Option Investor
Newsletter

Daily Newsletter, Saturday, 8/22/2009

Table of Contents

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

Market Wrap

Long Live the Bull

by Jim Brown

Click here to email Jim Brown

Shorts relived their worst nightmare once again as existing home sales and positive comments from Ben Bernanke spiked the markets higher at the open.

Market Statistics

The markets celebrated the jump in new home sales for July. The headline number rose from 4.89 million units (annualized) to 5.24 million in July. This was well over the 5.0 million estimate by analysts. This was a +7.2% jump and the biggest month over month gain since the NAR started recording this number in 1999. Sales were also up on a year over year basis. This was the fourth consecutive monthly gain and the first time that has happened in five years.

The sharp spike in sales was due in part to the first time homebuyer stimulus program. That stimulus program terminates at the end of November. Over 30% of the sales came from those first time buyers. Sales of homes under $100,000 jumped +38.8% while $100K-$250K sales rose only +8.7%. Sales between $250K-$500K FELL -6.2% and those $1 million to $2 million fell -23.3%, over $2 million -32.4%. Foreclosures were also prominent with 31% of the sales being distressed properties. The number of homes available for sale increased but inventories are now 11% below last year's levels. That is really surprising when you consider the massive number of foreclosures hitting the markets. Over 2.5 million foreclosed homes are expected to hit the market in 2009 and another 2.0 million in 2010. Helping flush the supply of existing homes is the drop in housing starts over the last 18 months. However, despite the rebound we are still well below the sales levels during the bubble.

Home Sales Chart

Despite the good news in the existing home sales there are still problems in the sector as evidenced by the monster number of foreclosures in the pipeline. The Mortgage Bankers Association says delinquencies are still rising even in the prime credit category. Second quarter mortgage delinquencies hit another record high at 9.24%, while Q2 mortgages in foreclosure surged to 4.30% from 3.85% in Q1.

Mortgage Delinquencies Chart

The other economic report on Friday was the regional and state employment report for July. Twenty-nine states reported a loss of jobs while 21 states and the District of Columbia reported an increase in jobs. This was not a market mover since the July payroll report already gave us the total job losses. It was encouraging that 21 states are reporting rising employment or at lease less bad conditions.

For next week the calendar is short but there are three regional manufacturing surveys and the Durable Goods report for July. All of those reports are expected to show improvement. The big report for the week will be the next update for the Q2 GDP on Thursday. The GDP number is expected to be revised lower due to some negative economics that have come to light since the first release. I don't expect any of the individual reports to really move the market other than possibly the GDP. There is a record amount of new debt being auctioned next week and that will eventually be a problem.

Economic Calendar

Also helping the market on Friday was comments from Fed Chairman Ben Bernanke. Bernanke spoke at the Federal Reserve's annual conference in Jackson Hole Wyoming. Bernanke said "After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near-term appear good." He also said banks still face significant losses and household credit is still difficult to access. He expects a slow recovery and only a gradual decline in unemployment.

Guess what part of his talk the press decided to promote? Yes, "Bernanke said we are on the verge of recovery." That helped to power the market higher and cause even more pain for the shorts. Technically nothing changed in the Bernanke comments but it was a summer Friday and news was hard to find. The press tried to put a positive spin on the "prospects appear good" and from the market response it appears to have worked.

The Bernanke speech Friday was really two things. It was a victory lap where he laid out the successful programs the Fed put in place to stop the crisis and it was a job application of sorts in hopes President Obama will keep him for another term. If you create a lot of good will in the markets over your successful actions then the president will have a tougher time putting in a replacement. Larry Summers has often been rumored as his replacement but the general consensus is that Summers would only be a puppet for the current administration and that could be dangerous. The Fed has to be independent or the potential for a disaster would be huge. The Fed's actions can never be political and many times the Fed went against what past administrations wanted. Bernanke continues to preach against lawmakers spending more money and that is a black mark on his resume. Lawmakers don't want to be lectured in public testimony four times a year on why their runaway spending is ruining the economy.

The jump in new home sales and the Bernanke comments crushed the dollar and treasuries while sending commodities surging higher. The dollar index declined to under 77.80 on the Bernanke comments and very close to the 52-week lows we saw on August 5th.

Dollar Index Chart

Crude oil finished the week with a monster 9.6% gain and coming within a quarter of touching $75. This was due in part to the falling dollar but also because of the huge -8.4 million-barrel drop in inventories on Wednesday. After three weeks of inventory gains totaling 9.4 million barrels that was almost entirely wiped out in only one week. Crude imports fell an average of -1.8 million barrels PER DAY for the last week and gasoline demand increased as families raced to get that summer vacation in before school started.

I can't tell you how many times I heard about the "increased demand" being the culprit for the Wednesday decline. One editorial stated, "This report on oil inventories is the most bullish in recent memory. Sorry, get your facts straight before you make a fool of yourself in public. The storm charts below are from the prior week. Remember most of our imported oil on tankers comes from Venezuela or the Middle East. A week ago there were three storms headed for the Caribbean from the west coast of Africa. The one in yellow on the chart turned into Claudette and went into the Gulf. Ana (white track) blew right through the tanker lanes before evaporating near Florida and Bill (labeled Three on this chart) has been moving westward from Africa through the tanker lanes for over a week now.

If you were a tanker driver what would you have done? Full speed ahead and ignore the hurricanes? Not if you want to keep your job and possibly your life. Tankers either went well out of their way to avoid the storms, including putting the throttle in idle and letting the storms blow ahead of you or simply going into a holding pattern somewhere out of danger until the storms passed. I would venture to say that we are going to see a huge spike in oil inventories over the next couple weeks as that backed up tanker flow arrives all at once.

Storm chart from Aug 16th

Storm track for Ana last week

Crude Oil Inventory Chart

Crude Oil Chart

The weeklong rally in oil prices, also aided by expiration of the September futures contract on Thursday, helped push the oil services sector to the top of the leader board. The Oil Service Index ($OSX) rallied +12% from the lows on the spike in oil prices. The entire energy complex was up strongly for the week and that includes the natural gas stocks despite the new low in gas futures at $2.80 on Friday.

There is currently a move away from commodity ETFs like the UNG and USO. There are rising fears that the CTFC is going to enforce position limits on the ETFs and that will be suicide. The UNG has already said it will not issue new shares and it currently trading out of parity with natural gas. Basically it is more like a closed end fund today and part of the price is based on the scarcity of UNG shares and not the movement in the price of natural gas. Analysts are warning that until the CFTC either makes a new rule or says they are not going to impose limits the commodity ETFs are a dangerous place to be. News of proposed changes can move the price dramatically without a corresponding move in the underlying commodity. Basically they are trading on popularity today rather than specifics.

In the "you can't make this stuff up" category the Dow Jones Indexes are for sale. You may remember Rupert Murdoch bought Dow Jones last year and he is trying to find a way to make money on the trade. Traditional newspapers are going out of business daily and subscriptions are plunging and hurting News Corp. Evidently he has decided that maintaining a huge set of global indexes as an expensive status symbol is not an option. According to the WSJ, Goldman Sachs has been retained to find a buyer. This suggests there could be a name change soon. For instance, the CNBC Industrial Average, the Warren Buffett Industrial Average, the Russell 30 Industrial Average, the Bloomberg Industrial Average, the S&P Industrial Average. If corporations are willing to spend $25-$200 million to name a stadium or a convention center how much more will they pay to own a global portfolio of indexes where the names are repeated millions of times a day.

It is not just the naming that is worth money. Over 700 companies license the Dow indexes and pay fees to be able to use them for various purposes. The Dow Industrial Average was created in 1884 by Charles Dow, Edward Jones and Charles Bergstresser. I am sure glad they left the third guy's name off the index. The Dow indexes are also prominent in the ETF field. If somebody bought the indexes and decided to change the structures the ETF community would be buried under the burden of portfolio updates. For instance the DIA ETF, which mimics the Dow Jones Industrials, is the 17th largest ETF with $7.29 billion in assets. There is also the DJ US Select Dividend ETF with $3.26 billion in assets. There are ETFs held by other funds under license to DJ like the ProShares Ultra DJ Financials with $2.34 billion in assets.

In another YCMTSU item Egyptian fruit sellers have named their best dates of the year after President Obama. Dates are a traditional food for Ramadan where Muslims fast eating, drinking, smoking and sex from sunrise to sunset for a month. Reportedly the Prophet Muhammad is said to have used dates to break the fast every evening. In Egypt the food shops that cater to Muslims have a tradition of naming their best and worst dates to attract attention and spur sales. President Obama captured the honor of having his name given to the highest quality dates after his landmark speech to Muslims in Cairo in June. The highest quality Obama dates sell for about $2.50 a pound. President Obama is not the first U.S. president to have his name on the dates. The lowest quality dates, worth about 17-cents a pound were previously named for President Bush. Ramadan begins this weekend. Link to Obama Dates

The administration said on Friday that the cash for clunkers program would end this weekend and all dealers must have their paperwork submitted by 8:PM Monday evening. According to the administration the program was ended in order to assure funding for all outstanding deals. However, I am sure you have been hearing all week where various state associations and automobile dealer groups quit taking applications a week ago. Dealers claim they can't get reimbursed for the deals they already did and could no longer front the money to the buyers if they were not going to get paid. Reportedly the paperwork requirements continue to change and more than 60% of deals submitted have not even been reviewed. The website is failing and even when all requirements have been met the payments have not been made. Is this how the new health care program is going to work?

Administration officials admitted on Friday that only $145 million had actually been paid to dealers out of the $1.9 billion in applications submitted. I suspect the abrupt termination of the program was self-defense given the rising tide of dealers backing out of the program. AutoNation was one of the major dealers who quit taking applications this week saying it was owed $45 million by the government. AutoNation owns 220 dealerships across the country. $45 million is a huge chunk of change and that came from selling 10,500 cars with clunker rebates. The program was supposed to last until Labor Day. Reportedly 457,000 clunkers have been traded in to be scrapped.

In my last YCMTSU item, California is going to vote on Monday to release between 27,000 and 40,000 prisoners in an effort to save money. They are also considering reducing many crimes from felonies to misdemeanors so the mandatory jail sentences in the future will be much shorter and many sentences can be limited to community service and house arrest. U.S. judges told California on Tuesday they had to release up to 40,000 prisoners in order to relieve overcrowding in state prisons. The order gave California 45 days to reduce overcrowding to "only" 137.5% of capacity. That amounts to a reduction of 40,591 inmates in 33 prisons. I wonder how Californians are going to react to an extra 40,000 criminals in their midst and felonies turned into misdemeanors? Will California become a criminal magnet since penalties will equate to a slap on the wrist?

Four more banks were closed on Friday bringing the total to 81 for the year. Guaranty Bank of Texas has been on the list for a long time and the FDIC finally sold it to BBVA this week. It will cost the FDIC $3 billion. Other closures were eBank of Atlanta GA, First Coweta, Newman GA and CapitalSouth Bank of Birmington AL. Those last three banks cost the FDIC about $250 million. Noted bank analyst Meredith Whitney said on Friday she expects more than 300 banks to be closed in 2009. She said investors had been "overzealous" in estimating bank profits for the next few years. Bloomberg said bankers might underestimate loan-loss reserves to make their banks look better and to extract year-end bonuses but the problems will still exist. Most bank loans are still carried at cost at origination despite the implosion in real estate prices. Facing that decline by slashing their value estimates would make most U.S. banks technically insolvent even though the majority of those loans are current.

You can tell Friday was a slow news day from the items making headlines above. However, it was option expiration and that helped produce a volume spike on a strongly positive day. You can imagine what a 19-point spike on the S&P at the open on expiration day can do to the best-laid plans of option traders. With the S&P hovering at just over the magic 1000 mark a +19 point spike can wreak havoc on open positions. If you had sold a bunch of calls at the 100 strike on the SPY (SPX 1000) the opening would have been traumatic with the gap to $103.

This was the same story across the board as the spike forced those who were short index ETFs to cover. Nearly every chart I looked at had one long green candle for the first 30 minutes. The opening spike pushed the volume to 9.9 billion for the day and the highest since August 7th. But, it was expiration Friday so higher volume was already expected and we can't claim it was bulls rushing into the market. It was shorts rushing in not bulls.

We are seeing a wonderful phenomenon where all the professional traders are getting killed trying to trade their market bias. I heard numerous analysts/traders this week saying something to the effect of "I sold all my banks, homebuilders and retailers last week and went short for the late August decline. I have been forced to cover those shorts and I am sitting here watching the market go higher without any longs." Another one said, "I really feel stupid after telling my people to go flat last week. Now I am sitting here with egg on my face." Last but not least, "I have been waiting for a material decline for weeks to get long and the market is setting new highs. Boy do I feel stupid. However it is not as stupid I am going to feel when I finally buy the highs and the market tanks?" I laughed out loud at that one.

This story is being repeated every day by thousands of traders and money managers. Everybody has expected a decline that has not appeared. We definitely had a great chance on Monday and support held. Tuesday's rebound was anemic and on low volume. We got another chance for a sell off on Wednesday when the market gapped down at the open to Monday's support and then rocketed off again. Everybody buying the dips is doing great and those shorting the rallies are losing money almost every day.

This is a "denial rally" where nobody believes it but funds can't afford not to chase it. With only three months left in the mutual fund year those managers can't afford to wait for a correction. They are being forced to chase stocks higher despite of the general consensus that a correction is imminent. You have heard me tell this story before so I won't beat the dead horse any longer.

The good news is the new highs. The Dow closed over 9500 and the S&P over 1025. In fact every major index with the exception of the transports closed at new highs. This can't happen on just one day of short covering. It has been building all week after Monday's collapse failed to bring on devastation in the markets. As long as market commentators continue projecting a decline there will be an endless supply of shorts to keep us moving higher.

The Dow closed at 9505 and well over prior resistance at 9422. The next material resistance is the November high close at 9625 and the 50% retracement level at 10335. Personally I am thinking that once over 9625 we need to get those Dow 10,000 hats out again because we could run for several hundred points before consolidating. Remember, in about three weeks we will start getting mid quarter earnings guidance for Q3. Expectations are lukewarm and a couple positive surprises could really build a fire under the market. Until then current Dow support should be the prior resistance at 9400-9422.

Dow Chart

The S&P posted a respectable +2.2% gain for the week but in reality it rebounded +4.6% off the Monday lows. When you start off the week with a -2% decline it makes the weekly numbers less impressive. When you consider nearly a +5% rebound on top of a 50% gain since March it does not appear that anyone is worried about a potential decline. The best analysis I could give you on the market is the horizontal movement the first two weeks of August. In retrospect this was a two-week consolidation pattern with a textbook retest of support. The market was trying to creep higher but there was the growing feeling that a failure was imminent. When the S&P failed to break support at the end of those two weeks on what appeared to be devastating news the buyers quickly returned.

S&P-500 Chart - 60 min

However, buyers did not return in volume because after all it is the last three weeks of summer. Traders are still trying to squeeze in a last vacation before Labor Day. I am going to reprint Tuesday's internals table with the last three days added to show the increase in volume and the improvement in the internals. However, we should expect to see volume return to the lows over the next two weeks. The Labor Day holiday will start weighing on the markets starting next week. Once past Labor Day the volume should pickup dramatically. Friday was nearly a 9:1 day with advancing volume 8 times down volume. Note that the last four days have been decidedly positive for advancing volume.

Internals Table

I saved the Nasdaq for last because the index is not as bullish as traders would like. The July 2006 resistance was 2014 and the Nasdaq did close over that level but only slightly. The internals for the Nasdaq Composite on Friday were less bullish than the entire market. Advancers only beat decliners by a little less than 3:1 and advancing volume was only 4:1 over declining. Overall market volume was nearly 9:1. That suggests the tech stocks may have come to the party but remained in the corner sulking because banks, homebuilders and energy stocks were getting all the attention. Despite the bullish book to bill number on the semiconductors on Tuesday the SOX closed below last week's high and well below its high for the year. The chip stocks are seen as the leading sector for the Nasdaq and while it posted a +2% gain for the week it did not accelerate the Nasdaq higher. Don't get me wrong, I am glad to see the Nasdaq over 2014 but until it breaks through that October downtrend resistance I will continue to be concerned.

Nasdaq Chart

Next week will be a critical week for market direction despite the new highs on Friday. You would think buyers would be convinced but there is also the danger that the new highs were a climax spike. Short covering fueled the Friday gains not bulls rushing into the market. I wish I could say that it was onward and upward from here but every day has its new set of challenges. The economics should not be a problem next week and if some economic problem does surprise us then we will want to see the bad news bulls rush to buy the dip again.

Remember, volume after Monday's expiration cleanup will be a challenge as we head toward Labor Day still two weeks away. The late holiday this year could be a drag on the markets as August stretches into five weeks. Everybody knows September does not start until after Labor Day. I am ready for fall. I want to get past the summer, into the Q3 earnings guidance period even though I know that this is historically a rocky period. If the markets can keep looking forward and not get too caught up in the lack of material economic growth then we can move higher. I am still in buy the dip mode until proven wrong.

Jim Brown


Index Wrap

Up into Expiration and High Bullishness

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

I've been bullish on stocks for some time but I'm also a trader and in many market cycles you have to assume potential for a correction under the circumstances seen coming into the week ending 8/14 when I last wrote. Elements I was seeing included:

1. a sideways move after a rally suggesting a pullback ahead

2. an overbought condition per past technical patterns

3. peak levels and a cluster of bullish sentiment extremes

So what happened of course was ONE (only) sharp downswing at the beginning of this past week, after which they then took stocks up again. Some of the 'they' included buyers of calls unwinding at least one side of S&P options/stock pairings; e.g., short calls versus long stock.

The result of resurging stock prices served to remind myself and the 'correction' crowd that the market is never completely predictable or doesn't follow the same patterns all the time. That's what makes it interesting, frustrating at times and humbling.

I did get an interesting and profitable take on some other charts and time frames over the week as suggested by some other traders who subscribe to OIN and follow my work even when I zig instead of zag!

CHARTS OF THE WEEK:

A subscriber e-mailed me on the question, given the snap back rally after Monday, of whether the market had 'thrown off' its overbought condition given the prior sideways trend and on an HOURLY basis that was quite true. The following chart will demo while I look a the hourly index charts and the 21-hour RSI as a guide to shorter-term trading:

There not much more to say about my first chart-of-the week as I explain what was especially relevant to me by notating the chart:

This next chart below takes a little more explanation and I wrote about this also in my second Trader's Corner column of the week (Thursday). (See the home page, click on the 'Trader's Corner' tab at top and go to my 8/20 article if you didn't already peruse it.)

A trader who read my (Essential Technical Analysis) book and seemed to pick up on the fact that I didn't believe in following overly complex trading 'rules' indicated that he had been following a simple method: Buy index calls when there is any closing bar on the 30-minute chart that puts the 12 period Exponential Moving Average (EMA) ABOVE the slower moving 26-period EMA.

Conversely, buy puts when the shorter 12-period EMA crosses UNDER the 26-period EMG. This method can be used as a moving average crossover system. As a 'mechanical' system it has some pluses and minuses. A plus is that it gets you fairly early into a move and doesn't reverse too quickly due to the nature of the exponentially smoothed moving average.

All in all, a useful method for shorter-term moves or even getting into and keeping in some long-term moves. I'm going to back test this as a 'system' in TradeStation to play around with it some more. Meanwhile, I find it an interesting add to the charts and indicators that I follow in the major indexes. Here these particular moving averages have been used on the 30-minute Nasdaq 100 (NDX) chart. An upside crossover assumes entry into calls and a downside crossover assumes entry into puts.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P has broken out above its prior trading range after a fairly minimal break of the low end of that range. The resulting move reconfirms the strong bullish trend.

There remains this potentially bearish price/RSI divergence as prices have gone to a new high 'unconfirmed' by the relative strength. Moreover sentiment readings have gone off the chart so to speak, although I also figure that some portion of the high Friday call/put equities ratio was boosted by unwinding activity. Nevertheless the bulls are getting carried away when they start to figure they can't lose in calls.

I don't trust such extremes for sure but I also have to respect the power of the trend here!

The key near support now becomes the top end of the prior trading range suggesting pivotal (very) near-term support in the 1015 area. Next key support is at the prior recent low at 978 in SPX. Further technical support is at 950.

Near resistance is now noted at the red down arrow which intersects in the 1057 area currently.

If long SPX calls enjoy the ride but keep an eagle eye on signs of a correction now that the buoying effect of August expiration is over. SPX has met my 'minimum' next upside objective to 1020 finally.

TRADER SENTIMENT:

My sentiment chart above above indicates visually just how bullish options traders have become and they are good harbingers of overall market sentiment. In a 'normal' market cycle, such high readings are clear cut warnings of at least a short-term correction ahead.

This current period could be the occasional power move that we see in a 3rd 'impulse' wave. While there was a prolonged first leg up, the second up leg can be even stronger and longer. Unusual, but this market went a very low extreme and may be going to an opposite extreme into the fall. The market goes from extreme to extreme often enough historically.

At some point the market DOES get to an 'overbought' bullish extreme and DOES correct and this keeps me cautious ahead in terms of NEW call positions especially.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart is bullish, bullish, bullish with the decisive upside penetration of its line of prior resistance. Look for support on any pullbacks to that line of prior highs as prior resistance, once overcome, 'becomes' subsequent support. Next stop up in the 490-500 area? This should be the case as long as there are no closes below the two support areas I've noted.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) broke out again along with the S&P, not so much in terms of the Nasdaq. Next stop 9700? Can 10,000 be far away, say by October. Wow, a close over 10,000 at some point ahead ought to put the media talking heads into a real state of hyperbole.

Near support is at 9438, then in the low-9100 area, with next support at 9000.

Just a reminder that they haven't repealed the laws of gravity here and prices can come down also although the bull is starting to gallop seemingly. Today's bullish housing sales figures can become tomorrow's bearish second wave of foreclosures or some other such financial report.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP)hasn't LED this latest rally and that is the bearish fly in the ointment potentially. It keeps me cautious at least. That and the very high bullish sentiment, now seen even on a 5-day moving average basis. It's about as high as this indicator gets without at least a slowing of upside momentum.

A next upside target is up in the mid-2100 area if tech now leapfrogs the S&P and resumes its leadership. It will be important to see if COMP can maintain daily and weekly closes above 2000. It's been a struggle to do this so far. Stay tuned for the next battle (or not) of 2000!

Near support is in the 2000 to 1970 area, then at 1930.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart has a slight closing breakout above its recent line of resistance and a SECOND day above 1630 would put the chart more firmly on a bullish footing. A move up to the 1700-1720 area (at the red down arrow) could be next. The overbought RSI has been 'relieved' by the recent correction.

A worrisome technical aspect for the bulls, although they have a 'what me worry' attitude right now, should be the failure of 'relative strength' in that the RSI has not 'confirmed' by some amount the new PRICE peak. This is not to say that there some magic market principle being violated. It's simply that these bearish divergences often are seen to precede pullbacks. There are always exceptions, just not too many.

Near support is in the 1630-1625 area, then should be found at the recent downswing low around 1563.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has managed a bullish close at a new high and above the recent line of its resistance.

Near support/buying interest is in the 40 area, then at 39.0, extending down to 38.5.

Daily volume finally ran up along with prices but didn't make a strong showing. Probably more important as its been is that the On Balance Volume (OBV) line has started line has started trending higher again.

Near QQQQ resistance: 40.7

Next overhead resistance: 41.7-42.4

Near QQQQ support: 40.0-39.8

Next support: 39.2-39.0

Key next support: 38.5

RUSSELL 2000 (RUT) DAILY CHART:

The way I'm projecting its major uptrend channel the Russell 2000 (RUT) doesn't have far to go before it hits some resistance around 590-600 implied by the top end of its broad bullish channel. This after a bullish breakout above the top end of its recent trading range which is not to be overlooked either.

Near support should be found at 570, extending to around 560, with next key support implied by its recent 547 low.

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

Oil, Wholesale Equipment, and Technical Instruments

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

EOG Res. Inc. - EOG - close: 75.79 change: +2.23 stop: 70.80

Why We Like It:
The oil sector produced a very nice rebound off its Monday lows last week. I believe the trend is still up but we want to buy a dip. I'm suggesting we buy calls at $74.00 on EOG. Our first target is $79.50. Our second target is $88.00. The daily chart is building an inverse H&S pattern that is forecasting a rally toward $100.

Suggested Options:
I am suggesting the September or October calls.

BUY CALL SEP 75.00 EOG-IO open interest=2311 current ask $3.50
BUY CALL SEP 80.00 EOG-IP open interest=1351 current ask $1.35

BUY CALL OCT 75.00 EOG-JO open interest=2024 current ask $4.90
BUY CALL OCT 80.00 EOG-JP open interest=2626 current ask $2.65
BUY CALL OCT 85.00 EOG-JQ open interest=3033 current ask $1.25

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 74.00
Change since picked:      + 0.00
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       2.4 million  
Listed on August 22, 2009         


Grainger W.W. - GWW - close: 89.82 change: +1.44 stop: 84.50

Why We Like It:
Traders bought the dip last week right where they were supposed to near support at $85.00 and its 50-dma. The trend is up and GWW looks poised to rally towards $95 and beyond. I'm suggesting readers buy calls on a dip at $88.00. Our first target is $93.50.

Suggested Options:
I am suggesting the September calls.

BUY CALL SEP 85.00 GWW-IQ open interest= 408 current ask $5.80
BUY CALL SEP 90.00 GWW-IR open interest= 855 current ask $2.40

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 88.00
Change since picked:      + 0.00
Earnings Date           10/14/09 (unconfirmed)
Average Daily Volume =       635 thousand 
Listed on August 22, 2009         


Mettler Toledo - MTD - close: 87.52 change: +1.29 stop: 83.95

Why We Like It:
Shares of MTD are breaking out from a five-week consolidation. Considering the coiling (tightening trading range) over the last few weeks I suspect MTD can breakout past resistance near $90.00. The plan is to buy calls on a dip into the $86.50-85.00 zone. If triggered our first target is $93.50. Our second target is $99.00. I am labeling this an aggressive play because volume is pretty light for this stock.

Suggested Options:
We want to trade the September calls

BUY CALL SEP 90.00 MTD-IR open interest=142  current ask $2.00
BUY CALL SEP 95.00 MTD-IS open interest= 20  current ask .45

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 86.50
Change since picked:      + 0.00
Earnings Date           11/05/09 (unconfirmed)
Average Daily Volume =       234 thousand 
Listed on August 22, 2009         



In Play Updates and Reviews

New Triggers & New Stops

by James Brown

Click here to email James Brown

Now that the S&P 500 has broken higher we are updating several new triggers and stop losses.


CALL Play Updates

FISERV Inc. - FISV - close: 49.09 change: +1.24 stop: 46.60

After an initial spike lower toward $47.00 FISV shot higher and broke out past resistance near $48.50. Shares hit our trigger to buy calls at $48.60 opening the play. I would still consider new bullish positions here but after four days of gains the market might dip. A pull back near $48.00 would also work well. Our first target to take profit is at $52.50. I'm setting a second target to exit completely at $54.00.

Suggested Options:
We want to use the September or December calls.

Annotated Chart:

Picked on   August 21 at $ 48.60 *triggered         
Change since picked:      + 0.49
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on August 19, 2009         


Fluor Corp. - FLR - close: 55.87 change: +1.43 stop: 49.95

Target achieved. FLR has exceeded our first target to take profits at $54.80. The stock gapped open higher at $55.10 and spent most of the day testing resistance near $56.00. Shares are a little short-term overbought. I would expect a dip. Our second and final target is $59.00.

Suggested Options:
I am not suggesting new positions at this time. Look for a dip near the long-term trendline of higher lows.

Annotated Chart:

Picked on   August 17 at $ 51.00 *triggered            
Change since picked:      + 4.87
                           /1st target exceeded @ 55.10 gap open (+8.0%)
Earnings Date           08/10/09 (confirmed)
Average Daily Volume =       2.4 million  
Listed on  July 25, 2009         


Flowserve - FLS - close: 89.29 change: +1.80 stop: 84.75 *new*

FLS has rallied to new highs for the year with a close above its early August highs. I'm tempted to buy calls here but shares look a little overbought with a $10 bounce off last Monday's lows. I'm suggesting we look to buy calls on a dip at $87.50 and we'll raise our stop loss to $84.75. This would be a test of the new trend of higher lows. If triggered at $87.50 our first target is $92.25. Our second target is $98.50. Our time frame is several weeks.

Suggested Options:
If triggered we want to play the September or October calls. I'd use the $85s, 90s, or $95s.

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 87.50
Change since picked:      + 0.00
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on August 17, 2009         


Genesse & Wyoming - GWR - close: 31.01 change: +1.57 stop: 27.75 *new*

The DJUSRR railroad index has broken out to new highs for the year. I'm expecting GWR to try and catch up with its peers. The stock is off to a good start with a 5.3% rally on Friday and a breakout over the $30.00 mark. Volume was above average on the gain. I'm upping the stop loss to $27.75. Our first target is $32.90. Our second target is $34.75.

FYI: The plan was to use small position sizes to limit our risk.

Suggested Options:
If you're looking for an entry point watch for a dip near $29.50. I'd use the September or October calls.

Annotated Chart:

Picked on   August 15 at $ 28.66 /gap down entry
                               /originally listed at $29.30
Change since picked:      + 2.35
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       230 thousand
Listed on August 15, 2009         


IDEXX Labs - IDXX - close: 50.73 change: +0.15 stop: varies

The market may have broken out from its trading range but IDXX has not. Our original plan is to buy calls on a dip near support at $47.50. However, that has refused to happen. I'm suggesting another aggressive entry point. IDXX has found resistance near $51.50. Let's use small positions and buy calls at $51.75. We'll use a stop loss at $49.75 and our first target will be $54.90.

If IDXX pulls back the trigger is $47.50 and a stop loss at $44.95.

Suggested Options:
If IDXX hits one of our triggers we want to trade the September or October calls. I'd use the $45s and $50s on the bottom trigger and the $50s and $55s on the upper trigger.

Annotated Chart:


*Original Strategy*
Picked on     July xx at $ xx.xx <-- TRIGGERs @ 47.50 or 51.75
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: 28.63 change: +0.38 stop: varies

I'm adding an aggressive trigger to LM in case the stock breaks out higher. Currently the plan is to buy calls on a dip at $26.60 with a stop loss at $24.95. I'm adding a breakout trigger at $29.50 and a stop loss at $26.40. If LM hits our breakout trigger we want to trade small positions sizes at least 1/2 to 1/4 our normal position. FYI: The P&F chart is bullish with a $39 target.

Suggested Options:
We want to trade the November calls (Septembers might work). I suggest the $30 strike but strikes are available at $1.00 increments.

Annotated Chart:

Picked on     July xx at $ xx.xx <-- TRIGGER 26.60 *new*
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: 74.87 change: +1.28 stop: varies

We've been waiting for LO to return and retest broken resistance as support near $70.00. That has yet to happen. I'm going to leave that trigger active (70.50, stop @ 69.45) but I'm adding an aggressive breakout trigger. Shares are testing resistance near $75.00. The July 27th high was $75.50. I'm suggesting an alternative trigger to buy calls at $75.75 with a stop loss at $72.75 and a primary target of $79.90. If triggered at $75.75 we want to trade very small positions 1/2 to 1/4 our normal trade.

Suggested Options:
We want to trade the September or December calls. At this point I'd probably favor the Decembers.

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 70.50 or 75.75
Change since picked:      + 0.00
Earnings Date           07/27/09 (confirmed)
Average Daily Volume =       1.5 million  
Listed on August 01, 2009         


State Street (Bank) STT - close: 53.52 change: -0.54 stop: 48.90

Hmmmm... it is a little bit disappointing to see STT slide -1% while the rest of the banking sector was breaking out to new highs. The trend is still bullish but the relative weakness may be a warning. Our plan is to buy calls on a dip at $52.50. Actually we can use the $52.50-50.00 zone as an entry point. Our first target is $55.00. Our second target is $59.50. Currently the Point & Figure chart is bullish with a $62 target.

Suggested Options:
I am suggesting the September or November $50 and $55 calls.

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER 52.50
Change since picked:      + 0.00
Earnings Date           10/13/09 (unconfirmed)
Average Daily Volume =       5.3 million  
Listed on August 19, 2009         


U.S. Oil Fund - USO - close: 38.23 change: +0.56 stop: 34.15 *new*

Commodities rallied on Friday but the USO failed to truly breakout past its August highs. I am upping our trigger from $35.00 to $36.00 and we'll raise our stop loss to $34.15, which is just under the rising 100-dma. If triggered at $36.00 our first target to take profits is $39.75.

Suggested Options:
If the USO hits our trigger to buy calls at $36.00 we want to trade the September or October calls. I prefer the Octobers. Strikes are available at $1.00 increments.

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 36.00 
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =      11.5 million  
Listed on August 15, 2009         


PUT Play Updates

First Solar - FSLR - close: 121.54 chg: -8.88 stop: 141.50 *new*

Target exceeded. Market rally? What market rally? Shares of FSLR opened up weak thanks to an analyst downgrade. Shares just continued to accelerate lower and lost 6.8% on the session. Our first target to take profits was at $122.50. The stock is very, very oversold with the three-week plunge from $175. I would expect some sort of oversold bounce near $120. Our second and final target to exit is $111.00. I'm lowering the stop loss to $141.50 since the $140 level should be new resistance.

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

Annotated Chart:

Picked on   August 17 at $135.88 *triggered/gap down entry
Change since picked:      -14.34
                               /1st target hit @ 122.50 (-9.8%)
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       3.5 million  
Listed on August 15, 2009         


Intl.Business Machines - IBM - cls: 119.90 change: +0.95 stop: 120.10

Wow! I am a little shocked that with the market in breakout mode IBM couldn't join in. Shares stalled at resistance at $120.00. It did manage to hit $120.01. A breakout seems imminent but resistance held for a reason and that reason was probably option expiration. It's common to see stocks close near major strikes at expiration. I am not suggesting new put positions and readers may want to exit any put positions immediately. We've been aiming for a drop to $113.75.

We already have a trigger to buy calls at $120.25 should IBM breakout. We'll use a stop loss at $117.45. Our first target would be $124.50. Our second target will be $129.00.

Suggested Options:
I am not suggesting new put positions. If IBM breaks higher we want to buy the September or October calls. I prefer the $120 or $125 strikes.

Annotated Chart:

Picked on   August 08 at $118.17 /gap down entry
                               /originally listed at $119.33
Change since picked:      + 1.73
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =       7.9 million  
Listed on August 08, 2009         


Marvel Entertainment - MVL - close: 38.01 change: +0.35 stop: 39.05 *new*

The S&P 500 has broken out to new highs after weeks in a trading range. That's a powerful current to swim against. More conservative traders will want to seriously consider an early exit in this MVL put play. I'm not suggesting new positions and we're lowering the stop loss to $39.05. Our target is $34.10.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   August 17 at $ 37.90 *triggered         
Change since picked:      + 0.11
Earnings Date           11/04/09 (unconfirmed)
Average Daily Volume =       710 thousand 
Listed on August 10, 2009         


Shanda Interactive - SNDA - close: 48.58 chg: -0.21 stop: 50.75

Our SNDA might still yet live. The Chinese market rallied 1.7% on Friday. Yet SNDA's rally attempt failed at $50.00 resistance. This looks like a new bearish entry point to buy puts but I hesitate to open new bearish positions with the U.S. markets breaking out higher. More conservative traders may want to ratchet down their stops closer to the $50.00 level. 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:
Technically this is a new entry point and I'd use the September puts but big picture I would hesitate to open new plays.

Annotated Chart:

Picked on   August 08 at $ 48.10 /gap higher entry
                               /originally listed at $47.83
Change since picked:      + 0.69
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.)

Schlumberger - SLB - close: 56.56 change: +2.76 stop: n/a

Strength in the oil and oil services sector has pushed SLB from a bearish breakdown last Monday to a new bullish breakout on Friday. I am not suggesting new positions at this time.

The options we suggested were the September $60.00 calls (SLB-IL) and the September $45.00 puts (SLB-UI). Our estimated cost is $1.00 and we want to sell if either option hits $2.50 or higher.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   August 15 at $ 52.00 /gap down entry Aug. 17th
Change since picked:      + 4.56
Earnings Date           10/15/09 (unconfirmed)
Average Daily Volume =       9.2 million  
Listed on August 15, 2009         


CLOSED BEARISH PLAYS

Ultra-Short Oil&Gas - DIG - close: 30.28 change: +1.57 stop: 29.10

Oil stocks exploded higher out performing the broader market. The combination of a weak dollar, stronger crude oil and a widespread market rally pushed the DIG through our stop loss at $29.10. Actually shares gapped open higher at $29.33. This ETF may be a new bullish candidate once shares fill the gap from Friday morning.

Chart:

Picked on   August 19 at $ 27.75 *triggered 
Change since picked:      + 1.58<--stopped @ 29.33 gap exit (+5.6%)
Earnings Date           00/00/00
Average Daily Volume =       5.9 million  
Listed on August 18, 2009         


iShares Transports - IYT - close: 67.57 change: +1.67 stop: 66.75

With the market in breakout mode the IYT managed a 2.5% gain. Shares hit our stop loss at $66.75. The ETF still has resistance at the $68.00 level but technicals are turning positive again.

Chart:

Picked on   August 19 at $ 65.40
Change since picked:      + 1.35<--stopped @ 66.75 (+2.0%)
Earnings Date           00/00/00
Average Daily Volume =       772 thousand 
Listed on August 19, 2009         


CLOSED STRANGLE & SPREAD PLAYS

McDonald's - MCD - close: 56.27 change: +0.13 stop: n/a

Our MCD strangle did not pan out with shares churning sideways over the last four weeks. The options we used were the August $60 calls (MCD-HL) and the August $55 puts (MCD-TK). Our estimated cost was $1.25 (0.70 + 0.55).

Chart:

Picked on     July 18 at $ 57.84
Change since picked:      - 1.57
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009