critical than the single resistance on the Dow.

Dow Chart - Monthly

Dow Chart - 60 min

The Nasdaq has its own set of converging resistance levels at 2000-2010. For the last two weeks this has been a solid top for tech stocks. Support is 1950-1970 and then 1750. We don't want to see support at 1950 break or the picture could get ugly very quickly.

The major tech stocks appear to be weakening. With the exception of Apple the tech leaders are turning into laggards. For instance Intel is struggling to hold over support at $18.60 and the SOX lost -2.5% on Friday. RIMM closed with a gain of a buck but was hammered for a -10% loss earlier in the week. Microsoft has been stuck at $23.50 for a month. Qualcomm collapsed with the chip sector and is clinging to support at $45.50. Ebay has declined for over a week and closed on support of $21.50 on Friday. Amazon closed near a six week low on Friday at $83.50. This is not a picture of tech strength. It is the most normal picture of typical summertime tech weakness I have seen this year.

Nasdaq Chart - Weekly

Nasdaq Chart - 120 Min

I believe the market will continue higher but eventually there will be a 10% correction before the end of October. Next week or next month I don't know. I bet I heard 20 traders last week saying the markets were overbought and needed to rest but nobody said they were shorting the market. That has been suicide lately. In the charts above there is a clear picture of support and resistance. Resistance is stronger today but the indexes keep moving higher despite the negative sentiment from professional traders. Don't bet against China and their current rebound. Also Hong Kong reported a 3.3% GDP on Friday. These markets can help pull the U.S. markets higher because individual investors don't want to miss out on another BRIC move.

I keep going back to Steve Grasso's comments that he is seeing fund buy orders cross his desk on every dip. They are not chasing price but they are keeping a steady stream of buy orders on the dips. Equity funds are still receiving money with $5.2 billion in inflows over the last week. However, bond funds saw $12.3 billion in new deposits according to TrimTabs.com. Vanguard confirmed the pattern for July saying $3.9 billion came into stock funds and $7.6 billion into their bond funds. Fund flows into stock funds are still way below the ten-year average of $7.8 billion a month.

If the majority of money is still going to bond funds then that suggests the majority of cash is still uninvested and this rally is running on a trickle of cash compared to a river. There is still enough chatter about a correction that many investors are still content to sit and wait for a better entry point. Once that point comes, probably a 10% correction, you can bet those flows will immediately go to stocks.

However, insider trading is not telling us it is time to buy. Last week there was 29 times more insider sales by dollar volume than buys by insiders. These are the people who should know when a company is doing good and when there is trouble ahead. Until that sales trend reverses we are still facing some future volatility.

For next week I would look to buy a dip to S&P 990 and short a break below that level with another dip buy at 970. Under 970 would be a clear short. Same with the Dow at 9200 and 9000. The same levels on the Nasdaq are 1970 and 1950. If by chance the Nasdaq broke over 2020 on volume I would have to hold my nose and buy something. That would be 1015 on the S&P but be careful of false breakouts that are knocked back by days end. The next six weeks could be rocky. This is a time to wait for an entry point rather than chase the markets. Plan your trades then enter passively and exit aggressively!

Jim Brown

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Index Wrap

Won't go up, won't go down

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The question regarding this recent sideways trend is whether prices will fall much from current levels and have a 'normal' corrective pullback. The probabilities for a next move tends to favor a downside correction rather than another upside breakout or a continued lateral move.

We can look at the Dow 30 (INDU) chart below where I highlighted two recent prior examples of the outcome of a sideways move in a strong uptrend AND where the RSI and my sentiment indicator were both at or near overbought extremes. You can see this pattern in the S&P charts also, but it happened that I made some chart notations on the Dow chart regarding these prior two similar (to now) sideways patterns.

In the first instance of a lateral move after a previous strong uptrend, there was another rally that developed. In terms of the S&P 500 (SPX) that only led to another 17 or so points higher before another sideways move occurred, this time followed by a pullback of about 80 points from peak to trough.

Can it happen that stocks just keep going up and don't offer those waiting to buy lower a way in? Of course this is a possibility but the historical probabilities for this outcome isn't very great unless perhaps when we're already in a raging bull market bubble. The first leg up was quite strong and this one could be stronger still but this kind of power move would be more common when more money was chasing stocks and when market sentiment (among traders) wasn't already quite bullish.

How will I play this market? I probably won't. If there's another rally ahead, I'd rather wait and see how at the money puts would look to me on another rally extension. The chances of another big rally from an existing 'overbought' condition are too low for me to consider playing calls any longer. I favor ONLY high risk to reward projected outcomes. This is not the case where the potential for the market going up another 50 S&P points is equal to the potential for it falling back 50.

Another question I got was about strategizing for a 100 point range in terms of SPX; e.g., projecting a range not above 1050 or below 950. That might be ok, but I tend to favor trading a DIRECTION rather than a range and would rather wait to buy a good-sized dip. All that's required on my part is waiting and for patience. Jesse Livermore said he made more money by sitting tight than he did by trading.

Hey, it was a long time back as a broker where I 'needed' to recommend trades, which also generated commissions that kept myself afloat. That may seem crass and I never DIDN'T believe or hope that I was right in my client recommendations. It's still a built in conflict of interest as I'm sure most of you know well.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P remains bullish in its dominant pattern but it also looks like a pullback could develop as upside momentum slows. A correction of 25 to 50 percent of the prior advance from lows in the 870 area would be a common outcome. Something less that a 50% correction would be consistent with the limited selling that has occurred on the way up from the March bottom; e.g., a pullback to 962 would represent a fibonacci 38% correction.

There is a price/RSI divergence that often has a bearish outcome, as prices trend sideways whereas RSI peaks have been falling as highlighted by the light blue trendline on each graph. Another way of looking at this situation is that prices have been holding up but on LESS (or falling) relative strength.

The aforementioned price/RSI divergence has more credence when also seen in relation to the recent cluster of high (overbought) peaks highlighted by the red arrows. While SPX and the other major indexes might continue to drift sideways WITH accompanying high levels of bullishness, it's very uncommon for a new up leg to ALSO develop given this degree of trader optimism.

Near support is anticipated around 986, then at 950 as highlighted with the two green arrows on my SPX chart.

Near resistance is noted on the SPX daily chart at 1015, the top end of the recent price range and then up around 1036, along the previously broken up trendline that has seemed to define a key rising line of resistance.

TRADER SENTIMENT:

The chart above above is worth 10,000 words on this subject. Bullish sentiment has been quite high in terms of the CBOE daily equities call volume versus daily equities put volume and this has typically bearish implications ahead. With so many traders bullish and committed already, there may not be enough buying power ahead to keep this rally going. We have yet to see in the current multimonth advance such a large number of daily spikes occurring in a similar time frame for my 'CPRATIO' indicator.

NOTE: The way I keep my equity call to put daily volume ratio is to divide daily equities CBOE call volume BY total daily put volume so that a HIGH number (e.g., 2.00 or above) equals a type of 'overbought' situation similar to overbought/oversold indicators like the RSI. If the PUT to Call ratio commonly seen is at .5 or less, this is an equivalent reading; same thing just different ways of dividing the daily volume totals. My "CPRATIO" chart isn't found elsewhere.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart remains bullish but, as noted last week, as also met my intermediate-term objective of 471. This target takes the prior trading range of 30 points (441-411) and adds this to the 'breakout' point at 441 to equal 471 which is a type of measured move objective. I expressed my outlook and considerations about a continued move higher in my S&P 500 comments above.

I've noted near resistance at 469, forming the line of recent highs, then at 482, along the rising resistance trendline. Anytime there is a decisive upside move, and sustained closes above, this trendline, a new up leg would be suggested as underway.

Near support is around 460, with fairly strong support suggested in the 440 area.

As with the other indexes, we see diverging price/RSI trends as OEX trends sideways whereas its Relative Strength Index (RSI) has been falling of late. This type of diverging trend typically forecasts a price break ahead. Based on past such divergences there's no telling just WHEN a downside price correction will occur, assuming it does. There are those occasional times when this same diverging pattern isn't predictive of any trend change, even short-term.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) continues to have a bullish chart pattern but the recent sideways drift does show some loss of upside momentum. I base my ideas of a correction developing ahead based on this somewhat scant evidence on a price basis, but more so in terms of the RSI and Sentiment indicator extremes. A break below 9200, especially on a closing basis would suggest the start of a correction.

Near support, below 9200, is noted at 9158 at the 21-day moving average, then down in the 8850 area, where there should be substantial buying interest/support.

Very near INDU resistance is at the top end of the recent narrow trading range around 9420. Next technical resistance is projected for the 9575 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has not seen enough buying interest repeatedly in the 2000 area to power it through this key resistance. The longer that the index drifts sideways the greater the risk of a price break. To round out the technical outlook, a sideways trend after a prior run up isn't always seen bearishly as it can also be viewed simply as a consolidation of the prior up trend. This viewpoint probably accounts for the strong interest in stock calls versus puts, which is what puts my sentiment indicator up to 'overbought' extremes.

The 5-day average in my sentiment indicator has stayed as high as I've seen it and for longer than when the current bull move began back in March. A correction is overdue no doubt as I've been saying. The caveat is whether the market is forecasting a FAR stronger economic and earnings recovery than currently forecast.

There's no reason to speculate overly much on how things are going to turn out economically ahead. Rather my focus is most of all on whether there is a decisive upside move above 2000 in COMP and one that is sustained; e.g., a typical strong move would be a couple of consecutive daily closes above 2000, followed by pullbacks that find SUPPORT/buying interest has developed in this area.

Pivotal resistance is 2000 and I've noted a next resistance up around 2115.

Near support continues to be at 1970, with substantial next support in the 1880 area.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish in its pattern with the same (overbought market) caveats noted regarding the Nas Composite and the other indexes.

A move above pivotal recent resistance in the 1635 area is needed to suggest that NDX was being propelled into a next upswing. If so, next resistance looks to come in around 1690-1700.

Repeating my view of LAST week, if NDX started falling below 1600, then 1580, I'd take this as an indication for further weakness ahead. Substantial technical support should be found in the low-1500 area. The lowest I would envision NDX pulling back to is to 1450 and I'd be surprised to see that much of a dip. More common for the kind of strength we've been seeing in tech is for a dip in NDX to the 1540, a 38% fibonacci retracement of the last advance, to around 1513, representing a 50% retracement.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) still is finding substantial resistance/selling interest on rallies above $40. A decisive upside penetration on good volume is needed to suggest that the NDX tracking stock was headed to the 41.7-42.0 area.

Key near support/buying interest has been seen on dips to the 39 area.

Daily volume has been on the low side which is what I would expect in a sideways trend without a breakout above the key resistance. The On Balance Volume (OBV) line is going sideways consistent with the direction of prices.

Near QQQQ resistance: 40.2

Next overhead resistance: 41.7

Near QQQQ support: 39.2-39.0

Next support: 37.2

Major support: 35.8-36.0

RUSSELL 2000 (RUT) DAILY CHART:

The way I've projected it this week, the Russell 2000 (RUT) has backed off from the top end of a broad uptrend channel as highlighted on the RUT daily chart below.

Resistance is apparent in the 579-580 area, then probably just a few points above that at 584-585, extending up to 600.

Further weakness is suggested if RUT starts falling under 560, especially on a closing basis. The most significant technical support should come in the 525-535 area. Major support is anticipated around 500, extending to 480.

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

Railroads, oil, solar, and oil services

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Genesse & Wyoming - GWR - close: 29.30 change: +0.19 stop: 26.90

Why We Like It:
GWR has been lagging behind the rally in the larger railroad names. Now that shares are breaking out past resistance it has a chance to catch up with its peers. I'm suggesting call positions now with a stop loss at $26.90 (under the 100-dma). More conservative traders might want to wait for a rise over $30.00 before launching positions. Our first target is $32.90. Our second target is $34.75.

Note: The market is still very overbought. We want to cut back on our position size and reduce our risk.

Suggested Options:
I am suggesting the September calls.

BUY CALL SEP 30.00 GWR-IF open interest= 40  current ask $1.10

Annotated Chart:

Picked on   August 15 at $ 29.30
Change since picked:      + 0.00
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       230 thousand
Listed on August 15, 2009         


U.S. Oil Fund - USO - close: 36.03 change: -1.77 stop: 33.30

Why We Like It:
Crude oil has begun to correct but the larger trend is up. We want to buy calls on the USO on a dip toward its trendline. Use a trigger to open positions at $34.50. We'll place our stop at $33.30. Our first target is $37.50.

Suggested Options:
I'm suggesting the September calls. Strikes are available in $1.00 increments.

BUY CALL SEP 34.00 UBO-IH open interest=2431 current ask $3.20
BUY CALL SEP 36.00 UBO-IJ open interest=4279 current ask $2.05
BUY CALL SEP 38.00 UBO-IL open interest=3028 current ask $1.20

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 34.50
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =      11.5 million  
Listed on August 15, 2009         


NEW DIRECTIONAL PUT PLAYS

First Solar - FSLR - close: 141.78 chg: -2.98 stop: 151.00

Why We Like It:
FSLR is poised to breakdown. The stock is testing support at $140.00 and its 61.8% Fibonacci retracement (see chart) for the second time in five weeks. The trend of lower highs is forecasting the next move will be down. If FSLR breaks $140 the next level of support is probably $120 and then $100. I am suggesting a trigger to buy puts at $139.00. If triggered our first target is $122.50. Our second target is $111.00. This is a very aggressive trade and FSLR can be an extremely volatile stock. I'm suggesting very small position sizes. FYI: the Point & Figure chart is bearish with a $108 target.

Suggested Options:
We want to use September puts. I would prefer to buy Octobers but none are available. The next month available is December.

BUY PUT SEP 130 QHB-UZ open interest=2973 current ask $5.20
BUY PUT SEP 120 QHB-UD open interest=7952 current ask $2.70

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 139.00
Change since picked:      + 0.00
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       3.5 million  
Listed on August 15, 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.)

Schlumberger - SLB - close: 53.38 change: -1.75 stop: n/a

Why We Like It:
SLB has been consolidating in a large pennant formation of higher lows and lower highs. A breakout is imminent. I'm suggesting we use a strangle to capture the move.

Suggested Options:
We want to buy the September $60 calls and September $45 puts. Our estimated cost is $1.05. The plan is to sell if either options hits $2.50 or higher.

BUY CALL SEP 60.00 SLB-IL open interest=2006 current ask .60
-and-
BUY PUT SEP 45.00 SLB-UI open interest=3427 current ask .45

Annotated Chart:

Picked on   August xx at $ xx.xx 
Change since picked:      + 0.00
Earnings Date           10/15/09 (unconfirmed)
Average Daily Volume =       9.2 million  
Listed on August 15, 2009         



In Play Updates and Reviews

Weekend Pruning

by James Brown

Click here to email James Brown


CALL Play Updates

C.H.Robinson - CHRW - close: 54.77 change: -0.71 stop: 53.49*new*

We could argue that technically CHRW's breakdown back under resistance at $55.00 is a new sell signal or reversal and that Wednesday's breakout was just a bull trap pattern. It may be true. However, the S&P 500 bounced from its lows on Friday and CHRW followed it higher in the last 30 minutes of trading. Furthermore CHRW has not broken the six-week trend of higher lows.

More conservative traders may want to exit early anyway. I am not suggesting new positions until we see CHRW back over $55.50 again. I am raising our stop loss to $53.49. Our target is $59.50. I Currently the Point & Figure chart is bullish with a $69.00 target.

Suggested Options:
No new positions at this time. If CHRW provides a new entry point I'd use the September calls.

Annotated Chart:

Picked on   August 12 at $ 55.35 *triggered       
Change since picked:      - 0.58
Earnings Date           10/20/09 (unconfirmed)
Average Daily Volume =       1.7 million  
Listed on August 11, 2009         


Diamond Offshore - DO - close: 87.63 change: -2.61 stop: 86.49 *new*

DO just erased Thursday's bounce. A bounce in the dollar and a sharp drop in crude oil sparked some selling in the oil service stocks. Fortunately, DO found some short-term support near $86.70 and was bouncing off its lows at the end of the day. The low today happened to be near the 50-dma. I'm inching up our stop loss to $86.49. I would buy calls on this bounce but I would use small position sizes. This remains an aggressive trade. Our first target is $94.00, which is where we want to exit at least half it not all of our position. I'm setting a secondary target at $99.50.

Suggested Options:
I am suggesting the September calls. My time frame is less than two weeks.

BUY CALL SEP 90.00 DWG-IR open interest= 154 current ask $6.10
BUY CALL SEP 95.00 DWG-IS open interest= 265 current ask $3.40

Annotated Chart:

Picked on   August 13 at $ 90.24
Change since picked:      - 2.61
Earnings Date           10/22/09 (unconfirmed)
Average Daily Volume =       2.3 million  
Listed on August 13, 2009         


Fluor Corp. - FLR - close: 54.03 change: -1.93 stop: 49.45

This last week looks pretty ugly for FLR. The post-earnings sell-off was followed by a two-day bounce and now Friday's sharp 3.4% decline. The $55.00 level of support did not hold. Odds are growing quickly that FLR will test the multi-month trendline of higher lows. We want to buy calls on a dip in the $51.00-50.00 zone. If triggered at $51.00 our first target is $54.80. Our second target is $59.00. This could take several weeks.

Suggested Options:
I suggest readers use the September or October calls. Trigger to open positions at $51.00.

BUY CALL SEP 50.00 FLR-IJ open interest= 516 current ask $5.30
BUY CALL SEP 55.00 FLR-IK open interest=1785 current ask $2.35

BUY CALL OCT 50.00 FLR-JJ open interest=2312 current ask $6.20
BUY CALL OCT 55.00 FLR-JK open interest=3676 current ask $3.40

Annotated Chart:

Picked on     July xx at $ xx.xx <-- TRIGGER @ 51.00
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: 141.86 chg: -0.91 stop: 139.95

The U.S. dollar managed a bounce today but the trend is still down and the FXE's trend is still up. I am not suggesting new bullish positions at this time.

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'm not suggesting new positions at this time but more aggressive traders may want to consider September or October calls. Keep in mind that the FXE does not normally move very fast.

Annotated Chart:

Picked on     June 23 at $140.76
Change since picked:      + 1.10
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Gold Miner ETF - GDX - close: 39.28 change: -0.67 stop: 37.85 *new*

Gold acts like it wants to go higher but it's struggling. That's putting the brakes on any bounce in the GDX. There is still a bullish trend of higher lows but I remain cautious. We're raising the stop loss to $37.85. I am not suggesting new positions at this time. GDX has already exceeded our first target. Our second target is $44.00.

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

Annotated Chart:

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 2.79
            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: 50.43 change: -0.27 stop: varies

The upward momentum in IDXX has stalled and that's why we raised the stop loss on our aggressive trade to $49.85 yesterday. That stop was hit this morning when IDXX broke down under the $50.00 level. We new the higher entry point was aggressive so I suggested very small positions sizes (about 1/4 of your normal trading size). We still have a plan to buy calls on a dip at $47.50.

Original plan is to buy calls at $47.50 with a stop at $44.95. If triggered at $47.50 our first target is $52.00. Our second target is $54.90. Our time frame is six to eight weeks once triggered.

FYI: The Point & Figure chart is bullish with a $77 target.

Suggested Options:
If IDXX hits our trigger at $47.50 I'd use the September or October calls.

Annotated Chart:

*Aggressive Strategy*
Entry on    August 05 at $ 51.10 *stop loss @ 49.85 *new*
Change since picked:      - 1.25<-- stopped @ 49.85 (-2.4%)

*Original Strategy*
Picked on     July xx at $ xx.xx <-- TRIGGERs @ 47.50 
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: 27.71 change: -0.54 stop: 24.75 *new*

We've been waiting for LM to dip for while. It looks like it's getting close. I am raising our trigger to buy calls to $26.00 and raising our stop loss to $24.75. If triggered our first target is $29.75. Our second target is $33.40. My time frame is six to eight weeks. FYI: The P&F chart is bullish with a $39 target.

Suggested Options:
I am suggesting the September calls.

BUY CALL SEP 25.00 JGM-IE open interest=  50 current ask $3.40
BUY CALL SEP 28.00  LM-IV open interest=1428 current ask $1.40
BUY CALL SEP 30.00  LM-IF open interest= 359 current ask .65

Annotated Chart:

Picked on     July xx at $ xx.xx <-- TRIGGER 26.00
Change since picked:      + 0.00
Earnings Date           07/20/09 (confirmed)
Average Daily Volume =       3.4 million  
Listed on  July 25, 2009         


Lorillard Inc. - LO - close: 72.38 change: -0.12 stop: 69.45

LO has been churning sideways in the $72.50-75.00 zone the last couple of weeks. We're looking for a dip back toward previous resistance and what should be support at $70.00. Our stop is pretty tight so $70.00 needs to hold. The trigger to buy calls is at $70.50. Our first target is $74.50. Our second target is $77.00. The Point & Figure chart is bullish with a $92.00 target.

LO had some news today. Management upped their quarterly cash dividend on the stock by 8.7% to $1.00. The dividend is payable September 11th to shareholders on record as of September 1st.

Suggested Options:
If LO hits our trigger I'm suggesting the September or December calls. So far there aren't any October or Novembers yet available.

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         


Mobile Telesys - MBT - close: 43.00 change: -1.85 stop: 41.90

Warning! MBT has produced a bearish reversal today with a bearish engulfing candlestick pattern. Now it still needs confirmation but I am not suggesting new bullish positions at this time. The sad news is that the gap higher this morning was above our trigger to buy calls at $45.35. So not only is our play open but our entry point is worse than expected. More conservative traders may want to abandon ship right here right now with the reversal pattern today. MBT still has some support near $42.00 I'm going to let it ride.

If there is no follow through lower I would wait for a new relative high over $45.50 before buying calls again.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   August 14 at $ 45.49 /gap higher entry  
Change since picked:      - 2.49
Earnings Date           08/12/09 (confirmed)
Average Daily Volume =      1.45 million  
Listed on August 13, 2009         


PUT Play Updates

Genzyme - GENZ - close: 50.59 change: +0.15 stop: 52.55

GENZ has been pretty resilient this week with traders buying dips near $49.00. I suspect the stock is going to make another run at the $51.00-52.00 zone soon unless the wider market clearly breaks down. I would wait for a failed rally near $52.00 before considering new bearish positions. 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.

FYI: More aggressive traders may want to give GENZ just a little bit more room and raise their stop loss above the $53.00 mark.

Suggested Options:
If GENZ provides us a new entry point we want to use the September or October puts.

Annotated Chart:

Picked on   August 03 at $ 49.90 *triggered         
Change since picked:      + 0.69
Earnings Date           10/22/09 (unconfirmed)
Average Daily Volume =       3.9 million  
Listed on August 01, 2009         


Green Mtn Coffee - GMCR - close: 63.37 chg: -1.36 stop: 72.05

Our speculative put play on the highly shorted GMCR has performed reasonably well. Although now it looks like time for a little bounce. GMCR is down five days in a row and shares tagged the 50-dma this afternoon and rebounded. Watch for the bounce to roll over in the $65-67 zone as a new entry point to launch positions.

This is a very aggressive bet that GMCR finally corrects. Just remember that most of the rally over the past several months has been short covering. There is always another chance for a short squeeze. I suggest very small position sizes. We're going to use a very wide stop loss. Our first target to take some money off the table is $60.50. Our second target to exit completely is $55.50.

Suggested Options:
If GMCR provides a new entry point we want to use the September puts.

Annotated Chart:

Picked on   August 11 at $ 65.84
Change since picked:      - 2.47
Earnings Date           11/12/09 (unconfirmed)
Average Daily Volume =       1.8 million  
Listed on August 11, 2009         


Biotech Ishares - IBB - close: 76.49 change: -0.66 stop: 80.75

IBB almost hit our target today. The stock broke down under short-term support at $76.00 and hit $75.50 before bouncing back in the last 30-minutes of trading. I'm not suggesting new positions at this time. Currently our exit target is $75.10. More aggressive traders may want to aim for the $74-73 area.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on     July 30 at $ 79.44
Change since picked:      - 2.86
Earnings Date           00/00/00
Average Daily Volume =       892 thousand 
Listed on  July 30, 2009         


Intl.Business Machines - IBM - cls: 118.57 change: -1.01 stop: 120.10

IBM is still trading sideways. While it remains overbought and due for a pull back shares remain resilient. While I hesitate to do so we can still launch put positions in the $118.00-120.00 zone but be prepared to exit quickly. Right now the plan is to close put positions at $120.10 and buy calls at $120.25. If IBM hits our trigger to buy calls at $120.25 we'll use a stop at $117.25 and plan to take profits at $124.50 and at $129.00.

For the current put trade our first target to take profits is at $113.75, which is just above the top of the gap from mid July. Our second and final target is $111.25, which is near the bottom of the gap.

Suggested Options:
We want to use short-term September or October puts (or calls) depending how IBM trades.

Annotated Chart:

Picked on   August 08 at $118.17 /gap down entry
                               /originally listed at $119.33
Change since picked:      + 0.40
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =       7.9 million  
Listed on August 08, 2009         


Intercontintental Exchange - ICE - cls: 90.49 change: -0.58 stop: 95.55

ICE traded under support at $90.00 for a good portion of the day but there was no follow through to the downside. The short-term trend of lower highs, easily identifiable with the 30-dma, certainly suggests the next move is lower. More conservative traders could probably tighten their stops down toward the $92.50 level. We want to give ICE a little more room since the stock can be so volatility. I would still be tempted to buy puts now but readers may want to wait for a move under today's low of $89.38.

ICE can be a very volatile stock so we should consider this an aggressive trade. Our target to exit is $83.75. More aggressive traders can aim lower.

Suggested Options:
I am suggesting the September puts.

Annotated Chart:

Picked on   August 08 at $ 93.60 Buy Half Now   
Change since picked:      - 3.11

Picked on   August 13 at $ 89.85 triggered 2nd half
Change since picked:      + 0.64

Earnings Date           10/29/09 (unconfirmed)
Average Daily Volume =       2.1 million  
Listed on August 08, 2009         


Marvel Entertainment - MVL - close: 38.73 change: -0.28 stop: 40.01

In spite of the huge bearish reversal, blow-off top in early August shares of MVL are still holding up. The stock has fallen into a $38-39 trading range over the last several days. Currently our plan is to buy puts at $37.90. If triggered our target is $34.10 as the $34.00 level could be support. I'm listing a stop loss at $40.01 but more conservative traders might be able to use a tighter stop at $39.55 or just above $39.00.

Suggested Options:
If triggered we want to use the September or December puts.

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 37.90
Change since picked:      + 0.00
Earnings Date           11/04/09 (unconfirmed)
Average Daily Volume =       710 thousand 
Listed on August 10, 2009         


Shanda Interactive - SNDA - close: 46.27 chg: -0.26 stop: 51.25

The little oversold bounce in SNDA this morning failed at $47.73. This is good news for the bears and shares look poised to test support in the $45-44 zone soon. I would focus on the $44.20-44.00 area and its exponential 200-dma as possible support. Our target is the $41.50-40.00 zone. Remember, SNDA is a volatile stock and readers may want to use smaller position sizes.

Suggested Options:
I would use the September puts.

Annotated Chart:

Picked on   August 08 at $ 48.10 /gap higher entry
                               /originally listed at $47.83
Change since picked:      - 1.83
Earnings Date           09/01/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on August 08, 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: 55.27 change: -0.51 stop: n/a

There has been a lot of talk about big investors and hedge funds and what they bought or sold last quarter with the release of their 13F or 13G filings. I heard that a couple of big investors increased their positions in MCD. Yet the news did not help the stock price. Shares lost 0.9%. We are down to our last five trading days. Considering our remaining time I am lowering our exit target to $2.00. I am 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 $2.00 or higher.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on     July 18 at $ 57.84
Change since picked:      - 2.67
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


CLOSED BULLISH PLAYS

Polaris - PII - close: 38.69 change: -0.62 stop: 33.85

We've been waiting for PII to pull back for a few weeks now. Shares are certainly overbought and due for a correction. I'm removing it from the play list and placing it on my watch list for a dip. We're better off looking for something with a closer entry point. Our plan was to buy calls at $35.15.

Chart:

Picked on     July xx at $ xx.xx <-- TRIGGER @ 35.15
Change since picked:      + 0.00                   *Never Opened*
Earnings Date           07/16/09 (confirmed)
Average Daily Volume =       436 thousand 
Listed on  July 18, 2009         


CLOSED BEARISH PLAYS

Chevron Corp. - CVX - close: 68.63 change: +0.10 stop: 70.60

I am cutting our put play on CVX early. Oil moved lower on a bounce in the dollar. While oil might keep falling I would expect it to bounce from its trendline of higher lows, which isn't that far away. Today's late session bounce in the OIX oil index doesn't help the bears here anyway.

Chart:

Picked on   August 11 at $ 67.94
Change since picked:      + 0.69 <-- exit early (+1.0%)
Earnings Date           10/29/09 (unconfirmed)
Average Daily Volume =      10.7 million  
Listed on August 11, 2009