Option Investor
Newsletter

Daily Newsletter, Saturday, 9/5/2009

Table of Contents

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

Market Wrap

Highest Unemployment In 26 Years

by Jim Brown

Click here to email Jim Brown

The markets shook off the unemployment news and posted a strong rebound but despite two days of decent gains they still finished the week in the red.

Market Statistics

The Non-Farm Payrolls for August showed a loss of 216,000 jobs and slightly better than the -225,000 consensus estimate. The two prior months were revised lower to show a loss of an additional 49,000 jobs. All sectors lost jobs expect for education/healthcare, which added 52,000 jobs and the biggest gain since November. The job losses for August by sector were construction -65K, goods-producing -136K, manufacturing -63K, service-providing -80K and retail -10K.

The big headline was the jump in the unemployment rate to 9.7%, up from 9.4% in July. That is the highest unemployment rate since 1983. Five million workers have been unemployed for more than six-months and 2.4 million have been out of work for more than a year. You can bet that lawmakers will be pushed to provide another extension of unemployment benefits since so many workers are seeing their benefits expire. A record number of men over 45 have lost their jobs and most will require retraining before they can get a job in a new industry. This suggests there will be a drag on the economy for quite a while before the unemployment rate returns to a normal 4.5%.

With unemployment at a 26 year high the employers will benefit from continued lower costs for wages. This will increase profits but reduce spendable income at the wage earner level to purchase those goods. However, the recent ISM reports showed significant increases in orders and production activity and that suggests the hiring patterns should improve soon. Moody's does not expect to see job gains until the second half of 2010. Most economists are not that pessimistic and expect gains as soon as November in some cases or early in the first quarter.

Non-Farm Payroll Chart

The economic calendar for next week is very light with almost nothing of importance in the normal reports. The Fed Beige Book is the only event that may be of interest to the market. Everything else is either a weekly report where surprises are negligible or a lagging report for July. That makes the Treasury auctions for $128 billion in bills, notes and bonds a likely focal point. The auctions will occur on Tue/Wed/Thr but I don't have the breakdown by day.

For the entire week there will be $38 billion in three-year notes, $20 billion in ten-year notes, $12B in thirty-year bonds, $29B in 13-week bills and $29B in 26-week bills. Almost every auction week we are seeing a new record in supply and I can't believe the rates have not moved higher yet. Talk of a double dip recession is growing and that is keeping auction interest high and yields low.

Economic Calendar

It was a low news, low volume Friday. As the last week of summer I was surprised the volume was so high early in the week. Stock news on Friday centered on some happenings in the chip sector and rumors about the Apple event on Sept 9th.

SanDisk (Nasdaq:SNDK) gained ground after Samsung formerly announced it was walking away from a long running attempt to buy SNDK. The company was crushed earlier in the week as rumors of the impending announcement weighed on the stock. When the announcement came it was almost an afterthought and traders expecting a bigger drop became disappointed and covered their shorts.

Rambus (Nasdaq:RMBS) stock price jumped on rumors Samsung was going to switch from the SanDisk play to an offer for Rambus. RMBS stock spiked +11% even after various analysts immediately said it would not happen because Rambus did not fit the Samsung business model. Samsung later responded to the rumor and said it had no interest. Samsung and Rambus have been fighting over patents for years. If Rambus and Samsung did get together it would create antitrust concerns because Samsung is the leader in DRAM chips and Rambus holds many of the patents.

Apple Inc (Nasdaq:AAPL) will hold its media extravaganza on September 9th and this is normally where new products are announced. Apple stock normally demonstrates high volatility around the event and this year should be no exception. The Apple faithful are hoping Steve Jobs will return as the product pitchman and to demonstrate he has conquered the medical problems he had last year. Jobs has not appeared at an Apple event since October 2008. A new iPod line is expected to be announced, possibly with a camera function. There has been a lot of hype over the possibility of a Mac tablet PC but analysts say no. It is always interesting to see what Steve Jobs pulls out of the Apple hat but they are faced now with trying to invent something to outdo the iPod and iPhone and that is going to be a tough job to accomplish. How many truly revolutionary products can one company produce in a handful of years? Expect volatility and a possibly lackluster event.

If there is nothing revolutionary in the announcement AAPL could retest support at $160. Apple is up more than 100% since March and eventually fund managers are going to have to take some profits so they can earn their bonuses. Taking profits in a company like Apple can offset declines and tax losses in other stocks they are holding. As we get closer to the year-end for funds I would be concerned that Apple will be the offset to tax loss selling. It will not mean that investors have fallen out of love for Apple but are simply selling Apple to offset losses elsewhere. Once the wash period is over you can bet they will be right back again as buyers.

Apple Chart

Biogen Idec (Nasdaq:BIIB) said on Friday it has offered $14.50 per share for Facet Biotech (Nasdaq:FACT). Within minutes it criticized the company for entering an agreement with Trubion in late August. Apparently Biogen told Facet in August it wanted to buy the company for $15 per share. When Facet did a drug deal with Trubion a week later it included payments to Trubion of up to $176 million. Biogen said that reduced the value of Facet. Facet shares fell -18% after the deal with Trubion was announced. Evidently Biogen still feels there is value there and Facet shareholders were treated to a +74% spike in Facet shares on Friday. Given the bad blood brewing between companies I would take the money and run before the deal changes again.

Facet Chart - Daily

Chip equipment maker Novellus (Nasdaq:NVLS) raised its guidance on Friday for the current quarter and the rest of the year. The new guidance for Q4 was up to a 35% improvement from prior guidance. Novellus expects to make a profit of 10-20 cents per share in Q4 and up from an estimated loss of 0-9 cents in Q3. The guidance upgrade was responsible for a 3% jump in the stock price.

Tower Semiconductor (Nasdaq:TSEM) also raised guidance for the third quarter. This was unexpected since they just issued guidance on August 12th. The new guidance midpoint is +30% over that August guidance. The CEO said they were seeing increased customer demand across all segments and the expected Q3 revenue would be the highest in the company's history. Since TSEM trades under a buck it makes me wonder if the guidance upgrade so soon after the Aug-12th guidance is not a little fishy.

Baker Hughes (Nyse:BHI) reported that the U.S. rig count rose by another ten rigs last week to 1,009. Of those 701 were drilling for natural gas, 295 for oil and 13 were listed as miscellaneous. A year ago the rig count was 2,013. This marks about 10th week that rigs counts have risen with the majority of the new rigs drilling for gas.

Baker Hughes also announced it was buying BJ Services (Nyse:BJS) for $5.5 billion. I bet that hurts. BJ Services is a previous spin off from Baker Hughes. Guess they were wrong about not needing that asset. Actually, since the spin off BJS has become a specialist in pressure pumping. BHI only does 1% of its revenue in pressure pumping and that will climb to 20% once the acquisition is complete. That allows BHI to better compete with the two giants in the sector, HAL and SLB. It also allows BHI to handle all phases of the service contract and drillers won't have to contract to multiple companies for a service complete package. The acquisition is expected to produce $75 million in cost savings in 2010 and $150 million in 2011 and will add to BHI earnings in 2011. Using the industry multiple for a PE of 12 for that sector the combined companies should be worth about $57 in 2011. That is significantly above the $35.60 close for BHI on Friday. Industry analysts were saying last week that this acquisition could kick off a wave of merger mania in the oil patch. The drop in oil and gas prices is only temporary but it has pushed many companies to multiyear low valuations.

Baker Hughes Chart

(Nyse:BP) announced earlier in the week a "giant" oil discovery in the Gulf of Mexico. Nobody know how "giant" it is because it will take years to prove the discovery with other exploratory wells. The discovery is named Tiber and it is being compared to a previous 3 billion barrel find called Kaskida. It will also take years to produce any oil from this new find. The well was drilled to 35,055 feet in 4,800 feet of water by a Transocean rig. No infrastructure exists in this area and running pipelines would be a challenge. No well has ever been commercially produced from this depth but technology is improving every day. If they can overcome the technology hurdles they could begin production around 2015 but I would not bet on any material flows until later in the decade.

Chevron (Nyse:CVX) has been experiencing serious technological problems at its Knotty Head discovery also in the deep water gulf (34,189 feet total depth) and from the same lower tertiary sands. Chevron suspended activity at the well in 2008 citing technological problems. It is unclear when they will resume and a spokesman for Chevron has repeatedly declined comment. Finding oil at these depths makes big headlines but until they figure out how to produce it the wells remain just a $250 million hole in the ground. Once peak oil arrives and crude prices go back over $150 you can bet that the technological hurdles will be solved. The amount of money they are willing to invest at $68 oil is far less than they will be willing to pay when oil moves over $150.

BP Chart

Natural gas prices rallied +8% on Friday but it was only a technical short covering bounce after falling to a multiyear low at $2.40 overnight. NatGas continued to fall earlier in the week after storage levels hit a 15-year high for early September. The U.S. does not have enough pumping capacity and pipeline capacity to cover peak winter demand cycles. To resolve this gas is produced year round and pumped into storage caverns for easy access when winter demand hits. The reported capacity of the various storage locations is a combined 4.234 trillion cubic feet. However, the highest amount ever recorded for this storage is 3.545 TCF so we really don't know what the actual capacity is. The EIA just released a study claiming that non-coincident peak storage for each location suggests they can handle 3.889 TCF but it is just an estimate. It also does not mean we can ever reach that level because regional storage may fill up in one region while others still have room. The way the pipeline system is built available production in one area may not have access to storage in another.

The peak storage usually occurs at the end of October and then it is a race for producers and storage managers to keep as much gas flowing in as possible while larger amounts are being sucked out to provide heating. To put this in perspective let's assume that current production is 200 BCF per week and assume that winter consumption is 400 BCF per week. That weekly 200BCF shortfall must come from storage.

Why is this important for gas prices? The amount of gas in storage as of last week equaled the peak October levels in all but 4 of the last 15 years. That number is 3.332 TCF. With two months of production to go before the consumption season begins in November that means only 213 BCF can be added to storage before hitting all time highs and beginning to test the limits of that storage capacity. With current weekly injections of around 65 BCF that is less than four weeks before new highs are reached. It also means that once capacity is reached the pipelines could shutdown and producers would have nowhere to send their gas for a month or more. Even if pipelines don't shutdown the rising pressure would mean marginal producers could not inject into the pipelines for lack of input pressure.

Basically storage will reach record levels in about four weeks and that will put further pressure on producers to either curtail production or physically be unable to put gas into the pipeline system. This means earnings for producers who are not hedged could implode as gas prices continue to decline. Ironically analysts are predicting a 7-12% shortage of natural gas in 2011 due to the collapse of drilling activity over the last 18 months. This is why the rig counts have suddenly rebounded over the last ten weeks.

OPEC meets again on September 9th but other than a media circus nothing material is expected to change. With prices hovering near $70 for crude there is going to be another call for restraint and to respect the production limits already in place. OPEC can't win with a production change at this meeting. If they try to cut production they will be blamed for raising global prices. If they relax the quotas prices will fall and they will be cutting their own cash flow. At the same time Russia produced a record high of nearly 10 mbpd in August. Russia is benefiting from the production cuts inside OPEC but is not subject to any OPEC rules. Russia would love for OPEC to cut another 5 mbpd because that would make Russian oil more valuable. I am surprised Russia has not funded a secret terrorist attack on some OPEC fields to drive up prices. As long as prices remain near $70 the OPEC meeting this week will be meaningless.

Despite the holiday weekend the FDIC was still in operation but three more banks were not. The First Bank of Kansas City, Sioux City based Vantus Bank and Illinois based InBank were all closed on Friday. This brings the 2009 total to 87. They were all small banks and the cost to the FDIC fund was around $240 million.

The 8-year anniversary of 9/11 is next Friday. To my knowledge there have not been any increases in the threat level. I got an email on Friday reminding me that steel from the twin towers was melted down and fabricated into the bow of the USS New York. This is a new ship that will be in New York harbor on Nov 1st and commissioned into the US Navy on Nov 9th. The ship is an amphibious transport dock ship for transporting men and equipment anywhere in the world. Governor Pataki requested the Navy revive the name USS New York in honor of the 9/11 victims. Currently state names are reserved for submarines. However, Secretary of the Navy Gordon England approved the request on August 28th, 2002. Interestingly a prior ship to carry the name New York (battleship) had its keel laid on 9/11 1911. Click here for info on USS New York

USS New York LPD 21

After this weekend vacations are over. Institutional traders will come back from the long weekend and start making decisions for year-end. They will decide which losers to drop and which winners to sell to offset those losses. The activity won't take place on Tuesday but it will begin next week and plans put into motion. It could take 30-45 days before we see the results but normally by the middle of October the trades have been made and funds are preparing their portfolios and their profit and loss statements for their October 31st year-end. Stocks held on Oct 31st and returns for the last 12 months are what you see in the annual reports for mutual funds.

This normally coincides with the market weakness in September and the October market bottoms. This year could be materially different. The rebound from the bear market bottom in March has produced 50% gains. However, funds only got those gains from stocks purchased at the bottom. Any stocks they were holding as the implosion began last October they were probably still holding in March. Mutual funds don't go to all cash just because the market is imploding. They are primarily buy and hold funds. Many of those stocks they were holding have rebounded strongly but many others may not have recovered their losses. How each fund will restructure their portfolios is a big question. If they still have some big losers they may have to sell some big winners to compensate.

Complicating this question is the Q3 earnings cycle. Companies are upgrading guidance daily and it appears Q3 earnings could be very strong given the weak comparisons of the Q3-2008 quarter. Are funds going to hold all these stocks with great expectations until after the earnings cycle and then restructure. I would say that possibility is very strong. That means they have to hold the stocks until the third week of October to get the most benefit of the earnings run then pull the plug and reload before month end. This is definitely going to be a stressful period for funds, especially those that have the most leeway in their decisions.

When they come back to work on Tuesday they will be looking at a market that refuses to die. The vast majority of market analysts continue to predict a correction but that correction never comes. We had a great opportunity last week with the decline in the S&P from its closing high of 1031 the prior Friday to 991 on Wednesday. After that 4% slide the markets languished for two days at the flat line as if waiting for the bears to launch their next attack. Sellers never showed and those who were short got tired of waiting and covered their positions in the last hour on Thursday. They had a genuine fear of what might be in the jobs report and decided it was better to go into the report flat rather than hold non performing shorts.

If you read my Tuesday night commentary you know I thought the big decline on Tuesday morning was due to a sell program. Since there was no follow through over the next couple days I am even more convinced that somebody needed to raise cash in a hurry and dumped on the market. I am afraid that funds that do have profitable positions could be trailing stops higher in order to lock in profits and bonuses. If we start to get a few more sell programs like we saw last week those stops will start to kick in.

For next week the S&P is only about 15 points from its 1031 closing high for August and the potential for a breakout still exists. However, the potential for another failed rally and a lower high also exists. September is normally volatile and I expect this one to be even more volatile because of all the conflicting cross currents in the market and the much harder than normal decisions made at the fund level. It is not impossible to have a positive September but the cloud of the past 80 years of history is working against us.

For now the trend is still with us and dip buyers showed up exactly where you would have expected them at 990. Actually I was looking for a retest of 980 but 990 also works on the chart. That gives us a clear exit point for longs if that 990 level breaks next week. Resistance is 1035-1040 and another failure there could be the start of a change in the trend. Once it appears the market has quit moving higher the incentive increases for funds to make changes in order to lock in profits and bonuses.

S&P-500 Chart - 120 Min

S&P-500 Chart - Daily

The Dow chart is identical to the S&P with long-term resistance at 9625. The close on Friday was slightly over the 9422 retracement level but that is still in play. I am concerned that a lack of any bullish follow through on Tuesday could start to form another head and shoulders pattern with the 9422 Fib retracement level as the shoulders. The gains in the Dow stocks were pretty broad based on Friday with no real exceptions. This was a good sign that one or two stocks were not supplying 50% of the gains.

Dow Table

Dow Chart - Daily

Dow Chart - 120 min

The Nasdaq performed as expected last week. Support at 1950 held and resistance at 2015 stalled the Friday afternoon rally. The Nasdaq still scares me because it has been so erratic within its current ranges. With chip stocks upgrading guidance almost daily you would expect the Nasdaq to start showing a trend higher. Unfortunately the only real trend is sideways. 2063 remains the 50% retracement of the bear market losses and should be solid resistance. On August 28th the spike stalled at 2059. I believe the tech stocks are telling us there is a lot of confusion under the surface. Until a trend develops I will remain wary.

Nasdaq Chart - 120 min

The Dow Transports are nearing their closing high for the year at 3774 and a move/close over that level would be very bullish. The transports and the biotech index were the only indexes to post a gain last week. The biotechs were up on merger activity spiking prices. The transports were up on expectations for an economic rebound. The transports typically precede economic growth by 3-6 months. A move/close over 3774 would be a new Dow theory signal suggesting the markets are going higher.

Dow Transports chart

The markets are always volatile at tops and bottoms. Economics are always conflicting and confusing at turning points. Since we are not at a market bottom and economics seem to be getting clearer I would like to believe that market fundamentals are improving. Earnings guidance is improving. Volume is improving. Manufacturing is improving. We are losing jobs at a slower rate. Housing is improving. It all sounds good on the surface.

Unfortunately it is the double dip bears making those points to suggest the economy is about to roll over into a second recessionary dip. They believe everything above is just a knee jerk reaction to the severely oversold conditions of the spring. They point to numerous past examples where a bear market rally off the recession lows produced improved sentiment only to see the entire house of cards collapse again. They believe shrinking consumer credit and the impending commercial real estate loan disaster will take us down again.

I prefer to leave the economics discussions to those more qualified than myself. I believe as long as corporate earnings are increasing and the financial system is not collapsing then the markets will survive and we can avoid the dreaded second dip. But, I also believe that inflation will bring back the 15% decline in value on my house. I don't know whether to root for inflation or be scared of it. (just kidding) I know it won't help for my house to go up 15% in value if my dollars go down 25% in value but that is not the issue today.

September and the markets is the burning question today. I am hoping for the market to win and for September to lose but that may only mean that October will be even worse. If funds holds their breath and their longs into Q3 earnings then I am really loading up on puts for the end of October. We got out of August with a gain when it is historically a losing month. If we are lucky enough to do that again in September I would take my chips off the table for October. I believe the market action next week will weigh heavily on the decision process for thousands of funds and for our sake I hope the direction is higher. I believe next week is the weather vane for September. Whichever way the week ends is probably the direction the month will end.

Jim Brown


Index Wrap

Resilient Market: uptrend Intact

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The technical/chart definition for at least an interim reversal of an uptrend is when the prior downswing low is pierced on a closing basis; this should be more than a 1-day affair also. On that basis the current bullish chart patterns for the S&P and Nasdaq are intact.

There were two hourly Nasdaq 100 (NDX) trading systems that I was studying and wrote about last week as an introductory 'bottom line' commentary to my prior week's Index Wrap. I won't go into the underlying parameters and explanations as this can be found in my last Trader's Corner article (9/1/09) by going to the OIN Home page, clicking on the "Trader's Corner" tap at top and scrolling down.

What I was mining in these hourly chart strategy studies for the nearly 3 past years of history I have currently was an added clue as to any trend reversal that might have been underway and also related to my thinking to do an NDX put trade. I did that trade but took profits on puts and got net long in QQQQ when there was both a second 'buy signal' and then a breakout above a line formation that I've noted on my two 'charts of the week'; i.e., ones I don’t usually feature as part of my ongoing weekly commentaries.

As I don't trade 'mechanically' I took the bullish signal that was generated by the QQQQ RSI Long-Short strategy or 'system' rather than stubbornly staying with the puts I had. The chart formation was the tip off as it usually is for me. Pattern trumps indicators and trading 'systems' for me. Even though I like a 'systems' approach as an objective tool.

The NDX trading system or strategy relies on more of an EXTREME developing in the lower RSI 'oversold' value and that's probably not going to happen in the current bullish climate. Even though my bullish/bearish sentiment has shown a high bullish extreme in recent days and weeks, that is also not uncommon in a strong bullish cycle. Traders can get bullish and then buy every dip for many weeks. In a trading range market we can rely more on the overbought extremes in both the RSI and Sentiment, assuming that the chart pattern also confirms a tradable top.

CHARTS OF THE WEEK:

There was a second buy indication for my QQQQ trade strategy on the 11:30 hourly close for QQQQ on 9/2 (Wed.), as noted at the second green up arrow on the hourly chart below.

For trading systems purposes a buy or short position of 100 shares is indicated for each buy/sell signal in the same direction. After a subsequent confirming chart breakout above the top end of a 17 hour (9/1-9/3) trading range the Q's had a nice run and then mirroring the underlying NDX hourly chart, formed a bull flag which is usually a consolidation pattern about midway in a move. (Flag patterns are relatively short-lived and cover only a few bars typically.)

A further upside breakout above the top end of the flag looks like it will follow and the overall formation suggests a 'minimum' upside objective back up the prior 41.1 QQQQ high.

The slower tracking trading system that 'tested' the best in terms of the NDX index itself is seen in my next hourly chart below. A buy signal on this 'system' is only triggered if the 21-hour NDX RSI gets to a low 'oversold' extreme and then flips up. The RSI in this case as to dip below 31 (versus only '39' in the QQQQ). The NDX test results is based on a data set (history) that is small relative to the best test results for an indicator-based system. As this strategy tested as having even more profitable results than the QQQQ system parameters over my nearly 3 prior years of hourly history I am continuing to evaluate it with interest.

Someone following this system strictly 'mechanically' would have taken 3 put positions in total. There is a problem applying such a system to index options trading in that it doesn't account for the erosion of time premiums and being well out of the money at an expiration(s).

To strictly follow this system with index options would require rolling up to a higher strike on expiration in order to stay positioned in puts and would be an added 'cost' and loss that is hard to measure with the trade system software I'm using currently. I haven't tried to refine this trade strategy to this extent and trade it in real time and am looking at the RSI-related strategy more as another technical input. (The system applied to a position in the QQQQ stock is another story and doesn't have the same drawbacks; e.g., erosion of time premiums, options expiring worthless, etc.)

Bottom line, as with the QQQQ, the NDX hourly chart looks bullish and an upside breakout of the small bull flag suggests a potential further move up to re-test the prior high around 1668.

I will cover the S&P, Dow and RUT in my regular weekly commentaries below.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) remains bullish in its pattern as the recent downswing low at 992 held above the prior 978 swing low. Moreover, by Friday of this past week SPX closed back above its prior line of resistance at 1015.

A next key test on the upside in the upcoming shortened trading week is at the prior rally peak at 1039. A move above 1039 with support on dips at or above 992 will suggest a continued move to new highs, perhaps to 1085 or higher as an objective for a next up leg.

TRADER SENTIMENT:

Bullish, bullish and bullish. Trader sentiment as seen above is not backing off much from the expectation that this market is going still higher. Trader sentiment will eventually be 'too' bullish to be sustained. Somewhere in the September to October period is often a time for a downside correction, sometimes a wicked one.

I don't think much of a pullback is imminent, but a second, or even third, spike in my sentiment indicator into 'extreme bullish' territory will suggest that the market is getting close to a bigger shakeout then the bulls are dreaming of currently. Right now they're in a 'fearless' mode. Eventually the market shakes up everyone's bet on a 'sure thing' trend.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart remains bullish for the same reasons as noted with big brother SPX. The key chart points now to maintain a bullish chart, are for OEX to pierce its prior high at 483 on a closing basis and to hold above its recent low at 462; absent that, to hold above the PRIOR OEX 455 downswing low. A close under 455 would be bearish.

Fairly major support begins in the 443 to 436 area. Major resistance can be anticipated at 500-505 currently.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The chart of the Dow 30 (INDU) is tracking the S&P in its bullish pattern; e.g., an ability to rebound from a higher level than the prior downswing low. The key overhead test is at the prior line of highs in the 9648 area, call it 9650. Fairly major resistance can be expected in the 10000 area.

The key near support is 9250-9255, with fairly major support expected in the 9000 region. Whether INDU, and the S&P indexes for that matter, will get oversold again in the near term is hard to predict. I think we can more safely predict that the indexes will get oversold again in the fall period, but this may be in October. Right now, given the bullish run and bullish chart pattern we're seeing, I'm not paying a lot of attention to the RSI and other overbought/oversold type indicators.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) index has been of course lagging the S&P somewhat for a change. It's not surprising if the indicators are now more positive for an overall economic recovery. The S&P stocks would then get more play and value would be seen there relative to earnings expectations in a recovery scenario.

Support is now assumed to lie in the area of the recent 1958 downswing low, then around 1930, with major support in the 1900 region.

Near resistance is at the prior rally peak at 2059, with my next projected resistance in the 2123 area. Fairly major resistance can be anticipated up around 2250 currently.

Bullish sentiment is high among options traders, making me a bit nervous in staying very heavily in calls, but sentiment will probably stay high unless the prior two lows are pierced.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart remains bullish. I had some caveats about that last week, but the NDX low at 1585 that held ABOVE its prior swing low at 1563, which was followed by a strong rebound and has kept a bullish chart intact.

Upside follow above the recent 1668 high would be a next bullish development. If this occurs, I've noted a next possible resistance up around 1728. Eventually, NDX looks like it may be headed to 1800 in a next up leg, relative to the recent low.

Near support is now assumed to lie at 1585 and below this level, at the prior 1563 downswing low. Only a decisive downside penetration of this prior low would turn the chart bearish and suggest a possible re-test of the 1500 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has of course the same bullish pattern and recent chart action as the underlying NDX index.

Volume is very unimpressive in terms of being quite low on the recent rebound and looks like it was driven significantly by short covering. Be that as it may, the On Balance Volume (OBV) indicator continues to trend higher so I tend to discount the low volume aspects of this most recent rally.

In a regular stock, low volume rallies are somewhat 'suspect' technically and doesn't provide a confirming volume indication for price action.

Near QQQQ resistance: 41.1

Next overhead resistance: 42.5

Near QQQQ support: 39.5

Next support: 38.5

Key next support: 37.25-36.85

RUSSELL 2000 (RUT) DAILY CHART:

If the Nasdaq is struggling some recently, the Russell 2000 (RUT) is as much or bit more so. However, the chart remains bullish in its pattern as the most recent 552 low held above the prior 547 low. Not a LOT of difference but the key thing is that we continue to have higher lows on corrections and maintain that 'stair-step' effect.

I've noted potential next resistance at 580 and then at 590, extending to the 599-600 area.

Key near support is at 552 extending to 547, with next support around 540 in the area of the moving average shown. A close below the 55-day moving average for more than an isolated day tends to suggest some further downside. I assume major support for the low end of the uptrend channel, intersecting around 516 currently, but rising gradually over time to 520 and above.

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

Four New Candidates!

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

CF Industries - CF - close: 85.93 change: +2.58 stop: 82.40

Why We Like It:
Last week we actually dropped CF as a bullish call candidate because we were tired of waiting for the breakout over resistance near $85.00. Well the breakout finally showed up. Shares soared off their Wednesday lows and by Friday afternoon CF was hitting new highs for the year. I'm suggesting readers buy calls on the breakout. If you're the patient type consider waiting for a dip back toward the $85-84 levels and then buy calls. Our first target to take profits is at $92.50. Our second target is $98.00. FYI: The P&F chart has a quadruple-top bullish breakout buy signal with a $99 target.

FYI: Agrium (AGU) is trying to buy CF but CF keeps rejecting the offer calling it too low. At the same time CF is trying to buy Terra Industries (TRA) and TRA keeps rejecting the offer calling it too low. Eventually one of these companies is going to give up or they're finally going to make a big enough offer or somebody else might step in and start bidding. There is a risk that someone bids too much and the market could think they overpaid, which might push the stock lower. This M&A dance has been going on for months and it will probably continue for months so I'm not expecting it to have much short-term impact on the stock. However, it's worth noting that CF recently filed a lawsuit to force TRA to hold their annual shareholder meeting. This way CF can try and vote some members onto the board of directors.

Suggested Options:
I'm suggesting the October calls. Novembers would probably work just as well. 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 OCT 85.00 CF-JQ open interest=1414 current ask $5.00
BUY CALL OCT 90.00 CF-JR open interest= 445 current ask $2.65
BUY CALL OCT 95.00 CF-JS open interest= 555 current ask $1.20

Annotated Chart:

Picked on September 05 at $ 85.93
Change since picked:       + 0.00
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        653 thousand 
Listed on September 05, 2009         


Danaher Corp. - DHR - close: 65.76 change: +1.61 stop: 62.25

Why We Like It:
DHR is also breaking out over significant resistance. I would prefer to wait for a dip back into the $64.00-63.00 region but I don't want DHR to get away from us. Let's open small positions now (1/2 our normal size). If DHR does dip back to $63.50 we'll buy another 1/2. Our first target is $69.00. The Point & Figure chart is bullish with a $77 target.

Suggested Options:
I'm suggesting the October calls.

BUY CALL OCT 65.00 DHR-JM open interest=1800 current ask $2.85
BUY CALL OCT 70.00 DHR-JN open interest=1888 current ask .80

Annotated Chart:

Picked on September 05 at $ 65.76 (buy 1/2 position)
Change since picked:       + 0.00
Earnings Date            10/15/09 (unconfirmed)
Average Daily Volume =        2.4 million  
Listed on September 05, 2009         


Factset Research - FDS - close: 56.70 chg: +0.90 stop: 54.35

Why We Like It:
The sideways consolidation in FDS is coiling more tightly and looks ready to breakout past resistance. I'm suggesting a trigger to buy calls on the breakout at $57.55. We'll use a stop under last week's low. Our first target is $62.00. Our second target is $64.75. The point and figure chart is bullish with a $76 target. Please note that FDS is due to report earnings in late September and we'll plan to exit before the company announces.

Suggested Options:
I'm suggesting the October calls but we'll exit ahead of the September earnings report.

BUY CALL OCT 55.00 FDS-JK open interest= 313 current ask $3.60
BUY CALL OCT 60.00 FDS-JL open interest= 343 current ask $1.35

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 57.55
Change since picked:       + 0.00
Earnings Date            09/22/09 (unconfirmed)
Average Daily Volume =        331 thousand 
Listed on September 05, 2009         


Union Pacific - UNP - close: 62.04 change: +2.01 stop: 59.40

Why We Like It:
The railroads have been showing relative strength. The DJUSRR railroad index has rallied toward its 2009 highs. UNP has followed suit and surged toward its highs for the year. We want to buy the breakout over resistance. I'm suggesting a trigger at $63.00. More aggressive traders may want to jump in early at $62.50. If we are triggered our first target is $69.00. FYI: The P&F chart is currently bullish with an $88 target.

Suggested Options:
I am suggesting the October calls.

BUY CALL OCT 60.00 UNP-JL open interest= 677 current ask $4.00
BUY CALL OCT 65.00 UNP-JM open interest=1835 current ask $1.55
BUY CALL OCT 70.00 UNP-JN open interest= 145 current ask .40

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 63.00
Change since picked:       + 0.00
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on September 05, 2009         



In Play Updates and Reviews

Taking Profits on FSLR

by James Brown

Click here to email James Brown

We're closing the FSLR trade and updating a handful of stop losses on our play list.


CALL Play Updates

Apple Inc. - AAPL - close: 170.31 change: +3.76 stop: 164.00 *new*

AAPL turned in a strong session on Friday. The stock got a boost after an analyst firm raised their price target on AAPL from $170 to $225. Plus rumors are growing about what AAPL might unveil at its annual media event scheduled for this coming Wednesday. Many think the company will release a new model of the iPod or it could be a new tablet PC. The low last week was $164.11 so I'm inching up our stop loss to $164.00. Our first target is $174.00. Our second target is $179.00. FYI: The P&F chart points to a $231 target.

Suggested Options:
More aggressive traders could use September options but they expire in two weeks. I suggest the October calls.

Annotated Chart:

Picked on   August 26 at $166.50 *(small positions 1/2 to 1/4)
Change since picked:      + 3.81
Earnings Date           10/21/09 (unconfirmed)
Average Daily Volume =        14 million  
Listed on August 25, 2009         


Allegheny Tech. - ATI - close: 29.78 change: +0.57 stop: 27.95

ATI continued to bounce but it stalled at its 50-dma. I am suggesting readers buy calls on this bounce. More conservative traders can wait for a new rise above Friday's high (30.33).

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 October calls.

Annotated Chart:

Picked on   August 31 at $ 30.25 *triggered         
Change since picked:      - 0.47
Earnings Date           10/21/09 (unconfirmed)
Average Daily Volume =       2.7 million  
Listed on August 27, 2009         


Compass Minerals - CMP - close: 57.10 chg: +1.52 stop: 52.90 *new*

Shares of CMP continue to surge. The stock gained another 2.7% on Friday setting new eight-week highs. At this point I'd prefer to buy calls on a dip near $55.00-54.00. I'm raising the stop loss to $52.90. Our first target is $59.75. We can tentatively set a second target at $64.00. FYI: The Point & Figure chart has turned bullish with a $69 target.

Suggested Options:
Look for a dip. Use the October calls.

Annotated Chart:

Picked on September 03 at $ 55.55
Change since picked:       + 1.55
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        415 thousand 
Listed on September 02, 2009         


Fedex - FDX - close: 70.86 change: +1.12 stop: 67.25

The transports performed well on Friday with the sector index up 2%. Shares of FDX tried to keep up and closed with a 1.6% gain. The stock hit our trigger to buy calls at $70.55 so the play is open. Our first target to take profits is at $74.75. Our second target to exit is at $79.00. This could take a few weeks to achieve. Thankfully FDX didn't run away from us and I would still consider new bullish positions right here!

Suggested Options:
I am suggesting the October calls.

Annotated Chart:

Picked on September 04 at $ 70.55 *triggered
Change since picked:       + 0.31
Earnings Date            09/17/09 (unconfirmed)
Average Daily Volume =        2.7 million  
Listed on September 03, 2009         


Goldman Sachs - GS - close: 162.97 change: +1.31 stop: 159.00

GS is still bouncing from its lows midweek. Some of the short-term technicals are still bearish. We're waiting to buy calls on a breakout over resistance. Our trigger is at $166.75. If triggered our first target is $179.00. FYI: The Point & Figure chart is bullish with a $228 target. Remember, we want to trade small position sizes.

Suggested Options:
I'm suggesting the October calls. Strikes are available every $5.00.

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         


Genesse & Wyoming - GWR - close: 31.16 change: +0.73 stop: 28.90

The railroad stocks performed well with the DJUSRR index up 2.5%. This sector index rallied right to resistance so it might see a dip on Tuesday. Shares of GWR gained almost 2.4% and looks like it has a lot further to run. I would be tempted to buy this bounce. 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:
I'm suggesting the October calls.

Annotated Chart:

Picked on   August 15 at $ 28.66 /gap down entry
                               /originally listed at $29.30
Change since picked:      + 2.50
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       230 thousand
Listed on August 15, 2009         


Grainger W.W. - GWW - close: 88.82 change: +1.65 stop: 84.75

GWW garnered an upgrade this morning with a new price target of $104. The stock rallied on the news and closed up almost 1.9%. Shares are now testing their four-week trendline of lower highs. If you didn't buy the dip with us at $86.00 I'd wait for a breakout over $90.35 before launching new positions. Our first target is $93.50. Our second target is $97.50.

Suggested Options:
If GWW provides a new entry point we want to buy the October calls.

Annotated Chart:

Picked on September 1 at $ 86.00 *triggered  
Change since picked:      + 1.17
Earnings Date           10/14/09 (unconfirmed)
Average Daily Volume =       635 thousand 
Listed on August 22, 2009         


iShares Financials - IYF - close: 50.21 change: +0.32 stop: 44.90

The rebound in the IYF the last two days was kind of anemic. I'm not ready to buy the bounce yet so we'll keep the buy-the-dip strategy open with a trigger at $47.00. If triggered our first target is $51.50. Our second target is $54.50.

Suggested Options:
If the IYF hits our trigger we want to buy the October or November calls.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 47.00
Change since picked:       + 0.00
Earnings Date            00/00/00
Average Daily Volume =        5.1 million  
Listed on September 01, 2009         


Legg Mason - LM - close: 27.48 change: +0.04 stop: 26.25 *new*

The rebound in LM has been kind of weak. It looks like an entry point with LM bouncing from the bottom of its bullish channel yet bullish traders should be a little concerned. The low last week was $26.28 near its 50-dma and the rising trendline of support. I am raising our stop loss to $26.25. I'd rather wait for a new rise past $28.25 or $29.25 depending on your risk tolerance as our next entry point to buy calls. If it looks like LM is going to roll over under $28.00 more nimble traders may want to bail out early. The plan was to use small position sizes.

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 we want to trade the October calls.

Annotated Chart:

Picked on   August 28 at $ 29.50 *triggered               
Change since picked:      - 2.02
Earnings Date           07/20/09 (confirmed)
Average Daily Volume =       3.4 million  
Listed on  July 25, 2009         


Mettler Toledo - MTD - close: 86.82 change: +0.09 stop: 84.99

MTD is trying to bounce and found support at its 30-dma last week. Yet the rebound was under whelming. I'd wait for a little more confirmation before buying calls on the bounce. Or readers can still wait for a new relative high. Keep in mind that the $90.00 level could be round-number resistance and is the top of the October 2008 gap down. 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:
If MTD confirms the bounce we want to trade the October calls.

Annotated Chart:

Picked on   August 27 at $ 88.50 *triggered  (1/4 normal size)
Change since picked:      - 1.68
Earnings Date           11/05/09 (unconfirmed)
Average Daily Volume =       234 thousand 
Listed on August 22, 2009         


Newmarket Corp. - NEU - close: 83.77 change: +0.82 stop: 79.00

So far so good. NEU continues to follow our script with a bounce from support near $80.00. I'd still be tempted to chase this bounce but more conservative traders may want to up their stop loss closer to $80.00.

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 October calls (or Decembers since they have more open interest). I'd use the $80s, 85s or 90s.

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:      - 0.56

Picked on September 1 at $ 80.50 *triggered 2nd half
Change since picked:      + 3.27
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       141 thousand 
Listed on August 24, 2009         


Occidental Petrol. - OXY - close: 72.73 change: +0.74 stop: 69.45

The rebound in OXY was kind of weak. More aggressive traders may want to go ahead and launch new positions here. A better entry point is a bounce from the $70.00 level. If you look at an intraday chart the $74.00 level might be short-term resistance. Our first target is $77.00. Our second target is $79.85.

Suggested Options:
We want to trade the October calls.

Annotated Chart:

Picked on   August 27 at $ 72.00 *triggered         
Change since picked:      + 0.73
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       5.0 million  
Listed on August 26, 2009         


PPG Inds. Inc. - PPG - close: 54.89 change: +0.78 stop: 52.95

PPG has continued to find support with a short-term trendline of higher lows. I'd consider new bullish positions on a move over $55.00. More conservative traders may want to consider a tighter stop near $53.25. Our first target is $59.80.

Suggested Options:
We want to trade the October or November calls.

Annotated Chart:

Picked on   August 28 at $ 55.65
Change since picked:      - 0.76
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       1.6 million  
Listed on August 27, 2009         


State Street (Bank) STT - close: 51.72 change: +0.91 stop: 49.45

STT tested support near $50 and its rising 50-dma. The bounce looks like a new entry point but more conservative traders may want to wait for a rise back over the 52.00-52.25 zone before launching new positions.

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:
Aggressive traders could use September calls, which expire in two weeks. I'm suggesting October or November calls.

Annotated Chart:

Picked on   August 31 at $ 52.00 
Change since picked:      - 0.28
Earnings Date           10/13/09 (unconfirmed)
Average Daily Volume =       5.3 million  
Listed on August 19, 2009         


United Health - UNH - close: 28.88 change: +0.01 stop: 27.49

Congress comes back from their August recess this week. If it appears that the government option for healthcare is dead then the healthcare names should rally. Our plan is to buy calls on UNH 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.

FYI: If you prefer a neutral strategy consider some sort of straddle or strangle on UNH. That way you don't care what direction this stock moves.

Suggested Options:
We want to buy the October or December calls. Trigger @ 30.55.

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         


U.S. Oil Fund - USO - close: 35.13 change: -0.19 stop: 34.49

The dollar is drifting lower and yet oil is having a hard time bouncing. The USO has spent the last three days testing support near its rising 100-dma and the longer-term trendline of support (see chart). I'm still tempted to buy calls on this dip but readers may want to wait for a new bounce over $36.00 before launching positions. Our first target to take profits is at $39.95.

Suggested Options:
We want to buy the October or January 2010 calls.

Annotated Chart:

Picked on   August 31 at $ 36.50 
Change since picked:      - 1.37
Earnings Date           00/00/00
Average Daily Volume =      11.5 million  
Listed on August 15, 2009         


PUT Play Updates

Apollo Group - APOL - close: 65.57 chg: -0.31 stop: 66.55

I heard some positive comments for APOL today. The analyst was arguing that companies like APOL, DV, and ESI were seeing an increase in students as unemployed workers go back to school. That's possible but shares of APOL aren't showing it. Shares have developed a bearish posture over the last several weeks.

However, if the market rallies from here we can expect APOL to participate albeit reluctantly. I'd wait for a new drop under $64.00 or a new relative low before launching new bearish positions. Our first target to take profits is $57.50. Currently the Point & Figure chart is bearish with a $56 target.

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

Annotated Chart:

Picked on September 01 at $ 63.63 
Change since picked:       + 2.25
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        1.9 million  
Listed on September 01, 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: 77.55 chg: +1.57 stop: n/a

RIMM continues to show strength and is now breaking out over its three-month trendline of lower highs. We only have two weeks left before September options expire. I'm not suggesting new positions at this time.

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:
No new positions at this time.

Annotated Chart:

Picked on   August 25 at $ 75.56
Change since picked:      + 1.99
Earnings Date           09/24/09 (confirmed)
Average Daily Volume =      11.7 million  
Listed on August 25, 2009         


Schlumberger - SLB - close: 55.87 change: +1.45 stop: n/a

SLB is bouncing from support near $54 and its 100-dma. Shares look ready to run higher. Readers may want to consider short-term directional call positions. I'm not suggesting new strangle positions.

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:      + 3.87
Earnings Date           10/15/09 (unconfirmed)
Average Daily Volume =       9.2 million  
Listed on August 15, 2009         


CLOSED BEARISH PLAYS

First Solar - FSLR - close: 121.47 chg: +1.53 stop: 131.00

I'm suggesting we call the game early on FSLR. With a bullish market bias and what looks like a short-term bottom forming for FSLR (or at least a set up for a stronger oversold bounce) we want to exit now. Bears could argue that volume has been very light on the bounce and they're right but I'd rather exit now and we can reconsider new positions if FSLR fails at $130 again.

Chart:

Picked on   August 17 at $135.88 *triggered/gap down entry
Change since picked:      -14.41 <-exit early @ 121.47 (-10.6%)
                               /1st target hit @ 122.50 (-9.8%)
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       3.5 million  
Listed on August 15, 2009