Option Investor
Newsletter

Daily Newsletter, Saturday, 08/29/2009

Table of Contents

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


Market Wrap

Hand Me the Paddles

by Jim Brown

Click here to email Jim Brown

After the prior weeks rally the bull looks a little faint this week and was barely able to keep the indexes in the green. Maybe it is time to apply the electric shock paddles and restart the old bull's ticker.

Market Statistics

It fell like a down week despite the minor gains. However when you look at the charts it was just another week of consolidation in place after a week of strong gains. In fact just holding its gains from the prior week was a major accomplishment.

Friday was another slow news day with one major exception, which I will get to later. On the economic front the final reading on Consumer Sentiment for August came in at 65.7 and +2.5 points higher than the first August reading 10 days ago. That is still a four-month low but still well off the winter lows. The drag is still the current conditions component, which fell -4 points to 66.6. The expectations component rose +2 points to 65.0. Canceled credit cards and reduced credit lines were given as the main reason for the current consumer depression. I still believe the health care furor in the local news is causing consumer worry.

Consumer Sentiment Chart

We also got the Personal Income report for July on Friday and it came in unchanged. The savings rate fell to 4.2% while wage income rose slightly after eight consecutive monthly declines. As a lagging number for July this report had little impact on the markets.

Next week has several economic events that could be market movers in a low volume holiday week. The first important release is the ISM Manufacturing report on Tuesday. This is expected to show a headline number of 50.5 and the first time in expansion territory since June-2008. If we do get a number over 50 this could provide some bullish fuel for the markets.

ISM Chart with August Estimate

Next most important is the FOMC minutes on Wednesday. This will give analysts an inside look at the Fed's thought process during the August meeting. This could be highly flammable if they say anything about inflation, removing rate stimulus or hint that there are still problems in the banking sector.

The ISM Services on Thursday is rumored to show a big increase well over the consensus estimate for 48.0, which is still in contraction territory. If the ISM services also goes positive it could be a market mover except that Friday has the big report that everyone will fear.

You could not have planned a more volatile Friday if you had tried. The Non-Farm Payrolls on the last summer Friday and the Labor Day weekend. Without this report the volume would have been nonexistent. With whisper numbers as high as a small gain in jobs to a loss of as much as 350,000 there is plenty of room for surprises. The official consensus estimate is for a loss of -225,000 compared to a loss of -247,000 in July.

Jobs are seen as the primary reading on the economy. A decline in job losses will continue to be favorable but even a slight gain would be very bullish as confirmation that the rebound is underway. We know it is from the other reports but jobs are the most visible indicator for consumers. Everybody can relate to a jobs number but few consumers and investors can relate to an ISM or PMI report. If we had a positive ISM Manufacturing, ISM Services Factory Orders and Non-Farm Payrolls all in the same week the current overhead resistance would be blown away with short covering. With the jobs report being the punctuation mark on the week's worth of reports and a holiday Friday the volatility could be huge.

Economic Calendar

The major news for Friday was a surprise guidance upgrade from Intel (Nasdaq:INTC). The chipmaker quit giving mid-quarter guidance several quarters ago but Intel said business had improved so strongly from their July earnings guidance that they had to update investors. An earnings surprise from a chipmaker was just what tech stocks needed. Intel said top line revenue would now be in the range of $8.8B to $9.2B. That is up from their prior guidance of $8.1B to $8.9B just five weeks ago, which was also better than analysts expected. Intel also said gross margins would be in the upper half of the prior range.

Intel said PC makers were ordering new chips at a breakneck pace. PC makers had let inventory decline to very low levels as the recession took retail customers out of the market for new computers. PC makers are anticipating a strong upgrade cycle in October when the new Windows operating system is released. Orders from PC makers for Intel processors are very strong but that does not mean they are selling those PCs yet but probably just rebuilding inventory for the October upgrade cycle. The PC sector is on track for its worst year in nearly a decade so the surprise guidance upgrade from Intel is definitely good news. Intel share jumped +4% on the news.

Intel Chart

Also helping the Nasdaq early was a sharp spike in (Nasdaq:DELL) shares after beating the street with earnings on Thursday night. This was another example of the bar being set so low that a snake could cross it. Dell reported a -23% drop in earnings but beat estimates by +2 cents. Dell has warned repeatedly about the poor health in the PC sector but their guidance, although far from bullish, did improve. Shorts were expecting another earnings disappointment and got a short squeeze for their efforts. The chart does not show it well but Dell was trading at $14.50 just before Thursday's close and then opened at $17.26. Investors were quick to take profits at the benefit of the shorts.

Dell Chart

Apple (Nasdaq:AAPL) also helped the Nasdaq after it announced it was teaming up with China Unicom (Nyse:CHU) to sell iPhones in China. That gives Apple access to the nearly 690 million cell phone users in China. However, Apple will have to fight for market share since Nokia, Sony Erickson and Samsung already have a large portion of the smart phone market in China. Apple shares spiked early on the news then faded with the market to close only fractionally positive for the day.

Apple has an unscheduled event tentatively scheduled for Sept-9th and it appears the current iPod is going to be discontinued or at least replaced with another model. Supplies of the current iPod models are dwindling and the SKUs (stock keeping units) are being discontinued. That suggests they are being replaced with something else. It is about time for the nearly forgotten iPod to get a new lease on life with some new models.

Apple Chart

It appears the chip stocks are pointing the way to the recovery. Marvell (Nasdaq:MRVL) also reported earnings on Thursday and blew past estimates on a +23% increase in sales. Marvell was rewarded with an 8% gain on Friday. The company said they saw improvement through the quarter and were encouraged by order stabilization.

ST Microelectronics (Nyse:STM) also reported earnings and guidance and they also said they were encouraged by the increase in bookings and expected to post solid sequential revenue growth in all market segments and geographies. STM shares exploded for a +12% gain.

Not all the news was good. News broke late in the afternoon that Cerberus was closing two major funds after 71% of investors demanded their money back. That equates to $5.5 billion in investor funds. Cerberus lost 24.5% on investments in 2008 and so far this year the funds are up only +3%. It should be no surprise that investors wanted to bail when given the chance. Cerberus sent a letter to investors saying they wanted to restructure the two funds and gave investors the option to invest in the newly restructured funds with a longer lockup period or withdraw their money. Duh, tough choice. The WSJ said Cerberus expected more than 50% of investors to remain with the fund. Somebody was living in a serious state of denial.

Because so many investors asked for their money back Cerberus said they would have to create a liquidation vehicle to orderly dispose of the assets and they would charge a $28 million fee to liquidate the assets. Cerberus took a serious hit in the credibility department after they took Chrysler private and then had to take government money to survive. They also took another credibility hit then they locked up redemptions in 2008 and refused to let anyone out. Many of the investors in Cerberus are funds of funds. That means they are hedge funds themselves and they were faced with withdrawal requests and they could not get their money back from Cerberus. Frankly I am surprised that 100% of Cerberus investors did not ask for their money back.

The loss of income to Cerberus on $5.5 billion will be a major hit. However, they were probably already in trouble because of the high water mark clause. Most hedge funds have a clause that says something to the effect that they won't take commissions on fund income after a big decline until the value of the fund is back over the previous high water mark. That could have been the reason Cerberus was trying to shift investors into a new fund to get around that high water mark rule. There could be some market impact from the fund liquidation but nobody really knows what assets they are holding. Most of it is said to be investments that are not highly liquid and will take some time to sell. That suggests it is not stocks but it could be futures, currency contracts or even tankers full of oil. Nobody really knows so you can bet there will be some cautious markets next week as traders look for a sudden dumping of positions. Since they are going to create a liquidation vehicle that suggests to me that it will take some time to sell and we won't see a wholesale dumping of stocks as a result. Part of the reason the fund was only up +3% this year was that there was no cash to invest in the market. All the cash was already tied up in whatever the fund owned last year.

For those not lucky enough to have millions locked up in the Cerberus funds you may be happy to hear that Kmart has started taking layaways again. Most retailers canceled their layaway programs a couple years ago when anyone with a pulse could get a credit card. Now that you actually have to be gainfully employed with a reasonable credit score the availability of a card is much harder. To deal with the declining sales Kmart and Sears (Nasdaq:SHLD) have restarted the layaway program. You put down a deposit and you have 8-weeks to pay it off or you lose your deposit.

If you liked that one you will love this. For those of you near my age you may remember your mother using her Christmas Club account at the local bank or credit union. Those disappeared decades ago but have returned at Kmart/Sears. A Christmas Club account "was" a savings account where consumers could deposit $5-$10 a week all year and earn interest on their money until they withdrew it to spend for the holidays. The Kmart/Sears version today is a debit card where Sears will pay you 3% on your deposits made before November 14th. The 3% will be in the form of a gift card so no hard money paid out on Sears behalf. The Sears store in Grandville Michigan opened 60 new CC account in the first week they were offered. There is also a $100 limit on the 3% interest gift card. While I seriously doubt anyone will actually deposit more than $3,333 and hit that $100 gift card limit I guess they had to draw the line somewhere. Otherwise people with money market accounts paying less than 1% might transfer large sums just to get the 3% interest. Maybe it is time to teach your kids the value of saving for holiday gifts with a Christmas Club account. Oh, your kids don't buy gifts unless you give them a couple hundred bucks and drive them to the mall? How times changed.

On the subject of credit cards Credit Suisse analyst said last week that available credit lines will be cut by about 20% or -$1.2 trillion in the coming months and warned that further cuts could result from the provisions in the new credit card law. Meredith Whitney predicted that unused credit lines would be cut by 50% or around $2.7 trillion by the end of 2010. A KBW analyst said recent cuts had been in inactive accounts but that future cuts would come from customer purges. He said banks will purge customers with lower credit scores to prevent higher losses later. Also subject to be cut are those who routinely jump from bank to bank to benefit from teaser rates. Banks will want to favor loyal customers who carry reasonable balances and always pay their bills.

Starting in February the new credit card law signed by President Obama will force banks to follow new rules regarding interest rates, late charges and fees. Faced with not being able to change rates or fees on customers who are late the banks are purging those customers now to avoid being locked in when February comes. This is a prime example of the law of unintended consequences. The idea was to keep banks from charging higher fees to those that could not pay on time. Now those accounts and accounts in danger of falling into that category are being eliminated rather than risk being carried on the books for a loss. Credit lines at (Nyse:AXP), (Nyse:BAC), (Nyse:COF), (Nyse:C), (Nyse:JPM) declined by a combined $32.1 billion last month. American Express canceled 2.7 million cards that had not been used in 24 months and had no outstanding balance. Those were NOT subprime borrowers.

Along the same line retail analyst Howard Davidowitz said last week that despite positive economic signs the consumer is dying. He said the retail sector is seeing declining trends, which are almost all negative. He expects retailers will close "hundreds of thousands of stores." Also, "The consumer is over leveraged, losing their jobs and their credit is being cut almost daily." He said the country is in a death spiral and out of control. He said the only stores that might do ok are Family Dollar (Nyse:FDO), Dollar Tree (Nasdaq:DLTR), 99 Cents Only Stores and Kohls (Nyse:KSS). Kohls is in the list only because of their extreme cost controls. Davidowitz has a retail consulting firm. Wonder what he is telling his clients to do?

Evidently Sears shoppers are not buying enough appliances because Whirlpool (Nyse:WHR) announced on Friday it was closing an Evansville plant and cutting 1,100 jobs. Whirlpool is the world's biggest maker of appliances and the company said it was moving some of the jobs to its newer plants in Mexico. Thank you NAFTA.

Bradford Bank in Baltimore MD, Mainstreet Bank of Forest Lake MN and Affinity Bank of Ventura CA were closed on Friday pushing the total for the year to 84. That is three times the 2008 total for the year but still well under the last major wave of 181 banks in 1992. Richard Bove said last week he expects over 300 banks to be closed in 2009. The FDIC said last week that the number of banks on their problem bank list rose to 416 at the end of Q2 and the highest level in 15 years. That is up from 305 at the end of March. The FDIC fund declined by $2.6 billion in Q2 to close the quarter at only $10.4 billion. The FDIC has an untapped $30 billion credit line at the Fed and a similar $500 billion credit line at the Treasury. The FDIC said it expects to lose $70 billion over the next several years due to the failure of insured banks.

The Federal Reserve went back to court on Wednesday to try and prevent the names of banks from being published that have asked for and received emergency Federal funding. The Fed does not want the names and amounts made public for obvious reasons. Bloomberg sued the Fed under the Freedom of Information Act and a federal judge in New York ruled in favor of Bloomberg. The Fed filed a motion with the court on Wednesday asking the judge to not enforce her ruling saying, "Immediate release of these documents will cause irreparable harm to the institutions and to the boards ability to effectively manage the current and future financial crisis." The Fed added that public interest favors a delay, citing the potential for "significant harm that could befall not only private companies but the economy as a whole" if the information is disclosed. I don't know about you but the "harm the economy as a whole" sounds ominous coming from the Fed. Obviously they are protecting a large bank or a group of banks from failure and they don't want us to know who. Since the FDIC has shutdown 84 banks already this year including the 6th and 9th biggest bank failures ever, it makes me wonder who the Fed is protecting that the FDIC can't handle?

I am getting a lot of email recently on the commodity ETFs. Actually on the energy ETFs consisting of the (Nyse:DXO), (Nyse:UNG), (Nyse:USO), etc. The problem with the commodity ETFs is the witch-hunt going on in the administration to find somebody responsible for the spike in energy prices in 2008. The evil speculators were blamed for a while but they were eventually ruled out as not having enough skin in the game to manipulate the prices significantly. Since lawmakers want someone to get the blame in order to prove they are working in your best interests the CFTC has been told to find somebody to blame. That somebody is apparently retail investors through the commodity ETFs.

The commodity ETFs hold large quantities of futures contract in "PASSIVE" accounts. That means they don't trade them. They buy the contract when a month rolls over and they hold it until it expires. The problem in the eyes of the CFTC is the quantity they own. For instance the natural gas ETF (UNG) reportedly holds 20% of the open interest in natural gas futures contracts. As new investors buy additional shares of the UNG they issue more shares and buy more futures contracts. It is totally passive and has minimal impact on the future markets. It is a buy and hold strategy. For instance the gold ETF (Nyse:GLD) owns more than $32 billion in gold bullion. That is more gold than most central banks but they are not trading it.

During this witch-hunt the investigation into the market spikes and the trading records of the ETFs showed that the funds were actually SELLING futures contracts into the price spike as investors took profits in their ETF holdings. They also proved that the funds were BUYING futures when the prices were falling because investors were buying the dips on the ETFs. This is completely contrary to what the CFTC expected to find. In fact, if the ETFs had not existed last summer the volatility would have been greater not lower.

That puts the CFTC in a bind and a regulator in a bind is not a happy camper. The CFTC has to assign blame and come up with a magic fix that satisfies lawmakers and does not disrupt the markets. The apparent solution they are considering is position limits on the evil energy ETFs. Actually on every commodity ETF. The ETF managers are trying to dodge this bullet in advance by limiting the number of shares in the market. Several of the top energy ETF managers have ceased issuing new shares. Basically they are in liquidation mode until the CFTC issues a ruling. This has caused the ETFs in question to actually trade higher rather than lower because of the shrinking supply. The UNG is trading at 12-15% over its net asset value as some investors continue to buy the dip in natural gas by using the ETF. At the same time the ETF is not buying more gas futures. Some of the ETFs have tried to alter their strategy by purchasing swaps from third parties but this is a limited strategy because those third parties will eventually have to hedge themselves against the long-term risk.

Here is the problem. If the CFTC suddenly say the position limit per ETF is X% it is a good bet that X% will be less than the futures they currently own. That means the funds will have to do a tender offering for their own shares and sell the futures to compensate. Prices on the ETFs will drop sharply once it becomes common knowledge that the fund is selling futures. Current owners will be caught in the downdraft.

If the CFTC finds a backbone and stands up to the administration and lawmakers and says something to the effect that the markets are functioning perfectly and imposing position limits would be dangerous then ETF prices will fall. The managers will immediately issue more shares to keep up with demand and equalize to their current futures holdings and that will depress the price of the ETF.

If the CFTC does not impose position limits then I would buy the dip. Today I would probably be a holder with a tight stop on ETFs like the DXO. If a sudden announcement crushes the ETF price I want to get out at the top so I can get back in once the smoke clears. The UNG is a victim of its own success in a thin market. I suspect the price of natural gas has fallen from the $4.30 high in early August simply because the UNG was one of the first ETFs to quit issuing new shares. Without the UNG providing liquidity to the gas futures market and actually trying to redeem its shares and close futures positions the price of nat gas has fallen to new multiyear lows. Gas closed on Friday at $3. However, nat gas futures rolled over on Thursday so there were some expiration pressures as well that were probably heightened by the lack of UNG in the market.

Bottom line, hold them if you own them but keep a tight stop and don't be afraid to exit. There is always plenty of time to get back into a position once the smoke clears.

Natural Gas Futures Chart

Doug Kass made news this week with his "market has topped" declaration. Kass said that the market has more than likely peaked for 2009. Voters in an online survey voted 2:1 in agreement with his prediction. Kass believes the consumer is dry and can't afford to spend money on anything but necessities. The retail consumer is the primary driver of the economy and responsible for some 72% of the GDP. With summer over and the home buying season over that will mean the consumer is going into hibernation for the winter. He also worries that taxes are going sharply higher despite campaign promises simply because of the rapidly rising Federal deficit.

Kass is not the only one looking for a decline. Nearly every analyst/trader I heard on stock TV this week was looking for a correction. However, nearly every one of them were hoping for the correction so they could go long again. It is a question of talking their own book. They are not long and are probably short or at best flat. It is in their best interest to talk down the market. They made a lot of money buying the dips and they are looking for another payday.

However, this is where the guidance turns ugly. On Friday we had five major Nasdaq stocks all announce positive news before Friday's open. All saw a big spike in their stock prices but all shrank significantly as the day drug on. The Nasdaq opened with a spike to 2059 and closed up only +1 point at 2029. That is a -30 point decline from the highs on good news.

Granted this is month end and some people needed to take profits for the month. The entire week was a profit-taking week if you really analyze it. The S&P rebounded +55 points last week and was due for a rest. You may remember that for the prior two weeks the big challenge was watching the S&P for a breakout over 1012-1014. We got a two-day dip back to support at 980 and then a +55 point rebound well over that prior 1012-1014 resistance level. Support is now 1020 with resistance 1040. I agree that the market looks heavy but it refuses to lay down and die. Unfortunately we are coming into the worst month of the year for the markets.

Historically Aug/Sep are the two worst months with the average decline from the Aug/Sep highs to the Q4 lows of 9.3%. The Q4 lows normally occur in October. In the last 33 years the Nasdaq has been down in September 16 times, the S&P 21 times and the Dow 24 times. The wild card here is that this is not a normal year. This was the year of the great recession and we don't know how the normal trends will play out.

September is not always a loser but 66% of the time the direction is down. This is probably weighing on the mind of every professional investor this week. Once past Labor Day everyone will be walking on eggshells in hopes of getting through September alive with their portfolio intact.

September Table

If professional investors are so smart and September is going to be so bad then why is John Paulson loading up on banks now instead of a couple weeks from now? Paulson has $17 billion under management and is recognized as one of the smartest investors around. He made billions betting against the housing market in 2007-2008. He just announced a 2% purchase in Citigroup along with 168 million shares of Bank America and 2 million shares of Goldman Sachs. Paulson is supposedly who the hedge funds and institutions are watching. What does that say about the next few weeks? Of course nobody had a lock on market direction and we don't know if he is holding back some cash in hopes of averaging down. He is just an investor with a lot more money than us but also somebody the market follows.

To narrow our focus a little I checked on the days before and after Labor Day for the last 30 years. Historically the market is down two of the last three days before and is up two of the first three days after. This year we have the benefit of month end coming a week before Labor Day so any month end retirement contributions will probably be put to work before the holiday, not after. This is also a very active week for economic events and that is going to keep traders in the game instead of checking out completely for a long week off. JP Morgan is predicting the S&P will trade between 1043-1053 by Labor Day. It hit 1039.47 on Friday. I would like to see the S&P move over 1040 because that is current resistance.

In the S&P chart below the rectangles are consolidations in an uptrend. These tend to resolve in the direction of the prior trend. Volume slows in the rectangles as traders formulate a plan for the future and consolidate positions. These are perfect sucker plays for shorts. Every rectangle appears to weaken just before the next event spurs the index higher. The breakdown to support on the 17th was event driven not market driven. That was the day the China market fell -5%. Eventually the consolidation patterns will fail but you can see every dip to support was met with a strong rebound.

S&P Chart - 60 Min

The Dow topped out twice this week at the 9625 resistance high from November. It is too soon to know if this is going to be a solid top or just one more rectangle continuation pattern. Support is now 9475 and the range is pressing upward on that 9625 resistance. The Dow is a story index. Breaking news on only one stock can push the index around and 20 Dow stocks were negative on Friday. That is contrary to the broader market statistics where advancers and decliners were roughly even. Also, up volume on the S&P was 4:1 over down volume. The Dow loss on Friday was not inline with the market internals.

Dow Chart - 60 Min

The Nasdaq had every reason to rally on Friday and the rally died. The -30 point drop from the highs put it back under the 2037 resistance level. The intraday spike pushed it to nearly 2063, which is the 50% retracement from the March lows. This could be a significant resistance barrier. When you realize that Intel, Dell and Apple all had good news on Friday and the Nasdaq only kept 1 point of that spike it makes you wonder what event could power a short squeeze long enough to get over 2063? Support is now 2015 and short-term resistance 2037.

Nasdaq Chart - 60 Min

I have seriously mixed emotions for next week. We have some economic reports that could provide some significant motive power if they come in as expected. We will have thin holiday volume, which could accelerate the volatility or dampen it depending on how good the data is. We also have fear of the Non-Farm Payrolls on Friday. Do investors buy in advance of expected good news or sell in fear of bad news?

Will investors worry about September or will they hold their ground? Once past Labor Day we will be into earnings guidance season. You may remember we did not have any negative guidance in June and earnings were better than expected. Intel has already guided higher twice this quarter. Is that going to translate into better guidance from other tech stocks? We already got that from MRVL and STM on Friday.

I think as an investor we should continue to buy the dips but be increasingly more selective on those dips because the law of averages suggests we will get a significant drop eventually. As traders I would look to be short term short under S&P-1020 and look to buy a bounce at 1000 and 980. Until a dip appears I would want to be cautiously long over 1020. If the majority of traders are flat or short next week and looking for a decline into September that means any rally should be met with additional buying as those traders chase the market higher. This is going to be a confusing week so watch SPX 1020 for market direction.

Jim Brown


Index Wrap

S&P Taking the 'Leadership' Reins?

by Leigh Stevens

Click here to email Leigh Stevens

THE BOTTOM LINE:

I spend quite a lot of time looking at my point of view for the market each week as to looking bullish, bearish or mixed. There's no doubt from a technical standpoint that we remain in a bullish pattern but tech looks to be struggling and could be on the verge of a pullback. Technically, you could make a case for shorting it, or remaining long. Take your pick!

What I wonder about is what happens to the market if leadership shifts from tech to some of the more mainstream economy stocks; e.g., consumer, consumer cyclical, etc. I've been looking for a correction given how bullish traders have been. My sentiment indicator on a 5-day basis recently got as high (extreme bullishness) as it's registered since late-2006 after a multiyear run up going back to the 2003 lows. Maybe a little overdone here folks!

I've had the most fun as a technician in years recently when I got back in looking at and tweaking some trading systems I used to play with. If you apply certain 'objective' trading rules mechanically (always the same), we can call it a trading strategy that you take into account. If you use that strategy to generate buy, sell (and maybe) stop-loss orders, that's what I would call a trading system .

Although the terms are used somewhat interchangeably, a system is strictly mechanical so to speak. When you want to 'overlay' a trading 'signal' with a judgment call, then it's no longer a 'system', at least until you do further back testing and development of the trading rules. The idea is that a system takes the emotional component out of the equation. You know, like when the Fed pulls the plug on the economy but you're strategy rules still has you long everything.

TAKE YOUR PICK: be long Calls or Puts.

I've been analyzing the Nasdaq 100 (NDX) intraday history I have (2 years and 9 months currently or 1000 calendar days). I started with the idea of shorting (buying puts) when the 21-period hourly Relative Strength Index (RSI) went BELOW 70 with entry assumed on the close of that hourly bar or period and staying short/long puts until the RSI dipped under 30, but only reversing into calls WHEN the RSI then rose ABOVE 30; i.e., exits puts and buy calls.

My TradeStation software, which is the ultimate in Systems Testing and Development (STAD), is better set up to show a back tested P&L for stock trading, so I was keen to use the QQQQ (NDX) tracking stock. With a stock, I can enter a starting account size, a 'slippage' factor (assumes a fill that is more than or less the point when the signal was generated), and a commission. I could enter a stop-loss trigger also, but didn’t in this run.

I then 'optimized' as to which RSI triggers (which levels) produced the best profit for the 2 year, 9 months of intraday data I had. Lo and behold, I got different trigger levels and different results, in terms of profitability, for the QQQQ NDX tracking stock versus the underlying index. My QQQQ 'RSI system' has me still long or still on a buy 'signal' and the NDX RSI trading system has me short.

Go figure. The ultimate hedge, flip a coin strategy, or use your more emotional or reasoned take on being on one side of the market or standing aside, at least as far as NDX. Some systems traders would stand aside when one system says be long and other to be short as they cancel each other out!! I find it interesting and will follow the outcome, but lean to being in puts for a trade; I have an exiting stop point however; if NDX closes above 1650, I'm out.

I'm just going to go ahead and present these results as they have back tested for the admittedly short period to test a 'system'; I'm going to start keeping up to 5 years of 1-minute data however and continue to try to develop better indicators to share with you.

CHARTS OF THE WEEK:

When I optimized the QQQQ RSI 'system' described on the chart below, I got the 'best' values to use as 72 on the high side and 39 on the low end of the 21-hour RSI. My RSI strategy has me still long the stock or long calls. In this system I'm buying a 100 shares and have seen the system call for buying several hundred shares when a 'signal' in the same direction occurred multiple times. I don't mind price averaging in a strategy, although conventional market strategy suggests not to do that in options or trading futures; i.e., speculative stuff.

I would be long QQQQ in this system described above. Next is the test results of 'applying' this system going back to the first trade on 12/11/06. I started with a theoretical $10,000 but the back testing results suggested I need at least 21,000 to trade this system for the time period given the maximum number of shares bought or shorted at any one time AND the largest loss sustained on an unrealized or realized basis. I also entered a 'slippage' factor of .01 and commission cost of $25.

Results for 12/11/06 to present period are shown below for 142 trades in QQQQ; with one current LONG position still open:

Notice that the percent profitable is 64.8% and that the average losing trade was several hundred more than the average winner. This was ok since there were nearly twice as many winning trades as losing, producing a net gain of $10,578 so far. Not bad for a 2 year 9 month period. The 'maximum intraday drawdown' says that the at one time anyone trading this system was down $21,610 and that up to 2900 shares (not 'contracts') was held at one time by taking multiple positions (pyramiding). So, if you can take the heat of having up to a maximum of 15, count em FIFTEEN, consecutive LOSING trades for the time period tested, this system is a winner.

What I further want to know however, is how the heck the same system idea produced a current SHORT (long puts) in the underlying NDX index and which one is MORE profitable for the period shown as I want to see which system has (PERHAPS) the greater probability of being right on the future direction of NDX and perhaps the market.

The answer to the first question is that I don't know why the following NDX system tested differently, except to say that we know the underlying index is more volatile. The buyers and sellers of the stock are a more 'conservative' lot of investors and hedgers who don't push the stock to the same RSI extremes.

Optimization of the RSI values to trigger a long or short position in the underlying NDX were different that the above QQQQ system; 72 and 39 for QQQQ and 69 and 31 for NDX, in terms of the same 21-hour length setting in the hourly RSI. The really other interesting thing is that the point gains were greater than in QQQQ. However, the true profitability of using the strategy to buy calls and puts can't be figured given all the possibilities of which calls and puts were bought, entry levels, commissions, etc. However, I was primarily interested in the winning percentage and the total (net) point gain in NDX.

The NDX strategy applied below from 12/22/06 to 7/24/09 (with a multiple short position still OPEN) with different RSI 'triggers', had 55 wining trades, versus 21 losers; 72.4% were profitable. The total net NDX point gain to date was 1,197 points, but the account trading this system had to sustain a 'maximum intraday drawdown' of 4,212 points in the underlying index but that was spread across multiple positions; e.g., the strategy had price averaged a number of calls or puts over time during at different periods of time.

Bottom line, the trading strategy system suggesting that we want to be short NDX, assuming you don't mind 'counter-trend' trades, has what looks to be the superior track record.

But I digress in a major way from my usual analysis. Just trying to add some value to what I usually do and keep learning myself as what might be the most predictive of the trend in the way of indicator patterns.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P has gone into another sideways trend that looks like a consolidation of the prior bullish up trend as long as dips hold above the high end of the previous price range; i.e., in the low 1000 area. So, the chart remains bullish in its pattern and I don't project any resistance before 1070.

If SPX starts retreating under the 1015-1000 area, especially on a closing basis and especially if for more than a single day, then it will look susceptible to a further pullback. It would be normal to see that but the bulls are not letting the bears have that; or those who want to buy/buy more, get 'in' so to speak. Those bulls, selfish to the end.

As far as indicators, the latest highs are not being 'confirmed' by the RSI but that is not uncommon in a strong upside move. Buying is a multiple decision event as people and institutions buy, then buy some more, then buy more still. Buying is not a 1 or 2-time decision, the way emotional scary sell offs can be. This is why 'oversold' readings in terms of the RSI type indicators are less common than 'overbought' readings.

Near support is still indicated around 1015, then down in the 980 area. Near resistance implied by the previously pierced up trendline is intersects in the 1070 area currently.

Upside momentum has slowed since SPX reached a 'minimum' upside objective that I projected back when, but this recent sideways trend is most often part of a natural consolidation process; that's what sideways moves (after an initial spurt higher) are usually about. At what point this 'natural' process of up, consolidation, up, consolidation or minor dip, ends is very hard to predict.

TRADER SENTIMENT:

Speaking of scary, I do find the EXTREME bullishness recently seen on my 'sentiment' indicator above makes me a nervous bull and a bit anxious about being on the same side of the market as the thundering herd here. As I noted in my 'bottom line' comments above, my particular sentiment model hasn't been this high on a 5-day basis since late 2006 after a multiYEAR bull run.

But, the trend is the trend and it's still strongly UP. Myself, I like getting into calls when there's not so much company. I don't like crowds. It tends to make me feel I'm overlooking something when everyone I talk to is bullish. I feel the same way about gold as so many tell me there 'has' to be inflation ahead and bad inflation at that and gold is a (somewhat) sure thing to go up a lot more.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart remains bullish after the decisive upside penetration of its line of prior resistance. OEX hasn't made huge headway since its strong rally from its recent 455 low but this is such a common pattern in trends, a bearish take on the fact that the market isn't quite galloping to the upside isn't warranted. From the lows at 317 just a few months back to 480, it's been quite a run.

I continue to anticipate support on pullbacks to the line of prior highs as this area should now offer support. If there is a couple of consecutive closes below 470, that's a bearish sign for a correction that might push OEX below 455. This would be 'normal' in an advance. A second dip often ends up going under the first corrective downswing. What is 'normal' in THIS market in terms of technical patterns and projections is harder to say given that we've been in such a deep recession and have a long ways to go to get back to sustainable growth.

Recent price resistance has been seen on rallies to 480-483. Next projected resistance above this area is up in the 500 region. Near support should be found around 470, and then I'd assume next support would lie in the area of the prior 455 low.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The chart of the Dow 30 (INDU) is like the S&P: A bullish sideways consolidation after the last spurt higher; pullbacks are mild and hold well above the line of prior highs.

An 'obvious' next target is to the 9800-9820 area at the red down arrow at the previously broken up trendline that has been a rising line of at least minor resistance; i.e., where upside momentum tends to slow.

I don't think that there's much question that we'll see 10,000 again in the not too distant future, probably in the next 4-6 weeks and this will have all the media talking heads in a lather. However, it is true that numbers that are multiples of 10, 100, 1000, depending on the level of the stock or index, often tend to be big deals.

Near support is in the 9400 area, then down in the 9100 area in the area of the prior recent lows. I could keep mentioning the bearish price/RSI divergence at the risk of sounding like a broken record. These kind of divergences may not lead to much in a strong advance. When they do 'forecast' an interim top, you can't predict WHEN. Hey, I want to know when and where; I want to know WHERE it's headed. Best guess for a sort of normal correction is a pullback to the 9300 area; worst case back to 9000.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has been struggling in this latest rally to gain much traction above the key 2000 level. One key as to whether the bearish RSI and sentiment indicators will prove to be any kind of harbingers for a pullback is whether COMP can stay above 2000 on daily and weekly closing basis.

A 'normal' correction would see the index re-testing prior lows in the 1930 area of COMP or maybe falling under the prior 1930 low, such as to the 1850 area. An currently unexpected stock market correction should bring down the overly optimistic bullish expectations that seem currently built into the market. As is often the case in illness, things get worse before they get better and as certain stimulus money dries up (cars and housing) there may be another economic dip to worry investors.

But let me stick to what we can SEE here and the key thing is that COMP hasn't gained much further traction after the substantial snap back rally from 1930. We have to see how this plays out. A rally FROM the 2000 area, with this a floor of support keeps the bullish chart pattern intact. A break under 2000 suggests a further fall ahead.

It appears that selling could come in again at 2060-2065. Fairly major resistance is noted around 2180 on the daily COMP chart below. Key support as already discussed is in the 2000 area. Next support has to be assumed in the area of the prior 1930 low.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart remains bullish but we have to see how able NDX is to mount a sustained rally above the prior 'breakout' point around 1635. Part of a bullish pattern is the ability to build on each prior rally but NDX was struggling this past week. Of course tech stocks have had the greatest advance and money seems to be naturally shifting to some underexploited stocks in areas that are more mundane than tech.

A close under the 1635 to 1616 levels (under the 21-day moving average) would be mildly bearish if this was more than a 1-day affair. If there's this kind of pullback, the next area that would be a prime re-test of continued buying interest is at the prior lows around 1563. I don't see much downside past 1550 currently however; e.g., it seems unlikely that NDX gets back to 1500.

Overhead resistance is at 1670, then up in the 1750 area.

A continued sideways trend will at least continue to mitigate the recent overbought extreme. A pullback AND a sideways move will bring the RSI down to a more 'neutral' level.

As noted extensively in my initial 'bottom line' commentary, I have one technical strategy that suggests remaining long in the NDX (QQQQ) tracking stock (from 38.7) but suggests a put position in the actual index. Go figure, but it is a mixed bag technically (and fundamentally) so it's not so surprising that there would be differences in forecasting models.

The mixed directional picture suggests risk as far as new call or put buys, while selling inflated call premiums and strategies banking on NDX staying range bound (e.g., between 165o and 1550) could pay off.

RUSSELL 2000 (RUT) DAILY CHART:

There wasn't much sustained headway made by the Russell 2000 (RUT) this past week and highs stopped short of resistance implied by the upper end of its broad uptrend channel.

578-580 is the key near support area, extending to 568. Next pivotal support is around 547, at the prior (down) swing low.

Key resistance is at 590-595. A decisive upside penetration of 595-600 would suggest that a new up leg was underway.

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

Wall Street, Healthcare, & Metals

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Goldman Sachs - GS - close: 164.42 change: -0.60 stop: 159.00

Why We Like It:
Technicals in GS are mixed but I think the stock could surprise traders with another move higher. Shares have been consolidating sideways under the $166.00-166.50 zone last week. I'm suggesting readers open small call positions (smaller than our normal trade size) at $166.75. If triggered our first target is $179.00. FYI: The Point & Figure chart is bullish with a $228 target.

Suggested Options:
This could be a quick two or three week play. Aggressive traders can use September calls, which expire in three weeks. The rest of us can trade October calls.

BUY CALL SEP 165 GPY-IM open interest=10202 current ask $4.15
BUY CALL SEP 170 GPY-IN open interest=10775 current ask $2.10
BUY CALL SEP 175 GPY-IO open interest= 7091 current ask .92

BUY CALL OCT 165 GPY-JM open interest= 4509 current ask $8.10
BUY CALL OCT 170 GPY-JN open interest= 6553 current ask $5.80
BUY CALL OCT 175 GPY-JO open interest= 7200 current ask $4.00

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 166.75
Change since picked:      + 0.00
Earnings Date           10/13/09 (unconfirmed)
Average Daily Volume =       8.8 million  
Listed on August 29, 2009         


United Health - UNH - close: 28.18 change: -0.76 stop: 27.49

Why We Like It:
When Congress comes back from its summer recess and it becomes more apparent that the government-run healthcare bill is dead then private health insurance stocks could soar. UNH already has a bullish bias and the Point & Figure chart has a triple-top breakout buy signal with a $45 target.

I am suggesting a trigger to buy calls at $30.55. If triggered our first target to take profits is $34.50. Our second target is $37.50. My time frame is about eight weeks.

Suggested Options:
I am suggesting the October or December calls. Options are available at $1.00 strikes but $34s are the highest Octobers currently available.

BUY CALL OCT 30.00 UNH-JF open interest=16214 current ask $1.35
BUY CALL OCT 32.00 UNH-JL open interest=    1 current ask .75
BUY CALL OCT 34.00 UNH-JB open interest=   74 current ask .40

BUY CALL DEC 30.00 UNH-LF open interest=6764 current ask $2.30
BUY CALL DEC 32.00 UNH-LL open interest=1427 current ask $1.55
BUY CALL DEC 35.00 UMH-LG open interest= 974 current ask .85

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 30.55
Change since picked:      + 0.00
Earnings Date           10/20/09 (unconfirmed)
Average Daily Volume =       9.2 million  
Listed on August 29, 2009         


Valmont Ind. - VMI - close: 84.84 change: -1.30 stop: 79.45

Why We Like It:
VMI is a Nebraska-based metal fabricator. The stock has been showing relative strength. We want to buy calls on a dip at $82.00 (actually anywhere in the 82.00-80.00 zone). We're going to try a tight stop loss at $79.45. If triggered at $82.00 our first target is $88.00. I'm setting a second target at $94.00 but that might be a little too optimistic. Currently the Point & Figure chart is bullish with a $104 target.

Suggested Options:
Our time frame is several weeks so I'm suggesting the October calls. Readers may want to trade Decembers since they have more open interest.

BUY CALL OCT 80.00 VMI-JP open interest= 12  current ask $8.40
BUY CALL OCT 85.00 VMI-JQ open interest=  0  current ask $5.50
BUY CALL OCT 90.00 VMI-JR open interest= 21  current ask $3.40

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 82.00
Change since picked:      + 0.00
Earnings Date           10/15/09 (unconfirmed)
Average Daily Volume =       315 thousand 
Listed on August 29, 2009         



In Play Updates and Reviews

More Entries

by James Brown

Click here to email James Brown

We continue to fine tune the play list with couple of new stops and a couple of bullish candidates hitting entry triggers.


CALL Play Updates

Apple Inc. - AAPL - close: 170.05 change: +0.60 stop: 163.40

It would be understandable to be disappointed in the market's and AAPL's performance today. The positive DELL earnings and the positive INTC news set tech stocks poised for gains this morning. Then AAPL announced it had reached a deal with China Unicom to bring the iPhone to the largest mobile phone market in the world - China. The iPhone launch in China is expected in the fourth quarter this year. Yet in spite of all this positive news AAPL rallied to $172.49 this morning and then gave back most of its gains. I believe we can blame it on end of the week and end of the month profit taking. The stock market is up on the month and traders are a little nervous given the overbought condition.

I remain bullish on AAPL and would use dips in the $166-165 region as new entry points to buy calls. Our first target is $174.00. Our second target is $179.00. FYI: The P&F chart points to a $231 target.

Suggested Options:
If AAPL provides a new entry point I would trade the September or October calls. Keep in mind that Septembers expire in three weeks.

Annotated Chart:

Picked on   August 26 at $166.50 *(small positions 1/2 to 1/4)
Change since picked:      + 3.55
Earnings Date           10/21/09 (unconfirmed)
Average Daily Volume =        14 million  
Listed on August 25, 2009         


Allegheny Tech. - ATI - close: 32.01 change: +1.14 stop: 27.95

ATI displayed relative strength on Friday. The stock gapped higher with the market, filled the gap, and then climbed back toward its highs for the day for a 3.6% gain. Volume was strong. The action on Friday was bullish. However, instead of chasing this move I'm still suggesting we wait for a dip.

I am suggesting readers buy calls on a dip at $30.25. We'll use a stop loss at $27.95. If triggered our first target is $34.50. Our second target is $39.00. Time frame on the first target is only two or three weeks. The $39 target could take several weeks.

Suggested Options:
I am suggesting the September or October call options depending on your time frame. It is always up to the individual trader to decide which month and which strike price best suits your trading style and risk profile.

BUY CALL SEP 30.00 AAS-IF open interest=5210 current ask $2.80
BUY CALL SEP 32.00 AAS-IO open interest=3167 current ask $1.60
BUY CALL SEP 35.00 AAS-IG open interest=1430 current ask .60

BUY CALL OCT 30.00 AAS-JF open interest=3250 current ask $3.70
BUY CALL OCT 32.00 AAS-JO open interest= 879 current ask $2.60
BUY CALL OCT 35.00 AAS-JG open interest=2201 current ask $1.45

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 30.25
Change since picked:      + 0.00
Earnings Date           10/21/09 (unconfirmed)
Average Daily Volume =       2.7 million  
Listed on August 27, 2009         


CF Industries - CF - close: 82.12 change: -0.06 stop: 79.75

There is no change for us with CF. Aggressive traders might be tempted to buy calls on this bounce near $80.50 and its 30-dma. I am suggesting readers wait for the breakout over resistance.

Currently our plan is to buy calls on a breakout over resistance with a trigger to launch positions at $85.25. If triggered at $85.25 our stop loss is at $79.75 and our first target is $89.85. Our second target is $97.50. My time frame is four to six weeks. FYI: A breakout over $85.00 would produce a new triple-top breakout buy signal on the Point & Figure chart.

Trading note: Investors should note that Agrium (AGU) has been trying to buy CF for months. CF has been trying to buy Terra Industries (TRA) for months. Nobody is selling because they claim the offers don't fully value the company (a.k.a. it's not enough money). There is potential upside if AGU finally makes a high enough offer or someone else steps in. There is potential downside if CF makes too high a bid for TRA and the market thinks they overpaid. This M&A merger dance hasn't affected the stock much lately but it is a risk either direction.

Suggested Options:
If CF hits our trigger at $85.25 I would use the October calls.

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER 85.25
Change since picked:      + 0.00
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       872 thousand 
Listed on August 24, 2009         


EOG Res. Inc. - EOG - close: 72.96 change: -1.02 stop: 69.90

Our bullish play on EOG has opened in the last couple of days. Yet the action in the stock hasn't been very strong. EOG seems to be under performing the sector indices. I am suggesting that readers scale back their position size on EOG. We don't have to exit completely but reduce the exposure by half*. There are other stocks in the oil sector that are showing more relative strength. I suspect that EOG will retest its 50-dma and probably the $70.00 level before bouncing higher, which puts us at risk for being stopped out. Look to buy calls on a bounce from $70.00.

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.

*The plan was to trade small from the beginning to cutting our position in half now should leave us with a very small position.

Suggested Options:
If EOG provides a new entry point I would use the September or October calls. Keep in mind that Septembers expire in three weeks.

Annotated Chart:

Picked on   August 26 at $ 73.25 /gap down entry point 
                               /listed at $73.98
Change since picked:      - 0.29
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       2.4 million  
Listed on August 22, 2009         


FISERV Inc. - FISV - close: 49.21 change: -0.41 stop: 46.60

FISV has failed under $50.00 for the second time in three days. Volume has been fading as we got closer and closer to the weekend. Short-term technicals are starting to weaken. I suspect that FISV will retest $48.00 and possibly its rising 50-dma. Wait for the dip as our next entry point. Our first target to take profit is at $52.50. I'm setting a second target to exit completely at $54.00.

Suggested Options:
If FISV provides a new entry point I would use the September or October calls.

Annotated Chart:

Picked on   August 21 at $ 48.60 *triggered         
Change since picked:      + 0.61
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on August 19, 2009         


Fluor Corp. - FLR - close: 53.58 change: -0.51 stop: 49.95

The short-term action in FLR continues to look bearish. We've been expecting a dip toward $52.50 and I still think it's going to happen. The $52.50 region should be support with its 50-dma, 40-dma and its long-term, multi-month trendline of higher lows. More conservative traders may want to up their stops toward $51.00 or $52.00 to reduce risk in case FLR breaks down.

Wait for a bounce from the trendline before considering new bullish positions. FLR has already hit our first target near $55.00. Our second and final target is $59.00.

Suggested Options:
If FLR does bounce from its rising trendline I would use the October calls. Septembers would work but they expire in three weeks.

Annotated Chart:

Picked on   August 17 at $ 51.00 *triggered            
Change since picked:      + 2.58
                           /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: 89.40 change: +0.90 stop: 84.75

FLR hit our aggressive entry point last week. I call it aggressive because FLS is overbought considering it was trading near $60 in early July. I also want to remind readers that this is an aggressive trade thanks to the bearish, wedge-like pattern building on FLS' chart (see below), which is why we wanted to trade small positions. Traders bought the dip near $85.50 on Thursday. More conservative traders may want to up their stop toward that low. Some of the short-term technicals are beginning to falter. Yet I suspect that FLR might retest the $85.50-85.00 zone so we're keeping our stop loss at $84.75. Our first target is $92.25. Our second target is $98.50. Our time frame is several weeks.

Suggested Options:
If FLS provides another entry point I would use the October calls.

Annotated Chart:

Picked on   August 26 at $ 87.50  (1/2 pos)
Change since picked:      + 1.90
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on August 17, 2009         


Genesse & Wyoming - GWR - close: 31.43 change: +0.37 stop: 28.90*new*

It's been a slightly volatile week for the railroad stocks. GWR dipped to $30.50 on Thursday and bounced. Shares still have a bullish pattern while some of its peers are seeing their momentum wane. I am upping our stop loss to $28.90. At this time I would wait for a bounce near $30.00 or the $29.50 level before considering new bullish call positions. 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 GWR provides another entry point we want to trade the October calls.

Annotated Chart:

Picked on   August 15 at $ 28.66 /gap down entry
                               /originally listed at $29.30
Change since picked:      + 2.77
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       230 thousand
Listed on August 15, 2009         


Grainger W.W. - GWW - close: 88.93 change: -0.39 stop: 84.75

It looks like GWW continues to consolidate in a bull-flag type of pattern. More conservative traders can wait for the breakout. We have two different entry points. I'm moving the dip entry point from $86.50 down to $86.00 and I'm upping the stop loss to $84.75. The breakout entry point is unchanged at $90.50. We want to trade smaller positions on the breakout. Our first target is $93.50. Our second target is $97.50.

Suggested Options:
If GWW hits one of our triggers I am suggesting the October calls. Depending on our entry point I suggest the $85, 90, or 95 strikes.

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 86.00 or 90.50
Change since picked:      + 0.00
Earnings Date           10/14/09 (unconfirmed)
Average Daily Volume =       635 thousand 
Listed on August 22, 2009         


Intl.Business Machines - IBM - cls: 118.22 change: -1.21 stop: 117.45

I have to issue a reversal warning for IBM. The stock has produced a bearish engulfing candlestick on Friday that coincides with yet another failed rally near $120.00. Monday's pop over resistance at the $120 level is starting to look like a bull-trap pattern. Now normally an engulfing candlestick needs confirmation but any significant drop under Friday's low to confirm the reversal will most likely stop us out at $117.45.

Should IBM surprise us and move higher I'd wait for a close over $120 or a new intraday rise over $121 to launch positions. Our first target is $124.50. Our second target is $129.00.

Suggested Options:
I am not suggesting new positions at this time but if IBM does provide a new entry point I would use the October calls.

Annotated Chart:

Picked on   August 24 at $120.25 
Change since picked:      - 2.03
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =       7.9 million  
Listed on August 08, 2009         


IDEXX Labs - IDXX - close: 51.00 change: -0.44 stop: 49.75

Friday was the fourth time in a row that IDXX has produced a failed rally at the $52.00 level. Yet there is little follow through on the sell-off. If the stock can breakthrough this resistance it could portend a sharp move higher. I am suggesting readers wait for the move over $52.00 to launch new call positions. More conservative traders might want to up their stops near the $50.50 level.

Currently our first target to take profits is at $54.90. Our second target is $58.00.

Suggested Options:
If IDXX provides a new entry point I would use the October calls.

Annotated Chart:

Picked on   August 25 at $ 51.75 *small position sizes (1/2 to 1/4)
Change since picked:      - 0.75
Earnings Date           07/24/09 (confirmed)
Average Daily Volume =       383 thousand 
Listed on  July 25, 2009         


Legg Mason - LM - close: 28.92 change: -0.16 stop: 26.40

The market's strength this morning was enough to push LM past resistance and hit our breakout trigger at $29.50. Unfortunately the rally didn't last very long and LM slipped back into its previous trading range. While our play is open with a stop loss at $26.40 more conservative traders might want to up their stops toward the $28.00 region. Furthermore I would wait for a new rise over $29.50 before launching new positions. Don't forget that we wanted to use small position sizes (1/2 to 1/4 normal size).

Our first target is $32.45. Our second target is $34.85. FYI: The P&F chart is bullish with a $39 target.

Suggested Options:
If LM provides a new entry point over $29.50 we want to trade the October calls.

Annotated Chart:

Picked on   August 28 at $ 29.50 *triggered               
Change since picked:      - 0.58
Earnings Date           07/20/09 (confirmed)
Average Daily Volume =       3.4 million  
Listed on  July 25, 2009         


Mettler Toledo - MTD - close: 88.57 change: +0.79 stop: 84.99

Thursday's rebound continued into Friday and the stock inched toward new highs for the year. We have a stop loss at $84.99. More conservative traders may want to adjust their stop toward last week's low near $85.94. Friday's close over $88.50 is bullish and I would still consider new call positions here, albeit in small size (about 1/4 our your normal trade). 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 or October calls. I prefer the $85 and $90 strikes.

Annotated Chart:

Picked on   August 27 at $ 88.50 *triggered  (1/4 normal size)
Change since picked:      + 0.07
Earnings Date           11/05/09 (unconfirmed)
Average Daily Volume =       234 thousand 
Listed on August 22, 2009         


Newmarket Corp. - NEU - close: 83.85 change: -0.80 stop: 79.00

NEU has been consolidating the last few days after hitting new 16-month highs earlier in the week. Volume has been slipping on the pull back, which is what we want to see. I would still consider new positions now but our plan calls for buying the second half of our position at $80.50.

Our first target to take profits is at $88.50. Our second and final target is $92.50. FYI: The Point & Figure chart is bullish with a $116.00 target.

Suggested Options:
We want to trade the September or October calls. Just remember that Septembers expire in three weeks. It could take longer than that to reach our second target.

Annotated Chart:

Picked on   August 24 at $ 84.33 <- buy half now 8/24/09
                    /originally listed at $83.54, gapped higher @ 84.33
Change since picked:      - 0.48

Picked on   August xx at $ xx.xx <-- TRIGGER @ 80.50 for 2nd half
Change since picked:      + 0.00
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       141 thousand 
Listed on August 24, 2009         


Occidental Petrol. - OXY - close: 74.52 change: -0.05 stop: 69.45

Thursday's bounce in oil and the oil sector stalled a bit on Friday. OXY traded sideways. Should OXY dip toward $72.00 again I would use it as another entry point to buy calls. Our first target is $77.00. Our second target is $79.85.

Suggested Options:
I am suggesting readers take advantage of the September, October or November calls. Keep in mind that Septembers expire in three weeks.

Annotated Chart:

Picked on   August 27 at $ 72.00 *triggered         
Change since picked:      + 2.52
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       5.0 million  
Listed on August 26, 2009         


PPG Inds. Inc. - PPG - close: 55.94 change: +0.75 stop: 52.95

Thankfully we did not have to wait very long for PPG to hit our breakout trigger to buy calls at $55.65. Shares rallied again with strong volume on Friday. I would still consider new positions now but more conservative traders might want to wait for a dip back toward $55.00. Our first target is $59.80.

Suggested Options:
I am suggesting the September calls. I prefer the $55 and $60 strikes.

Annotated Chart:

Picked on   August 28 at $ 55.65
Change since picked:      + 0.29
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       1.6 million  
Listed on August 27, 2009         


State Street (Bank) STT - close: 52.98 change: -0.45 stop: varies

Nothing has changed for us with STT. The stock spent last week consolidating sideways with a slight downward trend. The larger trend is still up. I am tempted to lower our buy the dip trigger toward the $50.50-50.00 zone but I'm going to keep it at $52.00. We have two different strategies listed to play STT.

Our aggressive breakout trigger is at $55.60 and we'll use a stop loss at $51.85 (updated stop). Our first target is $59.80. This is an aggressive entry so I'm suggesting smaller position sizes at least 1/2 to 1/4 our normal trade.

We also have a buy the dip entry point at $52.00 with a stop loss at $49.45 (updated stop). Our first target is $55.00. Our second target is $59.80. Currently the Point & Figure chart is bullish with a $62 target.

Suggested Options:
At this point I would use the October or November calls to trade STT.

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER 52.00 or 55.60
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: 37.66 change: -0.06 stop: 34.49 *new*

Thursday's bounce in oil looks like it wants to roll over again. I am raising our trigger to buy calls on the USO from $36.00 to $36.50. Our new stop loss is $34.49 near the rising 100-dma. If triggered our first target to take profits is at $39.95. Really conservative traders may want to use a stop loss just under $36.00.

Suggested Options:
Strikes are available at $1.00 increments. We want to use the Octobers.

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 36.50 
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: 124.21 chg: -1.67 stop: 135.25 *new*

The bounce in FSLR struggled on Friday with shares reversing under their 10-dma. While the trend is down the stock remains oversold and volume has been getting lighter. I am not suggesting new bearish positions at this time. Please note that I am lowering our stop loss to $135.25. FSLR has already hit our first target at $122.50. Our second and final target is $111.00.

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:      -11.67
                               /1st target hit @ 122.50 (-9.8%)
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       3.5 million  
Listed on August 15, 2009         


Marvel Entertainment - MVL - close: 38.65 change: +0.41 stop: 39.05

MVL continues to bounce around the $38-39 zone. Technical indicators are mixed. I am suggesting readers wait for another drop to $37.90 or lower before opening new put positions. Our target is $34.10.

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

Annotated Chart:

Picked on   August 17 at $ 37.90 *triggered         
Change since picked:      + 0.75
Earnings Date           11/04/09 (unconfirmed)
Average Daily Volume =       710 thousand 
Listed on August 10, 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.)

Research In Motion - RIMM - close: 73.83 chg: +0.20 stop: n/a

RIMM has certainly been accommodating. The stock offered us another entry point at the $75.00 level on Friday. Shares spiked to $75.65 and then faded lower. At this point I am narrowing our entry zone to the $74.50-75.50 region. The options suggested were the September $80 calls (RFY-IP) and the September $70 puts (RFY-UN). Our estimated cost was $2.64. We want to sell if either option hits $6.00 or higher.

Suggested Options:
We have three weeks for RIMM to pick a direction and move! Readers may want to consider using October options.

Annotated Chart:

Picked on   August 25 at $ 75.56
Change since picked:      - 1.73
Earnings Date           09/24/09 (confirmed)
Average Daily Volume =      11.7 million  
Listed on August 25, 2009         


Schlumberger - SLB - close: 57.36 change: +0.46 stop: n/a

SLB acts like it wants to go higher. Shares have new support near $55.00 and a cloud of moving averages. I am not suggesting new strangle positions at this time but readers might want to consider directional call plays.

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:
September options expire in three weeks. I'm not suggesting new positions.

Annotated Chart:

Picked on   August 15 at $ 52.00 /gap down entry Aug. 17th
Change since picked:      + 5.36
Earnings Date           10/15/09 (unconfirmed)
Average Daily Volume =       9.2 million  
Listed on August 15, 2009         


CLOSED BULLISH PLAYS

Lorillard Inc. - LO - close: 74.69 change: -1.59 stop: 73.25 *new*

LO has suffered a pretty nasty reversal. We had the big bullish breakout on Monday. LO hit our breakout trigger. Then shares reversed and investors sold it everyday following. LO hit our new stop loss at $73.25 on Friday. There was no news behind the recent weakness.

Chart:

Picked on   August 24 at $ 75.75 *triggered   
Change since picked:      - 2.50<-- stopped out @ 73.25 (-3.3%)
Earnings Date           07/27/09 (confirmed)
Average Daily Volume =       1.5 million  
Listed on August 01, 2009         


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