Option Investor
Newsletter

Daily Newsletter, Saturday, 9/19/2009

Table of Contents

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

Market Wrap

Laszlo Birinyi, Ben Bernanke and Warren Buffet Say It's So

by Linda Piazza

Click here to email Linda Piazza
Market Internals:

Introduction:

This week, Laszlo Birinyi and FOMC President Ben Bernanke sounded the news that the recession has ended, with Birinyi insisting that U.S. equities have room to climb further. Warren Buffett chimed in with his plans to buy equities.

For those who don't recognize Birinyi's name, he ranks with Nouriel Roubini as a market forecaster, but the two have been on opposite sides of the fence with regard to the bounce off the March low. Birinyi's forecast of room to go for the rally isn't new. Back in August, he was being featured in articles and on the airwaves for his prediction that the markets are in "a bull cycle in phase one" (Bloomberg, 8/26/09).

Equity and commodity markets were already in a partying mood when his newest comments were hitting the airwaves in the middle of this week. Never mind that it's begun to feel a bit frantic, this party: bulls celebrated his prediction all over again before tiring later in the week and pausing for breath.

Chairman Bernanke's warning that the end of the recession might not feel all that good to the average American due to continued unemployment was largely ignored when the comment was first made. This weekend, when regional newspapers mull over the Labor Department's Friday report that 42 states lost jobs in August, compared to only 29 in July, and that five states now have unemployment at 12 percent or over, more attention might be paid to the impact of that unemployment.

Thursday morning, CNBC's Steve Leisman drew from studies by Haver Economics to point out that unemployment peaked 15 months after the technical end to the 1991 recession and 19 months after the technical end to the 2001 recession. Payrolls didn't regain prior peak numbers until 23 months after the 1991 recession and 39 months after the 2001 recession. Anecdotally, out of the eight cousins in my children's generation, all in their mid 20's to early 30's, two have been laid off in just the last three weeks, both from jobs they'd held for years. Others currently fear for their jobs. Two of their parents or in-laws, people from my generation, have lost their jobs and been unable to find others, probably joining that talked-about group of Boomers that will never find another fulltime job. Both hold advanced degrees and had worked in professional careers. Families are sharply reining in expenditures. These are stories being repeated across the nation.

Since Option Investor is a market-related website, what everyone wants to know on these pages is when the economy returns to normal and when indices return to their prior levels. According to Leisman's research, the 1991 and 2001 recessions didn't provide a lot of help with that question. Earnings didn't return to peak levels until eight and nine months after the 1991 and 2001 recessions, respectively. However, peak SPX levels were regained in 1991 but not until six years after 2001. Go back further than 1991, and I could name longer periods before prior index price peaks were permanently regained.

Several forces--quadruple witching, S&P rebalancing and the approach of another quarter's end--combined to produce a sideways market on both Thursday and Friday. On Friday at least, that sideways movement was accompanied by strong volume. Strong volume equates to strong market participation by institutions as well as by individuals. When that strong volume results in little market movement, one must question what the institutions were doing. The general consensus mulled over on talk TV was that some institutions, particularly funds that missed the beginning of the rally and missed out on earlier gains, are chasing markets so that their end-of-quarter reports will show that they owned the big winners during the run-up. They were buying. If that's the whole story, why didn't markets advance significantly on strong volume? The institutional involvement Friday was without question: the volume proves it. We must conclude, however, that without a significant market advance, that some institutions were selling, too, and that the selling almost matched the buying, at least momentarily. Perhaps that was a result of rebalancing, but let's take a look at the charts.

Charts:

During the SPX's strongest and most sustainable rallies, the index often demonstrates a pattern of breaking sharply higher, then trending sideways for three to five days, dipping briefly to test or even pierce the 10-sma, and then springing higher again. Then the action is repeated.

The latest rally leg off the July low has been so strong that the SPX didn't even touch the 10-sma from July 14 until August 11. Then SPX prices fell through that 10-sma and chopped back and forth before springing above the 10-sma again on September 8 and charging way above that average. A faster moving average, the 8-ema, is the one from which it has been bouncing since July other than during consolidation periods. After September 11, when the SPX looked as if it was reinstituting its normal pattern of trending sideways until an important moving average rose up underneath it to provide support again, the SPX dipped only to the faster 8-ema on September 14 before taking off again, without waiting for the 10-sma to catch up. Now it's outstripped even that faster moving 8-ema and outstripped it by more than it has at any time during the last rally leg.

In other words, this rally is getting frothy from a moving-average perspective. I'm not predicting the demise of the equity markets. I am saying that it would be normal, even if the rally has Birinyi's room to run, to expect either a sharp pullback to one of those averages or a sideways trending until those still-rising averages pull up closer underneath the current price action. The 8-ema is now at about 1053.33 and the 10-sma is now at about 1046.66. At some point, too, the SPX needs to drop all the way back to test its 30-sma, with that average currently just under 1022. Let's watch how the SPX behaves with a 10-sma test before we make plans for a deeper 30-sma test, however.

Prices don't normally outstrip these 8-ema and 10-sma moving averages by such extreme amounts unless they're "going parabolic" as some technicians term them, a term that describes an ending action to a recent move. Those hoping for further equity gains actually don't want that to happen. They want orderly pullbacks to test and confirm support, so that there's confidence in buying and holding equities for an anticipated further climb. Then they want a rinse and repeat, so that they can put their stops under those averages and have confidence that they have a solid decision-making point for their equity longs.

On Thursday and Friday, the SPX action produced daily candles indicating indecision. A possible evening-star reversal signal was confounded on Friday when a second indecision-type candle was produced rather than a long red candle. This gives slightly more credence to the possibility that the SPX will trend sideways until the 10-sma rises closer and then dip to test that support but really just confuses the issue of what will happen next. This chart does not predict whether we get a rally, further sideways movement or a stronger downturn, so this weekend should be spent in just-in-case plans for each eventuality.

Annotated Daily Chart of the SPX:

Keltner channels (not shown here) help me to refine that support "near 1060" level. A daily chart with the Keltner setup I use suggests that it is currently at about 1056.40 on daily closes. A conservative trader would want to see consistent daily closes beneath that level to believe that the SPX has dropped enough to suggest that it won't find support on the red channel's former resistance.

Annotated Daily Chart of the Dow:

In normal market conditions, I would rate the chances of a Dow pullback to the 10-sma as "probable," but these market conditions, demonstrating runaway upward momentum, produce upside breaks out of formations that typically break to the downside. Until we see signs that the extreme upside momentum has abated, likely demonstrated by consistent daily closes back inside that rising channel, we can't assign "probable" to the chances of any sideways or downside move.

Annotated Daily Chart of the Nasdaq:

Annotated Weekly Chart of the SOX:

Annotated Daily Chart of the RUT:

The various Wrap writers all have their intermarket relationships that they watch for guidance. Long-time readers will remember that one of those relationships I watch closely is the TED spread. This is the basis-point spread between U.S. treasuries (the "T") and Eurodollars (the "ED"), and it measures default risk. This spread usually moves in opposition to equity charts and widened to record levels in 2008. In fact, it sometimes telegraphs equity moves. It's not a great market-timing tool, but the general idea is that equity traders don't want strong climbs in the TED spread. They were cheered when the March rally was accompanied by a TED spread decline. In fact, the TED spread fell to five-year lows, which seemed a bit overdone considering what we know about default risk, particularly in commercial real estate.

The TED spread has begun rising again, however. At 21.03, it's now 29 percent higher than the 16.28 level produced on September 10. The prior peak was on August 31 and was at 22.073, so the TED spread has not yet even so much as breached the prior peak's potential resistance, and it sometimes comes back to retest prior lows before mounting a sustained rally. However, keep an eye on this. It has broken higher through a three-month descending trendline in place since June, so there has been a first tentative change in tenor, as shown on this Bloomberg chart. I've overlaid the SPX chart so that readers can see the way that SPX prices and TED spread levels tend to move in opposition to each other.

TED Spread with SPX Overlaid:

With the TED spread breaking up through that descending trendline, those long equities should be aware of the possibility, if not yet the probability, that the SPX will break through its month's long rising trendline, with perhaps uncomfortable resulting action for equity bulls. Given the TED spread's occasional need to come back and retest prior lows before sustaining a rally, it's not yet a given that the SPX will break through that trendline, but this chart would be enough to prod me to protect long positions if I had a portfolio heavy in longs.

Last Week's Developments:

Quadruple witching, including expiration of the VIX options, likely played its part in this week's results for options traders. Many experienced options traders mention that they anticipate a bullish or at least supported equity market during quadruple-witching expiration weeks. Add in a few upside surprises on economic releases, Federal Reserve Chairman Ben Bernanke's assertion that the recession is probably technically over, various equity upgrades, dollar weakness and possible end-of-quarter window dressing that's begun, and that typical bullish or supported market appeared again.

Some of the week's upside surprises included Tuesday's Empire State Manufacturing Index, Retail Sales, and PPI. Although retail sales predictions were officially forecasting a 1.9 percent gain, I had begun hearing whisper-number gains in the 2.5 percent realm, and Tuesday's actual number showed gains of 2.7 percent. Some question how sustainable those gains will be with the Cash-for-Clunker's program now finished. That program contributed to a 10.6 gain in August's auto sales. However, the core number, excluding autos, still showed a greater-than-anticipated 1.1 percent gain, perhaps due at least in part to gasoline sales. Higher gasoline prices contributed to a 5.1 percent gain in sales at gasoline stations. A bounce in the dollar would likely negatively impact those sales.

Moreover, those worried about the possibility of deflation might have been cheered by a 1.7 percent gain in the PPI, measuring the price of finished goods and services. Some sources claim that the market reacts most strongly to the PPI when it comes before the CPI, as it did this week. Underneath the PPI headline number, however, the core gain was a much more modest 0.2 percent, only slightly higher than the predicted 0.1-percent gain. The core number excludes energy and food prices. When the CPI came in on Wednesday, it barely beat the predicted 0.3 percent gain in the headline number, with a 0.4-percent gain. The core number was in line with predictions of a 0.1 percent gain.

Higher energy costs had contributed to the headline gains for retail sales, PPI and CPI, and energy prices were still climbing into the middle of the week before steadying into a choppy consolidation zone just under the week's highs. Lower-than-expected inventories and a weak dollar contributed to higher prices in the energy complex and a late-week bounce in the dollar probably contributed to a stall in the gains.

Wednesday's crude inventories revealed that stockpiles had dropped an unexpected 4.7 million barrels in the week that ended September 11. Analysts had expected a drop but only by 2.4 million barrels. This Department of Energy data differed from Tuesday's estimation by the American Petroleum Institute, which claimed a gain of 631,000 barrels. Years ago, when I wrote the Wednesday Wraps each week, the API and the government both distributed their numbers on Wednesday, and they rarely coincided. I could never find definitive information about which numbers were the most reliable.

Whatever happens with crude costs, those cheering the return of the consumer should keep in mind that retail sales were still down 5.3 percent year over year. Economists such as RBS Securities' chief economist Stephen Stanley, interviewed for a MarketWatch article, question the sustainability of consumer spending. In a Tuesday article, Stanley was quoted as saying that RBS continues "to believe that the consumer will trail rather than lead the recovery, and we will only be confident about the consumer when we see job growth and labor income gains." After Wednesday morning's CPI, a Bloomberg article noted that "[c]ompanies such as Kroger Co. are having to keep a lid on prices to revive demand." When a grocery store has to keep a lid on prices, that knowledge doesn't exactly set up a celebratory party for the return of consumer spending.

While the early week economic releases provided cheer to the equity markets, Wednesday's releases produced mixed results. Capacity utilization and industrial production rates inched a little higher than anticipated, but the current account deficit was far worse than anticipated. The current account numbers measured a deficit of $99 billion rather than the anticipated $92 billion-deficit.

The NAHB Housing Market Index came in right at the anticipated 19 level. Still, that 19 level for the NAHB U.S. homebuilder sentiment was the highest it's been since May, 2008, the NAHB/Wells Fargo report noted. Some question the impact if Congress doesn't extend the soon-to-expire tax credit for first-time home buyers. Perhaps that worry was reflected in the component that measures sales expectations for the next six months. That component declined.

Wednesday's TIC Long-Term Purchases for July was a major disappointment, at $15.3 billion rather than the anticipated $65.3 billion. In the past, this was a little-watched indicator but that's not true now, or at least it shouldn't be true. This indicator measures the international demand for long-term U.S. financial assets. The net foreign buying of long-term securities for the prior reported month had been $90.2 billion. The report indicated that foreigners sold a net $97.5 billion of long-term and short-term securities.

We've been hearing rumblings from countries such as China and Russia about our federal deficit's impact on the dollar, and this TIC report indicated that foreign powers were indeed a bit wary about taking on our debt. On Friday, Russia's Prime Minister Vladimir Putin again called for other currencies besides the U.S. dollar to be added as global reserves, scolding the U.S. for its "uncontrolled issue of dollars," according to a Yahoo! Finance article.

Dollar futures (DXZ9 on my charting service) dropped to pierce the 77 level by September 11, then producing a number of potential reversal signals before slipping lower again earlier in the week. On Thursday afternoon, dollar futures began a climb that approached the 77 level again from underneath before pulling back into a consolidation zone just below that level.

The last three days of the week produced a dollar futures chart showing a red-bodied candle followed by a small-bodied candle below that and then a green-bodied candle that seemed to complete a potential reversal signal known as a morning star. The "seemed" qualification comes from the upper shadow left on Friday's green-bodied candle. That weakened the potential reversal signal.

Volume on this particular dollar futures contract had been dropping off since September 8 as the dollar futures continue to slip lower, a possible sign that sellers weren't out in force so much as buyers were lacking. Forex-related websites have been producing articles noting how overbought other currencies are against the dollar, so the opinions of those paying more attention to currency moves than I have been lately are in concert with what's showing up on the charts. Those who are heavily long U.S. equities should remember that the equity rally since March has been accompanied by dollar weakness.

That inverse intermarket relationship will question what will happen to the equity rally if the dollar should mount a rally of its own. That rally hasn't happened yet, and I would want to see the dollar futures sustain values above a 45-ema, now just above 78.50 but still drifting lower, to believe in a sustainable dollar rally. However, a first step in improvement in tenor for the dollar would be continued daily closes above about 76.80, a level making a Keltner band line on a daily chart that hasn't been breached on a daily close in about two weeks.

Equity longs should keep in mind that the early August rally in the dollar futures was accompanied by an equity pullback even though the dollar's rally brought it only up to the 45-ema before dollar futures pulled back again. The dollar futures don't have to sustain values above the 45-ema to result in an equity pullback: just rising up to test it may be enough for a normal equity pullback.

Another story this week involved the buying of assets from a failed Texas bank, Franklin Bank. Another Texas-based company, mortgage servicer Residential Credit Solutions, submitted the winning bid to buy a 50-percent stake in Franklin Bank's portfolio of residential mortgage loans. This was the first test of the FDIC's Legacy Loans Program (LLP), which is in turn part of the government's Public-Private Investment Program, which seeks to find investors for troubled bank assets. This initial test attracted nineteen bids from twelve bidders. The Treasury may also soon test its program designed for distressed loans rather than the whole loans offered by the FDIC program, with that Treasury test perhaps coming as soon as early October.

Another FDIC announcement wasn't so positive. A past specter raised its head this week. FDIC Chairman Sheila Bair admitted Friday that the increase in bank failures, although anticipated, had significantly drained the agency's funds. Although in the past Bair had thought it unlikely that the agency would ever have to tap into its line of credit with the Treasury Department, she said when the agency met at the end of the month, that option would be explored as a means to rebuild the depleted funds. The option wouldn't be the first or the preferable one, she said when speaking in Washington at a global finance conference. She mentioned others, including adding more special assessments to banks, prepayments of assessments on banks and issuing a note.

Chairman Bair extended her talk beyond the narrow focus of replenishing FDIC funds. She also said that she didn't believe that mark-to-market accounting for bank loans should be further extended or that large financial entities should be led to expect further government assistance if they experience problems.

Friday evening's closure of Irwin Union Bank, F.S.B., Louisville, KY and Irwin Union Bank and Trust Company, Columbus, IN were the institutions added to the previous 92 banks closed so far in 2009, compared to 25 in 2008. A year ago, the FDIC's insurance fund had $45 billion available, but that's now been diminished to $10.4 billion minus the $850 million blow the FDIC estimates that Friday's closures will cost the Deposit Insurance Fund. That fund can't stand too many more Fridays at this rate, can it?

First Financial Bank of Hamilton, Ohio, assumed all of the deposits of the two entities closed Friday. The two had 27 locations between, all of which will be open Saturday as branches of First Financial Bank.

The FDIC insurance program wasn't the only one low in available funds. The Federal Housing Administration reported Friday that when it sends its study to Congress in November, that study is expected to show that its reserves are below the mandated 2-percent mark. Rising defaults among FHA borrowers is responsible for the depletion of the FHA's reserves. FHA Commissioner David Stevens denied that the agency would require a rescue by taxpayers, however. (Hmm. Haven't we heard that previously?) The agency wants to stem rising defaults by requiring those operators (loan companies) participating in the FHA program to have a net worth of $1 million rather than the currently required $250,000. Among concerns about fraud, the agency wants annual audits of these firms.

While the FDIC's LLP program was being tested and the FDIC mulled ways to replenish funds, and the FHA announced that its reserves would likely fall below the mandated level, another government program was slated to come to an end. On Friday, the U.S. Department of the Treasury announced the expiration of the Guarantee Program for Money Market Funds. Initially intended as a three-month program that could be extended through Friday, September 18, the program never experienced any losses and in fact gained about $1.2 billion in participation fees, the Treasury announced. Treasury Secretary Tim Geithner said that "the risk of catastrophic failure of the financial system has receded," and with that "the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well." It was about this time last year that one fund "broke the buck," inducing fear in investors. Geithner said the expiring program had served its purpose of providing stability.

Were these various announcements about government programs responsible for the stalling of the markets near the week's highs? Perhaps technical reasons, already shown on the charts, existed and perhaps the late-week economic releases just weren't as cheery for the markets as the earlier ones had been. Thursday's releases provided insight into housing, employment and manufacturing. The housing numbers showed that housing starts, at 0.60 million, and building permits, at 0.58 million, came right in line with predictions. Housing starts displayed a 1.5 percent increase for August. Inside these Commerce Department numbers, however, was the information that starts of new single-family homes actually fell three percent in August, to 479,000. That's the first decline in six months, a MarketWatch article noted. A sharp 25.3-percent rise in starts of large apartment buildings and not strength in the single-family homes had pushed the starts higher.

Building Permits provides more of a future look, although not all permits result in completed projects. Permits rose 2.7 percent. The seasonally adjusted 579,000 permits marked the highest number since last November. Still, by Thursday morning, market participants were given more of a mixed view of the economy.

It was, however, perhaps the much-awaited Philly Fed Manufacturing report's jump to 14.1 that propelled the equity indices to reach for new recent highs on Thursday morning before the overheated markets suddenly deflated a few minutes later. The Philly Fed's take on manufacturing is one of the two more important predictors of the ISM's take on the nation's manufacturing, so it's closely watched. The 14.1 had beat expectations of 8 and had furthermore produced the first two-month consecutive gains since the end of 2007. Inventories continued slipping, pointing sooner or later to a need to gear up to replenish inventory.

However, the employment component fell, optimism about the future slipped, and orders slowed. This combination wasn't so cheery. Once market watchers got a look below the headline number, this combination perhaps contributed to that quick equity drop after the initial post-Philly-Fed pop Thursday morning.

That same morning, initial unemployment claims had dropped to 454,000, but the Department of Labor revised higher the previous week's numbers, to 557,000. The insured unemployment rate inched higher to 4.7 percent from the previous 4.6 percent. Continuing unemployed rose by 129,000.

All in all, the early week enthusiasm waned a bit by the end of the week, but the earlier study of charts and our knowledge of how some rallies progress predicted that it might have done so anyway. I'm among the Boomer group and I can't tell you how many in my age group, their retirement funds decimated by what happened over the last two years, have vowed to me, "When the Dow gets back to 10,000, I'm selling." With the Dow being "the market" for the uninitiated and that same "sell when it hits 10,000" intention perhaps being repeated across the nation, we have to figure that there's going to be at least some increase in selling pressure as the Dow more closely approaches this level. How much there is and how it might impact the markets when the institutional end-of-quarter window-dressing also wanes about three days before the end of September, we don't yet know. That end-of-quarter window-dressing might yet support the markets through another week. The markets are technically ready for a pullback right now--overdue for it--but whether it comes or how deep it might be are not yet known.

Next Week's Economic Events and Earnings Releases:

Next week's important events include the FOMC meeting, a G20 meeting and a heavy schedule of treasury auctions. The most important economic events are set off in red font. I've placed all treasury auctions and earnings in orange, to set them apart from other economic events, although some are more important than others. Pay particular attention to the results of the auctions of the longer-term treasuries, for example, including the 5- and 7-year notes. Jim has been discussing for months the negative import if a treasury auction should go badly. A treasury auction doesn't even have to go that badly in order for the economic landscape to change if it significantly impacts the yield curve.

Not all reporting companies are included in the chart, of course, even though it's a light earnings week. When earnings are mentioned, "BMO" means before the market open and "AMC" means after the market closes.

Important Economic Events, Treasury Auctions and Earnings for the Market Week Beginning Monday, September 21:

What about Monday?

Options traders should be forewarned that the Monday morning after option expiration, particularly quadruple witching, can be volatile. Contracts are being rolled forward, assigned stock is being sold, and other such option-related activities are shaking out the markets. What happens at and shortly after the open may or may not relate to what happens the rest of the day or week.

Annotated 30-Minute Chart of the SPX:

The SPX produced a close just beneath that purple Keltner band, hinting at a waning of that extreme upside momentum, but that could have been an end-of-day anomaly. Not until the SPX produces consistent 30-minute closes beneath that purple Keltner line, something that hasn't happened since Monday, can we consider that the upward momentum has temporarily waned. If Monday morning produces a quick bounce from that support, then the support continues to hold and upward momentum continues to be strong, and we can't yet predict the short-term end to that upward momentum. Equity bulls should be wary, however, of a retest of last week's high, if it should occur, or of a slightly higher high that is accompanied by bearish RSI/price divergence.

It's possible the SPX heads down as this chart hints would likely happen if that close was not an aberration and reflected true waning momentum. If the SPX then maintains 30-minute closes beneath that purple channel line, such action would suggest a potential short-term move toward the pink 45-ema. If that support holds on consistent 30-minute closes, look for a bounce and retest of the purple channel line or 9-ema, to see if it's now resistance. If the 45-ema's support fails, the next potential target is the lower black channel line. Remember that these channel lines are dynamic and that they'll move a little up or down with price movement.

Annotated 30-Minute Chart of the Dow:

Remember the injunction "on 30-minute closes" when studying these charts. As with all types of support or resistance, prices sometimes pierce a particular Keltner band but then close back inside it during the period being studied. That shows that the resistance or support did hold, despite being pierced.

Both these charts show coiling price action that may be "triangling" up. Seen by themselves without placing them inside a Keltner chart, such a consolidation pattern suggests that bearish and bullish forces were approximately equal for the time being, and we can't presume that we know which way prices will break out of that triangle. Sometimes such formations are continuation-formations and prices break in the direction of the previous move, but sometimes they reverse. The Keltner bands give me a little more perspective. This time, as prices coil, they're showing a little more vulnerability to a decline, but the signal is only tentative so far, and trusting a tentative signal to guarantee a pullback is dangerous in this market.

The Nasdaq's chart also shows this coiling action but displays a difference with respect to the normal outer Keltner channel.

Annotated 30-Minute Chart of the Nasdaq:

This chart suggests that, so far, the Nasdaq retains its breakout status and is as likely to bounce from that outer channel line again as it is to drop below it. At 50.85, RSI provides no hint either of the next direction.

If the Nasdaq so far maintains its breakout status, the Russell 2000 does so even more emphatically. The RUT was one of the leaders in the rally early this week as well as a downside leader in Thursday's early decline, and it may be key to watch next week, too.

Annotated 30-Minute Chart of the Russell 2000:

The RUT's extreme surge out of its channels brought the pink 45-ema, the moving average on which the black channel is based, all the way out of the normal outer channel, too. In fact, it almost dragged the entire black channel out. The RUT so far maintains 30-minute closes above the red 9-ema, too, unlike the others. As long as it continues to do so, bears must presume that it will go on testing the rising black channel's resistance. Bulls should consider that this black-channel resistance has been holding, and be wary of further tests of black-channel resistance, especially as that rising potential resistance approaches last week's high.

If the RUT maintains consistent 30-minute closes beneath the red 9-ema, however, some of the same potential setups exist, even though the chart displays some differences. The 45-ema might have been dragged entirely above the typical outer channel boundary, but its support is still likely the next to be tested if the RUT maintains 30-minute closes beneath the 9-ema. If the 45-ema's support fails, black-channel and purple-channel support, likely next support, may be converging by then. It would typically require a strong surge lower to break through both at the same time, and so a bounce attempt could come from that level if prices just meander down to that level. Watch for potential resistance back at the 45-ema if such a bounce should occur.

These Keltner channels are not the end-all and be-all of technical analysis. I love them because they allow me to set if-then kinds of theories of what might happen next. They help me to see that even when prices are climbing, as they were Friday afternoon on the RUT, they were still finding resistance on 30-minute closes at the black-channel line, a potential resistance level that the RUT's prices had leaped above on Friday afternoon before charging higher. So there's a slight change in tenor. Is it enough to predict an immediate downturn next week, one that will be sustained? Of course not. But, if I had been going into the weekend with a lot of long RUT exposure, I'd have been forewarned to make sure I felt comfortable with that level of exposure. I'd certainly have wanted to be sure I felt comfortable with a potential drop to 610-612, at least.

As should have been apparent from the daily charts, many indices show similar setups on their daily charts. All look ready to either drop immediately to test their 8-ema's or 10-sma's or else trend sideways until those moving averages rise up beneath them and dip down to test or pierce them. However, many of those prices have broken up through rising price channel resistance or daily and 30-minute Keltner resistance, so these are markets that are in breakout mode. Those who trade breakouts know how dangerous a trade they can be. Catch the right breakout and you'll be pocketing money by the fistfuls, but catching the "right" breakout is the difficulty. Breakout trades can be quickly whipsawed, too. Breakout traders spend years refining tools that predict which moves will be sustained and which reversed, but I haven't yet heard of one who has perfected the one that's right all the time.

So the best that the rest of us can do is recognize that momentum and pinpoint signs that help us determine when it has waned. It's time. It's certainly time for at least a normal pullback test of support if not something more, but some market pundits theorize that we may see continued window-dressing until the end of next week, at least. Watch the SOX and RUT for clues, as they may be the first to break out of the current consolidation in either direction.


Index Wrap

Bullishness reigns supreme

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

CBOE options traders on Wednesday this past week bought 2.2 times the number of equities calls than puts, which is a very high ratio of daily call volume to put volume. The 5-day (moving average) number for my call-put ratio is as high as it was in late-August. While this prior extreme in bullish sentiment wasn't followed by a major correction there was a 5-day sideways trend that followed, which in turn was followed by a 47 point pullback in the S&P 500 and around a 100 points correction (peak to trough) in the Nasdaq Composite.

CHARTS OF THE WEEK:

The same tendency for corrections is seen when the RSI hits certain extremes. If we look at this in terms of one of the most active index options, that of the Nasdaq 100 (NDX), that's when the 21-hour Relative Strength Index (RSI) gets at or above the 69 to 75 range as seen below. You'll notice the tendency for NDX to level off after hitting this high zone. In a strong rally phase like the current one, RSI declines to the 31 to 38 area have seen strong rallies follow, again in terms of the hourly chart.

I noted in the chart below that the steady climb after the 'confirming' bull flag pattern was very bullish. Actually, not as bullish was when, after that extended rally phase, there was an even greater surge higher. This is sometimes if not often an 'exhaustion' type move, as bullish traders dump their remaining money into bullish strategies. Corrections often follow.

I've been playing around with a trading system that automatically buys after certain low extremes in the hourly RSI in QQQQ and sells after the RSI falls back from certain high extremes in the same indicator. This is noted on my second 'chart of the week' below:

While the chance of a correction increases, I'm not seeing the conditions for more than a minor pullback consistent with the market action since May. On a cyclical basis, October tends to be more the period where I worry about a sharper and deeper correction. The market is now quite overbought on a longer-term basis. A few more weeks of this and some news could well cause traders to rush to all take profits at once.

This is the meaning of 'overbought': a period when most of the money available for buying stock has been committed and where relatively minor stampedes to take profits lead to a sharper than usual drop as there aren't enough new buyers immediately waiting in the wings. I tried to submit my Trader's Corner article on the whole topic of 'overbought/oversold' but had some technical glitches that prevented my publishing it this past week. You will see this piece tomorrow (Sunday) most likely.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is still in a strong move higher since the index pierced its last high in the 1040 area. It looks like it could be headed to the 1100 area or higher next. Working against this kind of further spurt higher in the near-term is the fact that SPX is also quite overbought both in terms of bullish sentiment and relative to the RSI, the aptly named "Relative Strength Index".

Regardless of indicator considerations and as I noted also last week, the chart will maintain its most bullish pattern if it can continue to hold above its prior high in the 1039 area, which is where I've noted initial technical support; i.e., a prior high, once exceeded, tending to 'become' later support.

The next key area of chart support is in the low-1000 area. Pivotal resistance looks to fall in the 1100 area, extending to 1115 currently.

TRADER SENTIMENT:

Another spike higher in trader sentiment in the past week is seen above. Prior such extremes on both a single 1-day basis and in terms of the 5-day moving average of my 'CPRATIO' have led to pullbacks, typically within 1-5 trading days. Stay tuned on this timing. It's not the time that I want to join the large number of bullish traders and start buying more and more calls. I like to buy em when not many want em and then sell to them when they are in a fever for more and more bullish participation.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index has the same bullish pattern as big brother (big sister?) SPX, with key support noted at the prior 483 high. Next lower support is noted below around 472.

As I've written on the OEX daily chart below, relative to prior peaks in the 13-day RSI indicator during this bull market cycle, overbought RSI extremes have not signaled big trend reversals, but have occurred ahead of some relatively long and some relatively short-lived corrections.

The key point is that the RSI peaks have suggested that better index options prices will follow for those that wait for the RSI to get back into what I've defined as a 'neutral' range. This is simply a range that's around the mid point of not 1 to 100, but between 30 (a typical oversold reading) and 70-75 (a typical overbought area). In a strong bull market, it's unusual for the RSI to fall to or near its 'fully' oversold zone.

Key near OEX resistance is suggested in the 500 area. Near support is noted at 480, then at 472-470.

DOW 30 (INDU) AVERAGE; DAILY CHART:

We saw a continued move higher for the Dow 30 (INDU) this past week and consistent with how the 30 stock charts look; as noted last week: ", there are at least 15 Dow stocks in strong up trends, maybe 5 under selling pressure and maybe 10 that are in more or less neutral sideways trends."

The bottoms up approach of looking at the chart patterns of the individual 30 Dow stocks suggests enough underlying INDU strength to propel the average to the 10000 area or a bit higher in the coming month. 10000 is a big deal in terms of the attention that the media talking heads will give to any close at or above this level.

There could be a pullback to the 9650 area before any such move (to 10000) that would 'throw off' the current 'overbought' condition, to be followed by another run that would carry the Dow to the magic 10000. Near support as mentioned is around 9650, with next technical support looking like 9450.

Very pivotal resistance is at 10000, extending to 10225.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) is bullish in its pattern. I've noted the indicator considerations that give me pause in taking on any new positions. I don't go in much for scale up buying in index options, the way I might in a stock.

Key support is suggested around 2059, at the prior high. I didn't note a next lower (green up) support arrow, but the levels I'll be watching is any close below the 21-day moving average currently at 2044, especially if this was more than a 1-day affair. The next pivotal support is at 2018, which would 'fill in' the upside chart gap from 9/4-9/8.

I've noted a first estimated technical resistance at 2165, with major resistance at the extension of the previously broken up trendline which currently intersects in the 2300 area.

Bullish sentiment was relative high among options traders the week before last, but this past week saw a level of bullishness that suggests more 'capitulation' to the 'what me worry' full-speed ahead bull camp.

I'm bullish too, but also try to keep emotions in check. I've been through too many sharp corrections when everyone is convinced there's little risk in being heavily on one side of the market. In bull markets it's true there's often quite lengthily periods of bullish fever. There's a bias to being long and you have plenty of company. There's no free ride forever however. Otherwise too many people would make 'too much' money!

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) continued its surge higher this past week in strong continuation of the move that began soon after the last (down) swing low was seen at 1585. The upside chart gap seen after that low was made (between 1640 and 1643) was the key initial pattern technically to suggest buying calls. Anyone waiting much after that point doesn't have the same 'comfort' level if a correction develops. One (a correction) seems due; e.g., 50 points from the recent 1725 close. As much as price considerations, I'd favor buying NDX calls again if the 13-day RSI gets back down to a neutral reading; e.g., around 45-50.

I've pegged initial technical support at 1668, the area of the prior high on the last rally that preceded this one, with next support not much lower, at 1650.

Near resistance I've calculated at 1760, with even more pivotal resistance up in the 1800 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) is bullish in its pattern, but upside momentum has stalled on a short-term basis. This may or may not lead to a pullback but one wouldn't be surprising. Daily trading volume is certainly muted. The On Balance Volume (OBV) line has been trending higher and OBV has been the most important Volume indicator with QQQQ; i.e., as long as OBV is trending HIGHER, this indicator has 'confirmed' the continued bullish price trend.

I've tried to figure why the relatively low volume of late as the stock continues to track higher. My best guess is that this situation is consistent with a somewhat overbought market, in that a lot of the would be buyers are in already and aren’t doing a lot of further buying. If prices crack, then volume jumps on traders taking profits on the stock or money managers lifting some of their buy hedges.

Near QQQQ resistance: 43.0

Next overhead resistance: 44.0

Near QQQQ support: 41.1

Next support: 40.75

Pivotal next support: 39.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has broken out to both a new high and to above the upper end of the broad uptrend price channel that it's been in for several months. A move ABOVE the rate of change or line of ascent that is hit at succeeding highs over some period of time is a CHANGE that is worth noting as it demonstrates visually that the rate of upside momentum for a stock or index has accelerated.

RUT will continue to show a quite bullish pattern if any near-term pullbacks find support along the trendline that marked those prior highs. Near support therefore comes in around 609-610 currently, with next support noted at 590, at the top of some prior highs. Major support is suggested by the 55-day moving average at 555.

Near resistance is estimated for the 632 area, with next resistance around 653.

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

Industrials & Coal

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Caterpillar - CAT - close: 53.42 change: -0.47 stop: 47.49

Why We Like It:
CAT is a big-cap industrial name that has broken out over serious resistance with last week's rally. Shares now look a little over extended and due for a pull back (as does the market). I'm suggesting readers buy calls on a dip at $50.00. More conservative traders could try and hold out for a dip closer to $49.00. If we are triggered at $50.00 our first target is $54.50. Our second target is $59.00. FYI: The P&F chart is bullish with an $85 target.

Suggested Options:
I am suggesting the October or November calls. Keep in mind that we'll exit ahead of the earnings report around Oct. 20th. My preference is the $55 strike.

BUY CALL OCT 50.00 CAT-JJ open interest=5076 current ask $4.70
BUY CALL OCT 55.00*CAT-JK open interest=6172 current ask $1.85

BUY CALL NOV 55.00*CAT-KK open interest=9681 current ask $3.25

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 50.00
Change since picked:       + 0.00
Earnings Date            10/20/09 (unconfirmed)
Average Daily Volume =         10 million  
Listed on September 19, 2009         


Consol Energy - CNX - close: 46.68 change: +0.31 stop: 39.45

Why We Like It:
Many of the coal stocks have shown relative strength and broken to new 2009 highs. CNX is one of them reaching close to $49 last week. I am suggesting readers buy calls on a dip at $42.50. If triggered our first target is $48.50. Our second target is $52.40. We'll plan to exit ahead of the late October earnings report. FYI: The Point & Figure chart is forecasting a $73 target.

Suggested Options:
I am suggesting October or January calls. October strikes will expire a few days before CNX's earnings report. My preference would be the January $45 strike.

BUY CALL OCT 40.00 SDF-JH open interest=4708 current ask $7.40
BUY CALL OCT 45.00 SDF-JI open interest=1953 current ask $3.70

BUY CALL JAN*45.00 SDF-AI open interest= 267 current ask $6.60

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER 42.50
Change since picked:       + 0.00
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on September 19, 2009         


Flowserve - FLS - close: 97.82 change: +0.03 stop: 88.95

Why We Like It:
FLS has displayed impressive relative strength with a big rally off its September lows near $82.00. Now the rally is getting tired under major resistance at $100.00. We want to jump on board but not at resistance. The plan is to buy calls on a dip into the $92.50-90.00 zone. More conservative traders can wait for the lower edge near $90.00. If we are triggered at $92.50 our first target is $99.25. Our second target is $107.50. However, we will plan to exit ahead of the late October earnings report. FYI: The P&F chart is bullish with a $128 target.

Suggested Options:
I would prefer to buy November options but none are available yet. That leaves us with Octobers and Januarys. My preference would be the January 95s.

BUY CALL OCT 90.00 FLS-JR open interest= 794 current ask $9.40
BUY CALL OCT 95.00 FLS-JS open interest=1245 current ask $5.80

BUY CALL JAN*95.00 FLS-AS open interest= 265 current ask $10.70
BUY CALL JAN 100.0 FLS-AT open interest= 159 current ask $ 8.20


Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 92.50
Change since picked:       + 0.00
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        1.2 million  
Listed on September 19, 2009         



In Play Updates and Reviews

Looking For A Dip

by James Brown

Click here to email James Brown

Stocks look short-term overbought but we can expect any pull back to be shallow.


CALL Play Updates

Alcon Inc. - ACL - close: 139.65 change: -0.06 stop: 129.49

There appears to be a bad tick at the open on Friday morning with ACL at $133.25. The rest of the day was spent between $139.00 and $140.50. The market looks a little overbought and if the S&P 500 corrects ACL could dip back toward the $136 or $134 levels. I encourage readers to wait for a dip before launching new positions. Our first target is $142.50. Our second target is $148.00.

Suggested Options:
If ACL provides a new entry point I would buy the October or November calls.

Annotated Chart:

Picked on September 10 at $136.75
Change since picked:       + 2.90
Earnings Date            10/21/09 (unconfirmed)
Average Daily Volume =        299 thousand 
Listed on September 10, 2009         


Allegheny Tech. - ATI - close: 34.86 change: -0.39 stop: 30.99

ATI also looks overbought with the rally from its September lows. If shares correct look for support near its 100-dma and exponential 200-dma or prior resistance near $32.00. I'm not suggesting new positions at this time. ATI has already exceeded our first target. We're currently aiming for $37.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   August 31 at $ 30.25 *triggered         
Change since picked:      + 4.61
                               /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: 90.19 change: +0.13 stop: 84.75

CF gapped open on Friday morning and almost hit $92.00. Shares spent the rest of the day bouncing around the $90-92 zone. Technically the close above $90 is bullish but if the market corrects I would expect another dip towards $86.00. Wait for another bounce near $86 before considering new bullish positions. 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:
No new positions at this time.

Annotated Chart:

Picked on September 05 at $ 85.93
Change since picked:       + 4.26
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        653 thousand 
Listed on September 05, 2009         


Compass Minerals - CMP - close: 59.50 chg: +1.33 stop: 54.75

CMP displayed some relative strength with a 2.2% gain and a bounce from the $58 level near its rising 10-dma. The $60.00 level could be round-number resistance and I would look for a dip back towards $56.00 before considering new positions. CMP has already hit our first target at $59.75. Our second and final target is $64.00. FYI: The Point & Figure chart has turned bullish with a $69 target.

Suggested Options:
No new positions at this time. If CMP provided a new entry point I'd use the October or December calls.

Annotated Chart:

Picked on September 03 at $ 55.55
Change since picked:       + 3.95
                               /1st target hit @ 59.75 (+7.5%)
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        415 thousand 
Listed on September 02, 2009         


Danaher Corp. - DHR - close: 68.15 change: -0.46 stop: 63.95 *new*

DHR has been looking overbought and vulnerable for a few days now. It's small and a little hard to see but Friday's session did produce a bearish engulfing candlestick pattern. I would expect a correction toward the $65.00 level. Wait for the bounce before considering new positions. I'm upping our stop loss to $63.95. Our first target is $69.50. The Point & Figure chart is bullish with a $77 target.

Currently we only have half a position open to limit our risk given the aggressive entry point.

Suggested Options:
No new positions at this time. If DHR provided a new entry point I'd use the October or December 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:       + 1.78
Earnings Date            10/15/09 (unconfirmed)
Average Daily Volume =        2.4 million  
Listed on September 05, 2009         


Diamond Offshore - DO - close: 93.99 change: -1.37 stop: 88.49 *new*

A bounce in the dollar took some area out of crude oil and the oil service stocks hit some profit taking. DO has some very short-term support at $92.00 and should find stronger support near $90.00 with its rising 50-dma and its trendline of higher lows. I would buy calls on a bounce from either (92 or 90). Please note I'm raising the stop loss to $88.49. The plan was to use small position sizes.

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:
I would use the October or December calls if DO does bounce from one of the support levels listed. My preference would be the $90 or $95 calls.

Annotated Chart:

Picked on September 15 at $ 94.69 *adjusted entry point
Change since picked:       - 0.70
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        1.8 million  
Listed on September 12, 2009         


General Dynamic - GD - close: 64.61 change: +0.18 stop: 57.85

The defense sector indices have broken out to new highs and look even more overbought than the major market averages. When these correct I expect GD to follow them lower. That's why we're waiting for a dip to buy calls at $61.00.

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:
At this point I prefer the November calls and if GD hits our trigger I'd favorite would be the November $60 (GD-KL) or $65 (GD-KM) strikes.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 61.00
Change since picked:       + 0.00
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        2.3 million  
Listed on September 09, 2009         


Genesse & Wyoming - GWR - close: 32.27 change: +0.55 stop: 29.90 *new*

The railroad stocks have been under performing all week. GWR out performed its peers on Friday with a rally from its morning lows and a 1.7% gain. I am raising our stop loss to $29.90. We've already taken profits once and our second target is $34.75. I am not suggesting new bullish positions at this time.

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:      + 3.62
                              /take profits 09/16/09 @ 32.45 (+13.2%)
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       230 thousand
Listed on August 15, 2009         


Grainger W.W. - GWW - close: 90.91 change: +0.94 stop: 87.40

GWW displayed a little strength with a new bounce back above $90.00. The trend is bullish but if the market corrects we can expect GWW to follow. I wouldn't be surprised to see GWW retest the $88.00 level if the S&P 500 dips. Readers can choose to buy this breakout over $90.00 or look for another dip. Our first target is $93.50. Our second target is $97.50.

Suggested Options:
I would use the October calls.

Annotated Chart:

Picked on September 1 at $ 86.00 *triggered  
Change since picked:      + 4.91
Earnings Date           10/14/09 (unconfirmed)
Average Daily Volume =       635 thousand 
Listed on August 22, 2009         


Intl. Bus. Mach. - IBM - close: 122.11 chg: +0.23 stop: 117.75

IBM spiked higher Friday morning after an analyst raised their price target toward $145. The stock spent the rest of the day hovering around $122.00. Broken resistance near $120 should be new support. I would look for dips near $120 as entry points. Our first target to take profits is at $126.00. Our second target is $129.75. We will plan to exit ahead of IBM's earnings report in mid October.

Suggested Options:
We want to use October calls. I prefer the $120s or $125s.

Annotated Chart:

Picked on September 16 at $121.82
Change since picked:       + 0.29
Earnings Date            10/15/09 (unconfirmed)
Average Daily Volume =        5.3 million  
Listed on September 16, 2009         


iShares Financials - IYF - close: 53.66 change: -0.04 stop: 49.49

After a two and a half week rally the financials look a little tired. Broken resistance near $52.00 should offer a little bit of support. I would wait for a dip and a bounce from $52.00 or the $50.00 level before considering new bullish positions. Our first target is $57.00. Our second target is $60.00.

Suggested Options:
I prefer the November calls.

Annotated Chart:

Picked on September 15 at $ 52.60 *triggered  
Change since picked:       + 1.06
Earnings Date            00/00/00
Average Daily Volume =        5.1 million  
Listed on September 01, 2009         


Mettler Toledo - MTD - close: 92.87 change: -0.05 stop: 86.95

MTD continues to show strength although shares look short-term overbought. I would look for a dip and a bounce near $88.00 or its rising 30-dma before considering new bullish positions. MTD has already hit our first target at $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 provides a new entry point I'd use the October calls.

Annotated Chart:

Picked on   August 27 at $ 88.50 *triggered  (1/4 normal size)
Change since picked:      + 4.37
                             /1st target hit @ 93.50 (+5.6%)
Earnings Date           11/05/09 (unconfirmed)
Average Daily Volume =       234 thousand 
Listed on August 22, 2009         


Occidental Petrol. - OXY - close: 77.15 change: -1.49 stop: 73.75

OXY was downgraded from a "strong buy" to an "out perform" on Friday morning, which exacerbated the profit taking. Shares fell toward $76 and the rising 10-dma. I would expect the dip to continue. Look for a bounce from $75.00 or $74.00 before considering new bullish positions. OXY has exceeded our first target and we're currently aiming for $79.85 but I'm tempted to raise the second target toward $82.50. The P&F chart is bullish with a $92 target.

Suggested Options:
If OXY provides a new entry point I'd use the October or November calls. My preference would be Novembers.

Annotated Chart:

Picked on   August 27 at $ 72.00 *triggered         
Change since picked:      + 5.15
                    /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: 59.65 change: +0.37 stop: 54.95

PPG is still testing resistance at $60.00. I would expect another dip back toward the $56-55 zone. Wait for a bounce before considering new positions. PPG has already exceeded our first target and we're currently aiming for $63.00. The P&F chart is very bullish with a $90 target.

Suggested Options:
If PPG provides a new entry point I'd use the October or November calls. My preference would be Novembers.

Annotated Chart:

Picked on   August 28 at $ 55.65
Change since picked:      + 4.00
                             /1st target exceeded @ 60.05 (7.9%)
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       1.6 million  
Listed on August 27, 2009         


SPX Corp. - SPW - close: 63.82 change: +0.31 stop: 57.25

SPW has turned sideways the last few days. If the S&P 500 pulls back we have a good chance of catching SPW near $60.00. More conservative traders could try and wait for a dip near $58.50 instead. Our plan is to buy calls at $60.50. If triggered our first target is $64.00. Our second target is $68.50.

Suggested Options:
If triggered we want to use the October or December calls (I don't see any Novembers available). My preference would be the December $60s (SPW-LL) or the $65s (SPW-LM).

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         


SOHU.com Inc. - SOHU - close: 69.27 change: -1.63 stop: 63.25

SOHU is starting to correct. If the market dips this week we have a good chance to getting triggered. Our plan is to buy calls at $67.50. More conservative traders may want to wait for a dip closer to the $66.00-65.00 zone.

Our first target is $72.50. Our second target is $77.00.

Suggested Options:
We want to trade the October or December calls (I don't see any Novembers available). My preference would be the December $70s (TKZ-LN).

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 67.50
Change since picked:       + 0.00
Earnings Date            10/26/09 (unconfirmed)
Average Daily Volume =        577 thousand 
Listed on September 15, 2009         


State Street (Bank) STT - close: 54.39 change: +0.60 stop: 49.45

The financials look a little overbought given their rally off the September lows. STT is not so overbought but could still see a dip back toward $52.00 or its 50-dma. Wait for a bounce before considering new bullish positions. STT has already hit our first target. 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 calls.

Annotated Chart:

Picked on   August 31 at $ 52.00 
Change since picked:      + 2.39
                             /1st target hit @ 55.00 (+5.7%)
Earnings Date           10/13/09 (unconfirmed)
Average Daily Volume =       5.3 million  
Listed on August 19, 2009         


United Health - UNH - close: 28.58 change: -0.76 stop: 27.49

The healthcare debate rages on. If it looks like any reform will be toned down to increase the chance of getting passed then healthcare stocks could rally.

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.

FYI: Readers may want to consider a strangle or a straddle on this stock instead. That way you don't care what direction it moves. Just make sure you give yourself enough time.

Suggested Options:
If UNH hits our trigger we want to trade the October or December calls (I don't see any Novembers). Just remember that we'll exit ahead of the mid October earnings report.

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: 37.12 change: -0.37 stop: 34.95 *new*

The long-term trend of higher lows is still intact but it's competing with a trend of lower highs. If the dollar begins to bounce it will put pressure on crude oil. I'm inching our stop loss up to $34.95. I would still buy a dip or a bounce from $36.00. Our first target is $39.95. I'm adding a second target at $42.50.

Suggested Options:
I would buy the January calls if the USO provides a new entry point.

Annotated Chart:

Picked on   August 31 at $ 36.50 
Change since picked:      + 0.62
Earnings Date           00/00/00
Average Daily Volume =      11.5 million  
Listed on August 15, 2009         


Waters Corp. - WAT - close: 55.32 change: -0.27 stop: 49.30

WAT has broken out from a multi-week consolidation. We want to buy calls on a dip at $53.50. If triggered our first target is $59.50. The P&F chart is bullish with a $69 target. We do not want to hold over the mid October earnings report.

Suggested Options:
If WAT hits our trigger I would use the October or November calls. My preference would be the November $55s (WAT-KK).

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER 53.50
Change since picked:       + 0.00
Earnings Date            10/20/09 (unconfirmed)
Average Daily Volume =        809 thousand 
Listed on September 12, 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: 31.84 change: -0.76 stop: n/a

CI failed twice near $33.00 last week and could retrace towards the $30.00 mark. I would still consider new strangles on a dip in the $30.25-29.75 zone.

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:
See above.

Annotated Chart:

Picked on September 08 at $ 29.40
Change since picked:       + 2.44
Earnings Date            11/05/09 (unconfirmed)
Average Daily Volume =        3.8 million  
Listed on September 08, 2009         


CLOSED BULLISH PLAYS

Factset Research - FDS - close: 62.17 chg: -0.18 stop: 57.45

We're almost out of time and I'm suggesting an early exit now. FDS is due to report earnings on Tuesday morning, September 22nd. We could try and hold on one more day and exit on Monday at the close. However, the market looks a little overbought and FDS looks very short-term extended. I'm suggesting an early exit now! FDS has already hit our first target at $62.00.

Chart:

Picked on September 08 at $ 57.55
Change since picked:       + 4.62 <-- early exit (+8.0%)
                               /1st target hit @ 62.00 (+7.7%)
Earnings Date            09/22/09 (confirmed)
Average Daily Volume =        331 thousand 
Listed on September 05, 2009         


Goldman Sachs - GS - close: 183.18 change: +1.72 stop: 166.45

Close enough! GS rallied to $183.95 on Friday afternoon. Our second and final target was $184.00. The stock looks too short-term overbought for us to want to stick around. I'm suggesting readers exit now we can look for a new entry point on a dip and bounce in the $175-170 zone.

Chart:

Picked on September 8 at $166.75
Change since picked:      +16.43<-- early exit (+9.8%)
                             /1st target hit @ 179.00 (+7.3%)
Earnings Date           10/13/09 (unconfirmed)
Average Daily Volume =       8.8 million  
Listed on August 29, 2009         


CLOSED STRANGLE & SPREAD PLAYS

Research In Motion - RIMM - close: 83.61 chg: +0.91 stop: n/a

RIMM gave us a little bounce on Friday and the September $80 calls settled at $3.60. The plan was to exit at the closing bell or at $5.00. Our estimated cost for the strangle was $2.64.

The options suggested were the September $80 calls (RFY-IP) and the September $70 puts (RFY-UN).

Chart:

Picked on   August 25 at $ 75.56
Change since picked:      + 8.05
Earnings Date           09/24/09 (confirmed)
Average Daily Volume =      11.7 million  
Listed on August 25, 2009