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Daily Newsletter, Saturday, 9/12/2009

Table of Contents

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

Market Wrap

FedEx Delivers

by Jim Brown

Click here to email Jim Brown

Traders tried hard to stretch the positive streak to six gains in a row but came up a little short. We are nearly half way through September and markets are setting new highs. Bears are completely confused.

Market Statistics

The economic calendar for Friday was light with September Consumer Sentiment the only major report. The headline number rose nearly 5 points to 70.2 from 65.7 in August. Both internal components posted gains. The present conditions component rose to 71.8 from 66.6 and the expectations component rose to 69.2 from 65.0. This was a very strong improvement in consumer sentiment and suggests the fear that gripped consumers in July/Aug has passed.

Some analysts claim that fear was worries that the health care reform plan was going to strip consumers of their current insurance and reduce the amount of care available. That fear has subsided due to recent events on the political front. There was also fear the economy might dip again into a W recession and the accompanying additional loss of jobs. That fear has also passed as each economic report shows improvement and payroll reports are less dire. Of course the stock market is also a prime component to consumer sentiment. It is the ultimate indicator of economic health for the average consumer. In their mind if the Dow is up routinely then the economy must be getting better.

Continuing to weigh on sentiment are the low home prices, increasing foreclosure rates and the reductions in their available credit card debt. There is also the prospect of reduced raises and lower end of year bonuses. Consumers are forgiving or maybe I should say forgetting. As time passes and daily life continues they will eventually forget the prosperous times during the housing boom and will begin living in the present. Once the non-farm payroll reports go positive we should see a large jump in sentiment.

Consumer Sentiment Chart

Another Friday report was Import & Export prices, which came in at +2.0%, +0.4% if you exclude oil prices. This suggests deflation pressures are still in check. Wholesale Trade fell -1.4% for July after a -2.1% decline in June. Inventories continued to decline and that means the eventual replenishment cycle will be strong once it arrives.

The calendar for next week includes the PPI and CPI reports, which will give analysts a clue about current inflation pressures. Industrial production on Wednesday is expected to show another minor gain of +0.5%. The Philly Fed Survey on Thursday is the first of the monthly manufacturing reports for the September period. This is probably the most important report for the week. However, that assumes there is no sudden uptick in inflation pressures in the PPI/CPI.

Economic Calendar

Friday started with a lot of upgrades and improved guidance announcements. The biggest was FedEx (FDX), which reported earnings of 58-cents and well above the 30-45 cent range they predicted back in June. They also raised their guidance for the current quarter to 65-95 cents per share. FedEx said better than expected international priority volume, strict cost management and solid execution led to the unexpected gains. I suspect it was more of an "under promise, over deliver" event than a real uptick in volume. Back in the May/June timeframe there was still a lot of worry about the economy. We had not seen any real improvement and corporations were being overly cautious about their outlooks. FedEx said back then that the quarter was expected to be "extremely difficult" so they were definitely guiding lower. Their guidance upgrade on Friday suggests the global economy is picking up speed. This helped power gains in FDX of +4.68 and UPS +2.50.

FedEx Chart

Chip companies have been in rally mode with company after company upgrading guidance and saying orders were increasing. On Friday Jeffries upgraded ASM Lithography Systems (ASML) to a buy from hold on stronger orders. The good news continued with an upgrade to Intel (INTC) by Roth Capital to a buy from hold and an upgrade to buy on Marvell Technology (MRVL).

National Semi (NSM) beat the street with earnings of 13-cents vs estimates of 7-cents and issued stronger guidance and predicted sales would rise between 5% to 8% for the quarter and see gross margins back over 60%. This followed a similar boost in guidance by Texas Instruments (TXN) Wednesday night.

Despite all the good news the Semiconductor Index lost ground as traders took profits from a monster chip rally over the last week. The selling was muted with only a -4 point drop after a +30 point gain since the prior Thursday. This was not a sell off but just some light profit taking.

Goldman Sachs was on an upgrade binge as well and upgraded Progressive (PGR) to a buy from sell. At the same time they cut Allstate (ALL) to a sell from neutral. Goldman said Progressive was best leveraged to the changing consumer trends while Allstate was at continued risk of market share losses in auto insurance. Also in the insurance sector Prudential (PRU) was upgraded by Morgan Stanley (MS) with a price target of $58.

AIG continues to get the most downgrades with a Wells Fargo analyst cutting them to an underperform saying recent trading gains have been a mystery. Wells says AIG has "virtually no tangible book value" which basically means the shares are worthless.

Colgate (CL) was upgraded by Goldman to a buy with an $85 price target. Goldman said earnings estimates were not pricing in new marketing and rising gross margins. Meanwhile Clorox (CLX) was downgraded to neutral by Goldman saying rising costs could limit upside potential.

Schlumberger (SLB) was upgraded by Goldman to a buy saying the company would benefit from the eventual increase in energy spending.

Goldman was upgraded by Citigroup saying the company should benefit from the growing strength in the capital markets and the improving deal pipeline. Citi gave Goldman a buy rating and raised the price target from $175 to $215.

Steel Dynamics (STLD) got a buy rating from Citi and a price target of $22 on rising business metrics. US Steel (X) also got a boost from Morgan Stanley on higher profits.

With analysts strongly in upgrade mode you would have thought the markets could have shaken off that bout of minor profit taking but it was not meant to be. I do expect that the current upgrade cycle will continue to provide market support on any pullback.

Motorola (MOT), remember them? They had one of the most successful cell phone models of all time in the Razor. That phone was left in the dustbin of history when the current generation of smart phones prompted a wave of upgrades to iPhones and various versions of the CrackBerry. Motorola announced another new phone on Friday called the Cliq. The phones claim to fame is auto aggregation of data from all of your social networking sites like Facebook, Twitter, MySpace, etc. It sounds to me like it will be marketed to the Hannah Montana crowd but analysts seem to like the announcement and MOT saw a +9% jump on various analyst upgrades. I doubt I will be ordering one.

I may order one of these instead. The U.S. has been forbidden to sell the high technology F-22 Raptor stealth fighter since 1998 because it was too good to allow anyone else to own it. A law was passed in 1998 to keep the technology from being shared with our allies. The F-22 program was in danger because the U.S. decided at the current 187-plane inventory level it did not need any more and it had terminated existing plans for a total of 750 planes. The Senate appropriations committee passed a new defense spending bill on Friday in 15 minutes with no dissenting votes and no debate. Must have been a lot of pork in that bill. The bill also killed a new search and rescue helicopter, a presidential chopper and a new missile defense interceptor. The committee now wants to allow sales of the F-22 to other countries to save 2000 jobs in America. I think that is a good idea. We can spend billions of dollars creating technology that is light years ahead of everyone else in order to protect ourselves. Then we sell it to everyone else and bring them up to our level. Then we have to spend additional years and billions to come up with some newer technology to defeat the technology we sold everyone else. Am I the only one that sees the flaw in this logic? We are in a highly expensive never ending weapons race with ourselves.

F-22 Raptor

Gold prices rose again to close just over $1005 and the level that has been strong resistance for the last 18 months. Gold is rising due to higher demand, lower sales from central banks and because of the falling dollar. As a dollar denominated commodity it has a direct dependence on the value of the U.S. dollar.

The dollar index fell again on Friday to close at 76.60 and a new 52-week low. The worries over the growing U.S. deficit and the amount of debt created to bail out the financial system is reducing the value of the dollar at a rapid rate. If you have any doubts at all on the price of gold being linked to the value of the dollar then look at the line chart below. That compares both in the same chart. Since the dollar is not likely to get well soon this suggests gold could finally break over that $1005 barrier.

Chart of Gold

Chart of the Dollar Index

Comparison Chart Gold & Dollar

Oil and natural gas were extremely volatile last week. Gas prices traded as low as $2.41 on the 4th and a level not seen since 2001. This prompted a lot of technical trading and some buying in the futures. Since most companies can't produce it for less than $2.40 a sustained price at that level would cause production halts in thousands of wells where the production was not protected by hedges.

There was a rebound to $3 by Wednesday before another sell off began. Something hit the market early Thursday that caused a massive amount of short covering and a +16% rally in gas prices to just over $3.40. That is a +41% spike from low to high in one week. Nobody knows for sure what happened but the spike in the futures was dramatic. The drop again on Friday was almost as dramatic with the close at $2.96. The dramatic part of Friday's drop was the 198,021 contracts traded on a down day. That is nearly twice the daily average and nearly twice the volume of Thursday's spike.

I suspect this is all related to the CFTC's efforts to curb the position sizes of the energy ETFs. The natural gas ETF (UNG) ceased issuing new shares on August 12th because of pending changes in regulatory requirements. They have permission to issue as much as 1 billion new shares but fears over CFTC position limits kept them on the sidelines. The fund has been trading at a premium to its net asset value, sometimes as much as 20%, since the announcement. Short sellers have been pounding the nat gas futures in anticipation of a position limit requirement that would force the UNG to divest itself of a large number of contracts.

Rumors started surfacing this week that the CFTC was moving away from position limits in their discussions. This caused some short sellers to exit the trade and gas prices rose slightly early in the week. On Thursday it was rumored that the UNG was going to start issuing shares again. I believe the sharp spike in the gas futures was shorts running for cover since a new share issuance would mean the position limit scare was over. It appears the rumors were true because on Friday the UNG announced it was going to start issuing new shares again under "limited circumstances" on Sept 28th. It would appear the crisis was over EXCEPT that the statement said they may condition the sale of new shares of the funds ability to hedge its position in the futures markets and they put off the date to Sept 28th. That means the fund is still not clear of the position limit problem and they may be trying to put pressure on the CFTC to make a decision by Sept 28th. The fund said they would attempt to hedge their position with alternative instruments like swaps. Shorts immediately piled into the futures again thinking the position limit trade was back on again.

People email me on the energy ETFs nearly every day. What ETF should I buy? First, I can't answer that in an email because of SEC rules governing individual advice. Second, I would be skeptical of any energy ETFs until the CFTC issues a final determination. Third, I believe the leveraged ETFs are dead. Since it takes a $1.0 billion futures position to produce a 2x leverage for a $500 million ETF it no longer makes sense for fund managers to fight the CFTC for a product that has a higher risk. Lastly the leveraged ETFs have been proven to have a high beta on a 2-3 day positions but a very low beta over long term holds.

Every single leveraged commodity ETF performed worse overall than a 1x1 ETF over the last 12 months. The options, swaps and futures positions necessary to replicate a 2x or 3x multiplier of the underlying positions produces a drag on the ETF over time. Options expire, premium decays and markets don't move in a straight line. Today I am not recommending ANY energy ETF based on the actual commodity. I would try to get exposure to the price of oil/gas by investing in a sector ETF like the XLE, VDE, IYE, IGE, XES, XOP or IXC. If you check the charts of those 1:1 ETFs and compare them with a chart of DIG you will see that the double leveraged DIG has performed worse than any of the other ETFs.

A better way to play the specific price of oil and gas today is with the individual stocks. With nat gas so badly beaten up the shares of a gas stock like CHK or APA have far more upside when the tide does turn. I reported last week that the rig count was rising and mostly in gas rigs. Analysts claim there will be an 8% to 12% shortage of gas in 2012 so drilling activity needs to pickup fast to capture the coming rise in prices. Those prices will not likely rise any time soon since the gas in storage is going to break a record sometime in the next 8 weeks. The chart below shows the yearly storage cycles and the peaks are at the end of each October. We are nearly at the prior peak and 2007 record high and it is still early September. It is tough to justify a rise in gas prices until after the peak passes and we get into the winter consumption season.


Oil prices rallied throughout the week only to collapse on Friday for no specific reason. OPEC kept the production at current levels when they met this week but nobody expected them to make any changes. The IEA raised their estimates of global demand by 500,000 bpd for 2009 and 2010 but those numbers change monthly so that should not have been a factor. Hurricane Fred did weaken but it is so far away and the track so erratic that nobody is really trading on Fred yet. Nobody knows why oil prices dropped on Friday but I believe the long-term trend is still up. Support at $68 should hold but you never know what forces will show up on any trading day to push the price around. Resistance remains at $75.

Crude Oil Chart

Three more banks bit the dust on Friday. Regulators closed the Chicago based Corus Bank with $7 billion in assets. In Minnesota the Brickwell Community Bank was closed and the Venture Bank of Lacy Washington was closed. Venture had 18 branches. The FDIC said the three closings would cost the FDIC fund $2 billion. This brings the total to 92 banks closed in 2009.

You can't tell me the market makers don't have control over the market. On Sept 10th, 2001 the Dow closed at 9605.51. On Friday, the 8th anniversary of 9/11 the Dow closed at 9605.41. The Dow traded all over the map on Friday with an opening high of 9649 and afternoon low of 9571. The market makers had to drag it back from that low to close it at 9605. Volume was low and internals about dead even between advancers and decliners so it was probably an easier task than one might think. CNBC hyped that 9605 9/10/01 close all day and then acted surprised when the market makers matched it on 9/11/09.

The minor 22-point loss for the Dow on Friday was not material. Given the +165 point rebound for the week this was just a short breather for the markets. The Dow is the only major index that has not broken over current resistance. That level is 9625 on the Dow and dates back to last November. The Dow traded over that level intraday but profit taking brought it back neutral territory. I view this as bullish.

There is a real conflict in progress under the surface of this market. Every major analyst is still expecting a pullback or even a serious correction. TrimTabs said last week that insider selling was at the highest level since May 2008. For every insider buying there were 30.6 insiders selling their stock. This suggests that the economic rebound is going to fail if that many insiders are seeing problems in the future. At least that is the TrimTabs take on the data. There is another view. I believe those insiders need cash and those shares are the only asset they have left. Home values are underwater and credit lines are being cut off and bonuses slashed. Even if they knew the stocks were going to double over the next year many of those insiders would still have to sell to pay the bills.

This makes the continued rally last week even more important. The market is moving higher despite the constant caution by analysts that the market is going to correct. This forces those who have moved to cash to rethink their position and to come back into the market and push prices higher. Eventually we will get a correction but funds are aggressively buying the dips and brokerage analysts are upgrading expectations for any stock with a pulse. It is a classic denial rally.

If we do see a pullback the initial support on the Dow is 9500 followed by 9300. Once over resistance at 9625 the next material resistance is 10,318 with a pause at 10,000 for psychological reevaluation. I know that sure sounds like wishful thinking but that is what the charts are showing.

Dow Chart - Weekly

The S&P closed down a little over a point at 1042 and clearly in breakout mode. Resistance from last week at 1035 was broken and the last October high at 1044 is the last thread of resistance before the S&P is in blue-sky mode. The S&P may have finished negative on Friday but it held on to the +50 point gain since the prior week's lows. It was Friday after a big run. We could have easily given back 10-20 points but we didn't. This is bullish and a breakout here should draw some cash back into the market next week. Support is 1020-1030 followed way below at 995.

SPX Chart

The Nasdaq has been a reason for worry until last week. The Nasdaq has broken out over the 50% retracement level at 2063 and broken out of its month long trading range. The chip stocks led the charge higher but there was plenty of help from the other sectors. Support should be 2040 on any serious profit taking. Resistance at 2160 should be the next target.

Nasdaq Chart

The good news from FedEx helped power the Dow Transports well over current resistance and the next target should be 4220. A breakout by the transports is a confirmation to a Dow rally.

Dow Transport Chart

Russell Chart

Notable from last week was the flat line in the financial stocks. They have been the backbone of the market for weeks and they quit going higher on August 24th. The rebound out of last week's dip was lackluster compared to the rest of the market. This is a critical point suggesting the market support is broadening out and that is a bullish sign. Techs and industrials are taking the lead while financials are taking a breather. Eventually they will return once Meredith Whitney quits beating up on them in print.

BKX Chart

We need to watch out for a bull trap next week. That is defined as a spike to a new high in the morning and a collapse at the close to below the prior day's low.

I would continue to buy the dip until proven wrong. A market in breakout mode contrary to normal historical cycles could go a long way. This may really turn into a September to remember.

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Jim Brown


Index Wrap

Bull Market Rolls On

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Nasdaq Composite (COMP) and the Nas 100 (NDX) achieved decisive upside penetrations of their prior highs; the S&P 500 (SPX) did manage to nudge above its prior high also. Technical considerations also point to increasing risk of a correction. I'm not suggesting this points to a downside reversal, as we've yet to see even a minor one. Technically, a correction isn't really much to consider until a prior downswing low is pierced.

As a cautionary note, on a longer term weekly chart basis, COMP is as overbought as it was at its October-November 2007 highs as can be perused on my first chart. The primary significance to a trader of an 'overbought' situation is that the more extreme such indicators it tends toward a greater probability of a sharp reaction to bearish news after the bulls have all bought into the most recent up leg.

That said, the most recent week was again an impressive advance and the bulls are as happy as the bears are grumpy. Yes, there are still bears out there! Ones who are economic fundamentalists and can't accept that a still lousy economy could have such a resurgent market. Nothing personal folks, it's just that the market is perverse that way and lives in future hopes on the Street of Dreams.

Speaking of the Street, I pause to remember many of my lovely former Cantor Fitzgerald colleagues who were downed on 9/11/01. I could have been in that rubble pile too were it not for the fact that I was still off finishing my (Essential Technical Analysis) book. I was at the first NYC remembrance ceremony and the second and will go back for the 10th. Their memory still burns bright in me!

CHART OF THE WEEK:

There's not a lot to say about this first chart. It mainly serves as a reminder that if I keep on buying calls, there is increasing risk of a down to this up. And, COMP is now just passing the 50% retracement of its last major downswing and which is about as far as a 'normal' correction gets in terms of a retracement. Once it crosses above a 62-66% retracement however, it would then look more like the index was on the way to making a round trip back to the prior high (in the low-2800 area).

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is on track to possibly tacking on another rally that would carry up toward where I see the main current technical resistance in the 1100-1150 area.

The chart will maintain its most bullish pattern if it can continue to hold above its prior high in the 1039 area. The next most bullish indication will be to maintain closes above the 21-day moving average, currently at 1016. A close below the prior (down) swing low at 992 that was more than a single day affair would be a bearish note. Key near-term chart support levels are at 992, then at 978.

It's hard to peg 'resistance' when an index or stock is at a new high for a move. I've noted a potential rising line of resistance at the previously broken up trendline as can be seen on the chart and which intersects currently at 1102 at the red down arrow.

COMP is also registering an overbought extreme again in terms of the RSI. This doesn't always mean much in an strong bullish trend except that its common to see more back and forth trading swings when an index or stock is at such extremes and is evident in the chart below.

TRADER SENTIMENT:

Trader sentiment is not at quite the same bullish extremes as we were seeing in late-August and earlier in September. As we've seen more back and forth trading swings, options traders who want to buy calls hoping for another sustained advance, don't have quite the same enthusiasm to buy calls. I'd rate bullish sentiment as 'high' but not at an extreme.

Coupled with an overbought RSI on a 2-week and 13-week basis, I'd rate buying more index calls as relatively high risk; i.e., the risk of a 30-50 point downswing is probably equal to a further 30-50 point advance (from the 1050 area). This versus a favorable risk to reward ratio where there's a 30-40 point upside potential versus a 10-15 point pullback risk.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index hasn't yet broken out to new highs on a closing daily chart basis. The chart is bullish overall but we have to recognize the possibility of a double top if OEX doesn't climb above 483-485 on a closing basis. When I (often) use the term a 'decisive' upside or downside breakout I mean one that clears a prior high by more than a hair's breadth and then keeps going. Moreover, subsequent pullbacks then find support/buying interest in the area of the prior highs; i.e., prior resistance 'becoming' new support.

Key very near-term resistance is at 483-485; with next resistance in the 500 area. Technical resistance implied by the previously broken up trendline intersects currently in the 513 area.

Support should be found in the 472 area, then at 462. If 462 was pierced, then next support has to assumed at the next (lower) swing bottom around 455.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The chart of the Dow 30 (INDU) looks identical to the S&P 100 in that the Average here hasn't yet achieved a decisive upside penetration of its prior high in the 9648 area. If such a move is upcoming, then next resistance is also hard to identify short of what will likely be major resistance in the 10000 area.

Near support is in the 9430 area, then is assumed to lie at the prior 9253 low. Next support is in the low-9100 area.

Based on the individual Dow stocks and it's instructive to look at all 30 individual stock charts, there are at least half in strong up trends, a handful under pressure (e.g., 5) and 10 that are in more or less neutral sideways trends. There's enough strength in the 30 Dow stocks on balance to propel INDU up toward that magic 10000 area in the coming month.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) index has achieved another bullish upside breakout above its prior rally peak. I've noted potential near resistance around 2100 and then at 2160. There's potential for a next advance to the 2300 area.

On the downside, look for very near-term support in the 2060 area, then at 2010-2000, with next key support in the area of the prior 1958 low.

The RSI is showing an overbought extreme again. This knowledge and a subway token will get you on the NYC subways! In seriousness it’s a factor to keep in mind, even when it's the 2nd or 3rd time an index or stock has registered such a reading. The more times any index like COMP reaches an overbought extreme the greater risk that this instance might preface a deeper correction. I feel a little like the boy who cried wolf too much to even point this out as something to be concerned about.

Bullish sentiment is high among options traders, but again nothing we haven't seen and may have more to do with the potential put buyers having been burnt too much and staying out rather than a rabid rush into more and more index call positions; and, where portfolio 'insurance' (hedging) doesn't seem so necessary.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart has a renewed bullish pattern with its decisive upside penetration of its prior high. I've noted possible next resistance around 1700, then up at 1760. There's potential up to 1800-1825 as a next objective.

It's also hard to figure there will be another 100 point move higher straight away given another near-term overbought market but the charts look good. Price action is king in terms of indicator considerations. You may notice however, that the rallies have been coming after the RSI backed off to a more 'neutral' reading; e.g., 50-45 in terms of the 13-day RSI.

Near support is now assumed to be at 1668 or so, at the prior high, than down in the 1638 to 1628 area. Pivotal support then lies in the area of the prior 1585 (down) swing low.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has the same bullish pattern as the underlying NDX index with its move above its prior 41.1 rally peak. Volume continues to be relatively low compared to what is happening with the move to ever higher highs.

I noted last time that "In a regular stock, low volume rallies are somewhat 'suspect' technically and doesn't provide a confirming volume indication for price action." However, the On Balance Volume (OBV) line has been moving up at an equivalent rate (to prices) and OBV seems to be the key Volume indicator with QQQQ. It's not like an individual stock in some key ways given that it reflects a 100 share index.

Near QQQQ resistance: 42.0

Next overhead resistance: 43-43.25

Major resistance: 44.5-45.0

Near QQQQ support: 41.1

Next support: 40.4-40.1

Pivotal next support: 39.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) tracked along in the same bullish pattern as the Nasdaq, given its breakout above its prior 590 price peak. Next technical resistance around 600-605 may be a little tougher for RUT as coming in at the top end of its broad uptrend channel.

The upper channel line may offer an area of rising resistance and mark a slowing of the recent strong advance. That's a common way these upper channel lines play out. In the case of a decisive upside penetration of the 600-605 area, that would suggest a renewed bullish surge higher.

Near support is now assumed to lie at the recent 'breakout' point (the prior high) in the 590 area. Next support is in the 557-552 area and then slightly lower, around 547.

GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.


New Option Plays

Oil Services, Multi-Industry, & Technical Instruments

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Diamond Offshore - DO - close: 93.66 change: -0.83 stop: 87.75

Why We Like It:
The oil service stocks tend to be more volatile than the rest of the oil sector. That also means they offer a lot of opportunity. DO looks like a candidate for calls. Shares have been showing relative strength. The stock broke out to new 2009 highs on Friday morning, which has produced a major bullish buy signal on its Point & Figure chart. Meanwhile the OSX oil services index is nearing resistance at its June highs. The OIH oil service holds still has a bit further to go before reaching its June highs.

Is DO leading the sector higher ahead of an industry breakout? Or will the sector indices roll over and drag DO down with them? We can't know and that's why I'm suggesting small positions at least 1/2 to 1/4 your normal trade. I'm also listing two different entry points.

If DO breaks higher from here we want to buy calls at $96.00. If DO dips then we want to buy calls at $90.25. I'm listing our stop loss under the longer-term trendline of higher lows. We will take some money off the table at $99.90 (1st target). Our second target is $104.50. More aggressive traders can aim for $110. The P&F chart is forecasting a $114 target.

Suggested Options:
Our time frame is four or five weeks. I'm suggesting the October calls. My preference would be the $95s or $100s depending on our entry point.

BUY CALL OCT 90.00 DO-JA open interest=725  current ask $6.40
BUY CALL OCT 95.00 DO-JB open interest=474  current ask $3.60
BUY CALL OCT 100.0 DO-JC open interest=454  current ask $1.80

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 96.00 or $90.25
Change since picked:       + 0.00
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        1.8 million  
Listed on September 12, 2009         


SPX Corp. - SPW - close: 63.52 change: +2.07 stop: 57.25

Why We Like It:
SPW is a multi-industry company that has exploded higher after a four-week consolidation phase. The breakout higher looks significant and the P&F chart points to a $70 target. I am suggesting traders buy calls on a dip at $60.50. If triggered our first target is $64.00. Our second target is $67.50.

Suggested Options:
Our time frame is about four weeks. I'm suggesting the October calls. My preference would be the 60s or 65s.

BUY CALL OCT 60.00 SPW-JL open interest=425  current ask $5.10
BUY CALL OCT 65.00 SPW-JM open interest=464  current ask $2.10

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 60.50
Change since picked:       + 0.00
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        570 thousand 
Listed on September 12, 2009         


Waters Corp. - WAT - close: 54.61 change: +0.15 stop: 49.30

Why We Like It:
WAT is a technical instrument maker that his hitting new 2009 highs after breaking out from a six-week consolidation. The rally looks like it might be stalling near resistance around $55.00. The top of the prior trading range near $53.00 should offer some support. I'm suggesting readers buy calls at $53.10. We'll use a stop loss under the bottom of the trading range. If triggered our first target is $59.50.

Suggested Options:
I'm suggesting the October calls. Our time frame is about four weeks. My preference is the $55 strike.

BUY CALL OCT 55.00 WAT-JK open interest=130  current ask $1.75
BUY CALL OCT 60.00 WAT-JL open interest= 41  current ask $0.35

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER 53.10
Change since picked:       + 0.00
Earnings Date            10/20/09 (unconfirmed)
Average Daily Volume =        809 thousand 
Listed on September 12, 2009         



In Play Updates and Reviews

Target Friendly Friday

by James Brown

Click here to email James Brown


CALL Play Updates

Apple Inc. - AAPL - close: 172.16 change: -0.40 stop: 164.00

A relatively quiet Friday for the market translated into a very quiet day for AAPL. The stock traded sideways in a narrow range. The trend is up but now that the AAPL media event has come and gone more conservative traders may want to exit early or raise their stop loss. As long as the market continues to climb we can expect AAPL to keep rising but any significant sell-off in the market and AAPL could lead the way lower as traders rush to lock in profits.

I'm not suggesting new positions at this time but more aggressive traders might consider buying a dip or bounce from $170 with a tighter stop loss. AAPL has already hit our first target at $174.00. Our second and final target is $179.00. FYI: The P&F chart points to a $231 target.

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

Annotated Chart:

Picked on   August 26 at $166.50 *(small positions 1/2 to 1/4)
Change since picked:      + 5.66
                             /1st target hit @ 174.00 (+4.5%)
Earnings Date           10/21/09 (unconfirmed)
Average Daily Volume =        14 million  
Listed on August 25, 2009         


Alcon Inc. - ACL - close: 135.19 change: -1.56 stop: 129.49

ACL provided us a slightly better entry point with a dip under $135.00. If you think the market is poised to dip then wait for ACL to slip toward $133-132 and use the pull back as an entry point to buy calls. I'm suggesting new positions now. Our first target is $142.50. Our second target is $148.00.

Suggested Options:
I'm suggesting the October calls. We want to use small positions as open interest is relatively small.

BUY CALL OCT 135 ACL-JG open interest= 67  current ask $4.40
BUY CALL OCT 140 ACL-JH open interest=120  current ask $2.15
BUY CALL OCT 145 ACL-JI open interest= 76  current ask $0.90

Annotated Chart:

Picked on September 10 at $136.75
Change since picked:       - 1.56
Earnings Date            10/21/09 (unconfirmed)
Average Daily Volume =        299 thousand 
Listed on September 10, 2009         


Allegheny Tech. - ATI - close: 33.49 change: +0.79 stop: 29.85 *new*

Target achieved. ATI continued to rally and broke through technical resistance at its 100-dma and exponential 200-dma. Shares hit $34.00 several times. Our first target to take profits was at 33.85. I'm upping our stop loss to $29.85. I am not suggesting new bullish positions at this time but it looks like ATI might be in a new bullish channel. Thus we could see a new entry point on a dip in the $31.50-31.00 zone. Our second and final target is $38.00 but that might be a little too optimistic. ATI has produced an inverse H&S pattern, which would suggest a $38 target but it could take a few weeks to get there.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   August 31 at $ 30.25 *triggered         
Change since picked:      + 3.24
                               /1st target hit @ 33.85 (+11.9%)
Earnings Date           10/21/09 (unconfirmed)
Average Daily Volume =       2.7 million  
Listed on August 27, 2009         


CF Industries - CF - close: 87.44 change: +0.01 stop: 83.49

CF traded sideways along with the major averages. It would be natural to see a minor pull back here and I'd use a dip near $85.00 to $84.00 as a new bullish entry point to 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 late. 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:
If CF provides a new entry point I prefer the October $85 or $90 calls.

Annotated Chart:

Picked on September 05 at $ 85.93
Change since picked:       + 1.51
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        653 thousand 
Listed on September 05, 2009         


Compass Minerals - CMP - close: 58.57 chg: -0.10 stop: 53.90 *new*

CMP is still trading under short-term resistance at $59.00. It would be healthy to see a minor correction. A dip near $56 or $55 can be used as a new bullish entry point. I'm inching our stop loss up to $53.90. Recently I suggested more conservative traders take profits near $59.00 and CMP traded near $58.80 a few times today. Officially our first target to exit is $59.75. Our second and final target is $64.00. FYI: The Point & Figure chart has turned bullish with a $69 target.

Suggested Options:
If CMP provides a new entry point I would buy the October $55 or $60 calls.

Annotated Chart:

Picked on September 03 at $ 55.55
Change since picked:       + 3.02
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        415 thousand 
Listed on September 02, 2009         


Danaher Corp. - DHR - close: 67.44 change: +0.04 stop: 62.95 *new*

Volume continues to slide as the rally slowly runs out of gas. DHR is nearing potential resistance at $68.00 and the stock looks short-term overbought here. I would wait for a dip back toward the $65-64 zone as a new entry point to buy calls. I'm upping our stop loss to $62.95. Our first target is $69.50. The Point & Figure chart is bullish with a $77 target.

Currently we only have half a position open. I am eliminating the trigger to buy more calls at $63.50. A dip to the $65-64 zone should suffice as a new entry point.

Suggested Options:
If DHR provides a new entry point I'd use the October $65 or $70 calls.

Annotated Chart:

Picked on September 05 at $ 66.37 (buy 1/2 position)
               /originally listed at $65.76, gap higher entry @ 66.37
Change since picked:       + 1.07
Earnings Date            10/15/09 (unconfirmed)
Average Daily Volume =        2.4 million  
Listed on September 05, 2009         


Factset Research - FDS - close: 60.11 chg: +0.37 stop: 54.90

FDS continues to show relative strength. The stock managed to close over round-number resistance at $60.00. Yet FDS does look a little overbought. I'd wait for dips near $57.50 before considering new bullish positions.

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 on September 22nd and we'll plan to exit the day before the company announces.

Suggested Options:
If FDS provides a new entry point I would use the October 60 calls.

Annotated Chart:

Picked on September 08 at $ 57.55
Change since picked:       + 2.56
Earnings Date            09/22/09 (confirmed)
Average Daily Volume =        331 thousand 
Listed on September 05, 2009         


Fedex - FDX - close: 77.32 change: +4.66 stop: 70.95 *new*

Target exceeded. FDX made headlines this morning when management raised their first quarter guidance and second quarter guidance. FDX raised Q1 estimates from the 30-to-45 cent range to 58 cents compared to analysts' estimates at 44 cents. FDX raised Q2 to 65-to-95 cents versus estimates at 70 cents. The stock gapped open higher at $75.95. Our first target to take profits was at $74.75. Shares hit an intraday high of $78.30. I am upping our second and final target from $79.00 to $79.75. I'm also raising our stop loss to $70.95.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on September 04 at $ 70.55 *triggered
Change since picked:       + 6.77
                  /1st target exceeded, gap higher @ 75.95 (+7.6%)
Earnings Date            09/17/09 (unconfirmed)
Average Daily Volume =        2.7 million  
Listed on September 03, 2009         


General Dynamic - GD - close: 63.34 change: +0.81 stop: 57.30

GD is showing a bit more relative strength than expected. We want to buy a dip near $60.00 but GD looks poised to break higher. More aggressive traders may want to buy calls now. I'm going to stick to the plan since the market has been up several days in a row.

I will adjust our trigger to buy calls from $60.20 to $60.50 and raise the stop loss to $57.49. Our first target is $64.90. Our second target is $69.00. Investors with a longer-term time frame may want to aim a lot higher. GD has produced an inverse H&S pattern that is forecasting an $85

Suggested Options:
If GD hits our trigger I prefer the October $60 or $65 calls.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 60.20
Change since picked:       + 0.00
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        2.3 million  
Listed on September 09, 2009         


Goldman Sachs - GS - close: 174.70 change: -0.17 stop: 159.00

GS continues to garner bullish analyst comments. This morning one firm raised their price target on GS from $175 to $215. The stock gapped open higher at $176.80 and hit $177.81 before trimming its gains. GS does look short-term overbought. I'd consider new positions on a dip in the $170-166 zone. Our first target to take profits is at $179.00. Our second target is $184.00. The $185-190 zone looks like potential resistance.

FYI: The Point & Figure chart is bullish with a $228 target. Remember, we want to trade small position sizes.

Suggested Options:
If GS provides a new entry point I'd use the October $170 or $175 calls.

Annotated Chart:

Picked on September 8 at $166.75
Change since picked:      + 7.95
Earnings Date           10/13/09 (unconfirmed)
Average Daily Volume =       8.8 million  
Listed on August 29, 2009         


Genesse & Wyoming - GWR - close: 31.86 change: -0.32 stop: 28.90

Railroad stocks struggled even as the transports rallied higher. GWR spiked to $32.89 before giving up its gains. Our first target is $32.90. More conservative traders may want to take profits now. I'm not suggesting new positions. Our second and final target is 434.75.

FYI: We want to use small position sizes to limit our risk.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   August 15 at $ 28.66 /gap down entry
                               /originally listed at $29.30
Change since picked:      + 3.20
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       230 thousand
Listed on August 15, 2009         


Grainger W.W. - GWW - close: 88.64 change: -1.36 stop: 84.75

GWW is still struggling with resistance near $90.00. The company said August sales fell 13%, which was inline with the previous month. However, September sales are expected to improve. If you're looking for an entry point another bounce from its rising 50-dma near $87.00 or a breakout over $90.35 can be used as an entry. Our first target is $93.50. Our second target is $97.50.

Suggested Options:
If GWW provides a new entry point I'd use the October $90 calls.

Annotated Chart:

Picked on September 1 at $ 86.00 *triggered  
Change since picked:      + 2.64
Earnings Date           10/14/09 (unconfirmed)
Average Daily Volume =       635 thousand 
Listed on August 22, 2009         


iShares Financials - IYF - close: 51.44 change: -0.28 stop: 49.49

After five days of gains the financials could be losing a little steam as they near resistance in the $52.00 area. We have moved our trigger to buy calls to $52.60. We want to use very small positions given the aggressive nature of the entry point. If triggered our first target is $57.00. Our second target is $60.00.

Suggested Options:
Options are available at $1.00 increments. I'd use the October $50s, $54s, or the November $50s or $55s.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 52.60
Change since picked:       + 0.00
Earnings Date            00/00/00
Average Daily Volume =        5.1 million  
Listed on September 01, 2009         


Mettler Toledo - MTD - close: 89.57 change: +0.79 stop: 84.99

MTD has rallied to new highs for the year but it's also testing round-number resistance at $90.00. I'd expect another dip but look for support near $88.00 or its rising 30-dma. I'm not suggesting new positions at this time. 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:
No new positions at this time.

Annotated Chart:

Picked on   August 27 at $ 88.50 *triggered  (1/4 normal size)
Change since picked:      + 1.07
Earnings Date           11/05/09 (unconfirmed)
Average Daily Volume =       234 thousand 
Listed on August 22, 2009         


Newmarket Corp. - NEU - close: 88.26 change: -0.60 stop: 81.45

It's not a surprise to see NEU hit a little profit taking after the big bounce from $80.00. I suggested readers take profits a couple of days ago. If NEU does correct I'd watch for short-term support near $84.00. Our second and final target is $92.50. More aggressive traders can aim for $99. FYI: The Point & Figure chart is bullish with a $116.00 target.

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

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:      + 4.18
                               /take profits @ 87.97 (+4.3%)

Picked on September 1 at $ 80.50 *triggered 2nd half
Change since picked:      + 8.01
                               /take profits @ 87.97 (+9.2%)
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       141 thousand 
Listed on August 24, 2009         


Occidental Petrol. - OXY - close: 76.97 change: +0.19 stop: 71.90

Target exceeded. OXY gapped open higher at $77.23 and hit $77.80 before paring its gains. Shares look a little overbought given the big bounce from $72.00 this past week. I'm not suggesting new bullish positions at this time. Our second and final target is $79.85. More aggressive traders could aim for the $83-84 zone.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   August 27 at $ 72.00 *triggered         
Change since picked:      + 4.97
                    /1st target exceeded, gap higher @ 77.23 (+7.2%)
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       5.0 million  
Listed on August 26, 2009         


PPG Inds. Inc. - PPG - close: 57.30 change: +0.31 stop: 52.95

PPG is still inching higher but has yet to really breakout past its August highs. Odds are growing for a dip even though the trend is up. I'd use a pull back near $55.00 as a new entry point. More conservative traders may want to raise their stops a bit. Our first target is $59.80.

Suggested Options:
If PPG provides a new entry point I'd use the October $55 or $60 calls.

Annotated Chart:

Picked on   August 28 at $ 55.65
Change since picked:      + 1.65
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       1.6 million  
Listed on August 27, 2009         


State Street (Bank) STT - close: 52.73 change: -1.21 stop: 49.45

After a multi-day bounce some of the banks stocks hit some profit taking. STT gave up 2.2%. I'd be tempted to buy calls again if STT bounces from $50 and its rising 50-dma (again). Otherwise readers may want to wait for a new relative high as an entry point.

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:
If STT provides a new entry point I would use the October or November $50 or $55 calls.

Annotated Chart:

Picked on   August 31 at $ 52.00 
Change since picked:      + 0.73
Earnings Date           10/13/09 (unconfirmed)
Average Daily Volume =       5.3 million  
Listed on August 19, 2009         


United Health - UNH - close: 29.07 change: -0.04 stop: 27.49

We've been expecting some volatility in the healthcare names now that congress is back in session. We saw a little bit of movement on Thursday. Readers may want to try a strangle or straddle on UNH. That way you don't care what direction it goes. Right now the plan is to buy calls on a breakout with a trigger 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 once triggered.

Suggested Options:
If UNH hits our trigger we want to use the December calls. I prefer the $30 or $33 strike.

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         


Union Pacific - UNP - close: 62.55 change: -0.99 stop: 59.40

A handful of the major railroad stocks reversed course on Friday. UNP is one of them. The stock hit $64.46 this morning and fell back to short-term support near $62.00. Technically this is a bearish engulfing candlestick pattern. I'm not suggesting new positions at this time. Our first target is $69.00. FYI: The P&F chart is currently bullish with an $88 target.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on September 09 at $ 63.00
Change since picked:       - 0.45
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on September 05, 2009         


U.S. Oil Fund - USO - close: 37.37 change: +0.43 stop: 34.49

It was a rough day for crude oil. Futures reversed lower and the USO lost 4%. Oddly enough the news today should have been positive for oil. China said their factory output was up, retail sales were up, lending was up. Here in the states consumer confidence was up. All of this should have been bullish for oil in addition to weakness in the U.S. dollar. The only thing I could find that might have been bearish was a note on a 6% decline in oil imports into China for the month of August.

Right now the USO is falling toward its longer-term trendline of support and its 100-dma. A breakdown under this trendline could be very bearish for the energy stocks and thus the wider market. I'd wait for signs of a bounce off this support or the $35.00 level before considering new bullish call positions. Our first target to take profits is at $39.95.

Suggested Options:
If the USO bounces from support I'd use the October calls. My preference would be the $35 strike but strikes are available in $1.00 increments.

Annotated Chart:

Picked on   August 31 at $ 36.50 
Change since picked:      + 0.87
Earnings Date           00/00/00
Average Daily Volume =      11.5 million  
Listed on August 15, 2009         


PUT Play Updates

*Currently we do not have any put play updates*


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.)

Cigna Corp. - CI - close: 31.33 change: +0.27 stop: n/a

CI hit another new high for the year on Friday. I'm not suggesting new strangle positions at this time unless the stock retests the $30.00 region.

The options I suggested were the October $35 calls (CI-JG) and the October $25 puts (CI-VE). Our estimated cost was $1.20. We want to sell if either option hits $2.50 or higher. The closer we can open this trade to $30.00 the better.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on September 08 at $ 29.40
Change since picked:       + 1.93
Earnings Date            11/05/09 (unconfirmed)
Average Daily Volume =        3.8 million  
Listed on September 08, 2009         


Research In Motion - RIMM - close: 79.37 chg: +0.42 stop: n/a

The trend for RIMM appears to be up but the stock is facing resistance near $80.00. We are down to our last week before September options expire and RIMM needs to make a run at the $85 level if we're going to hit our target. More conservative traders may want to lower their target. 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:      + 3.81
Earnings Date           09/24/09 (confirmed)
Average Daily Volume =      11.7 million  
Listed on August 25, 2009         


Schlumberger - SLB - close: 60.39 change: +1.96 stop: n/a

Goldman Sachs upgraded SLB from a "neutral" to a "buy" this morning. The stock gapped open higher at $59.81 and quickly rallied to $61.77 before trimming its gains. The September $60 calls spiked to $2.40 before slipping back to $1.45. Our target to exit is $2.50. We're about to run out of time with September options expire in five trading days. More conservative traders may want to take profits now. 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:      + 8.39
Earnings Date           10/15/09 (unconfirmed)
Average Daily Volume =       9.2 million  
Listed on August 15, 2009