Option Investor
Newsletter

Daily Newsletter, Saturday, 10/3/2009

Table of Contents

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

Market Wrap

October Arrives With A Thud

by Jim Brown

Click here to email Jim Brown

The fourth quarter started out miserably with a -200 point drop on Thursday and a continued decline on Friday. The damage was not as bad on Friday as you may have expected but the trend is still down.

Market Statistics

The markets continued Thursday's closing decline when they opened for business on Friday. The incentive for Friday's decline was a worse than expected jobs report. The economy lost -263,000 jobs in September according to the Non-Farm Payroll report. Expectations had been for a loss of -150,000 to -188,000 jobs. The private sector job losses came in a -210,000 and surprisingly the government sector lost 55,000 jobs. The previously reported job losses in July of -276K were revised to -304K while the -216K loss in August was revised higher to -201K. The economy has now lost jobs for 21 consecutive months.

The really bad news came from the Household Employment Survey where the unemployment rate increased to 9.8%. Over 571,000 workers left the job market as discouraged workers. Household employment fell by -785,000 for September and that was the biggest drop since March. The average workweek shrank to 33.0 hours and that is the wrong direction if you are expecting the economy to improve. You want an expanding workweek to reduce the slack in the workplace and require new hiring. The pre-recession workweek was 33.8 hours. Returning to that level would be the equivalent of hiring 3 million workers.

Non-Farm Payroll Chart

The quoted unemployment rate of 9.8% is very misleading. If you have not actively searched for a job over the last four weeks or your benefits have expired you are not counted as unemployed. You have fallen into that discouraged worker category or another term is marginally attached workers. 571,000 additional workers fell into that category in September. If you factor all of these workers into the unemployment rate you get what the government calls the U6 unemployment and that rose to 13.2% in September. That was up from 12.8% in August.

There are roughly 154,577,000 people in the U.S. workforce according to the BLS. Also, according to the BLS there are currently about 15 million people unemployed. If you add in those who are underemployed the number rises to about 17.5 million. Underemployed means you took a part time job to pay the bills while you looked for a new job in your chosen field. Some estimates suggest the underemployed could be as much as 9 million of the 17.5 total.

Unemployed and Under Employed Worker Chart

Another factor to consider is the estimated 150,000 new workers who enter the job market every month. Not only do we have to create jobs to put the unemployed back to work but also we have to create 150,000 more jobs per month for new workers entering the system. Over the next five years the total workforce will grow to 163 million according to the BLS. That is an additional 8.32 million workers who will need jobs in addition to the 17.5 million currently unemployed/underemployed and disadvantaged. To get back to 5% unemployment by 2014 would require the creation of 15 million jobs. That means we will have to create an average of 250,000 jobs per month starting in 2010. The year 1999 was the most recent year where we hit that average at 264K per month thanks to Y2K. In 2003, the year after the last recession only a total of 87,000 jobs were created. Employers are always very careful after a recession to not over hire and give extra hours to existing employees first. Real job growth normally does not come until 24-36 months after a recession. 2.54 million jobs were created in 2005 and 2.14 million in 2006 thanks in part to the boom in the housing market. It took 48 months to recover the 2.7 million jobs lost in the 2001 recession. It could take a lot longer to recover the 7.2 million lost so far in the 2008 recession.

In 2010 an employer will have the option of hiring experienced workers at a higher rate or inexperienced workers at an entry-level rate. This will push the average income per worker to a lower level for years to come because of the millions of workers applying for new positions. For unskilled positions employers are now averaging over 100 applications. There is definitely no need to offer high wages to new employees. Most currently unemployed would just be happy to have a full time job. This is going to depress the economy for the next 12-18 months because unemployed, underemployed and underpaid workers make lousy consumers. Most analysts believe the unemployment rate will remain around 10% possibly into 2011.

With the negative economic numbers we saw last week the odds of a double dip recession are growing or at least that is what the professional analysts are saying. The ISM Index fell slightly to 52.6 from 52.9 but analysts were expecting a jump to 54.7. Definitely a negative surprise there. The production index fell sharply from 61.9 to 55.7 and new orders fell from 64.9 to 60.8.

National ISM Chart

Also released on Friday were the Factory Orders for August. Orders fell -0.8% after four consecutive months of gains. Durable goods orders fell -2.6%. The overall numbers would have been much worse were it not for a spike of +5.4% in petroleum and coal products. Most of the increase in orders for petroleum products came from in increase in the price of the commodity not in the quantity ordered.

Factory Orders Chart

A double dip recession "W" looks just like a "V" until the economy starts to slide into the second dip. We have not seen that slide yet and the disappointing economic reports simply tell us that recovery is still in its tenuous stage until it finds better traction. It is still too early to call it a V bottom but also too early to be calling it a W.

The economic calendar for next week is one of the lightest of the year. The two reports I highlighted are really non-events. The ISM Non-Manufacturing has already been overshadowed by the ISM Manufacturing last week. I am really stretching to call Consumer Credit a significant report but with the credit lines being cut every day it could hold some surprises. I added some earnings to the calendar to fill it out because the beginning of earnings season is going to be a pivotal event. I did not add the Treasury auctions to the calendar since the $79 billion total was one of the smallest weeks in recent months.

Economic Calendar

Analysts were expecting Q3 earnings to be relatively decent since the comparison to Q3-2008 would have been easy. Unfortunately the closer we get to the actual earnings the worse the numbers get. Over just the last week the Thomson estimates for Q3 earnings growth have worsened to -24.8%. On July 1st the consensus estimate was for a -20.9% growth rate. For comparison Q2 ended with a -27.3% growth rate. Since earnings were already negative in Q3-08 you would have thought that with our budding recovery many companies would have rebounded back into positive results. Apparently it is too early to make that call on the entire S&P but there are some leaders who are rebounding out of the recession.

The list below is the top 15 earnings improvements according to Thomson Reuters. I left off WFMI because going from a penny to 17-cents put them at +1700% improvement and off the chart numerically. I also ignored those going from seriously negative to less seriously negative like AIG. I listed the earnings date for those who have already set a date.

Thomson Top 15 Earners Table

The FDIC closed three more banks on Friday bringing the total to 98 for 2009. The Jennings State Bank in Spring Grove Minnesota, the Warren Bank in Michigan and Southern Colorado National were added to the list of failures for 2009. In other news Starwood Capital Group appears to have won the FDIC auction for $5 billion in assets seized when they shut down Corus last month.

In stock news Apple (AAPL) was upgraded to a BUY at UBS with a price target of $265. That is $95 over their last target and $80 over the $185 where Apple was trading today. The upgrade came on claims by analysts that exclusive relationships with carriers will expire in 2010. Apple signed exclusive deals with carriers in the various markets when the iPhone was first introduced. There is no reason in today's markets for exclusivity and opening up the iPhone to all carriers will give Apple added market penetration. UBS said Apple's market share could rise from 4% in currently exclusive markets to 10% when those contracts end. UBS said expiring contracts in Asian markets could add an additional 20.3 million Iphone shipments in 2010. UBS said consumers did not appear to be moving to the $99 iPhone 3G and Apple would retain strong margins. UBS expects total iPhone shipments would hit 36 million in 2010 and 40.5 million in 2011. Apple is expected to earn $6.98 in 2010 and $8.53 in 2011.

Apple Chart

First Solar (FSLR) had coverage initiated by Montgomery Scott with a buy rating. First Solar was also named to replace Wyeth in the S&P-500. Wyeth is being removed due to the acquisition by Pfizer.

First Solar Chart

Intel (INTC) was upgraded by Oppenheimer to outperform after global chip sales rose to $19.1 billion in the latest Semiconductor Association report. That was a +5% jump from the prior month but still down -16.1% from the same period in 2008. SEMI said this was the sixth consecutive month of growth in chip sales powered by consumer spending. Oppenheimer said chip sales could grow +10% in 2010. Intel CEO Paul Otellini said last week that PC sales could be flat to slightly higher for full year 2009. Not bad for the deepest recession since the 1930s. Sales of netbook PCs now account for 17% of all notebook sales. That is a huge new market niche that is exploding.

Intel Chart

The financial sector closed September with only a minor gain as worries over the true health of the sector continue to mount. The credit crunch is still the hot topic for consumers and for small businesses. GE may be able to borrow billions on their good credit but small businesses are still out of luck. Meredith Whitney wrote an opinion column for the WSJ on Friday and her outlook has not changed. According to Whitney "In the U.S., small businesses employ 50% of the country's workforce and contribute 38% of the input to GDP. Without access to credit, small businesses can't grow, can't hire and too often end up going out of business." Whitney believes banks should be given incentives to implement small business loans on a greater scale. She also said she expects another $1.5 trillion to be cut from credit card credit lines. With commercial real estate in implosion mode banks are loading up on cash for the second leg of the credit crunch expected to hit in 2010.

Banking Index Chart

I am going to try and get through this paragraph without being political but it may be tough. I have been reading about the various methods lawmakers are contemplating to fund the health care reform. Since President Obama promised not to raise taxes on families making less than $250K and individuals less than $200K, lawmakers are being creative with their ideas. Being considered are taxes on makers of medical devices like shoulders, hips, stents, etc. Taxes on providers like WellPoint, United Health and Aetna. Taxes on drugs like Lipitor, Crestor, etc. Taxes on procedures like Lasix, colonoscopy, etc. Plus taxes on businesses that do not provide health benefits. While these may technically not be a tax on individuals making less than $200K we all know who will end up paying the bill. Medical companies will pass these costs on to the consumer and while not a tax the medical bills will increase dramatically.

Paul Volker, the Presidents tax czar is now exploring the addition of a value added tax or VAT to fund health care. This is like a national sales tax. He is also recommending that money market funds be closed but that is another story. John Podesta, also an Obama adviser was also talking VAT last week as a way for the government to raise additional revenue to pay for new spending programs. Let's hope rational minds prevail before these things end up being turned into laws or those small businesses Whitney was talking about will be out of business. FYI, the Tax Policy Center said Friday that 47% of U.S. households or 71 million people will not pay any income tax in 2009 and quite a few of those households will receive checks from the government for various kinds of assistance.

Somebody needs to put a tax on Alan Greenspan's public speaking. On Friday Greenspan said the Fed balance sheet is a serious inflation risk. Greenspan warned that the Fed must remove its stimulus from the market at exactly the precise time or the damage could be severe. I guess he is trying to make up for his mistakes of not acting in a timely manner. He went on to say that the economy is "undergoing a disinflationary process" and said the Fed faces no urgent need at the moment to unwind its monetary stimulus. He warned, "It is critically important the Fed's doubling of its balance sheet be reversed. If you allow it to sit and fester it would create a serious problem." Since so many people are now looking back and pointing fingers at Greenspan's key mistakes including the housing bust he is apparently trying to shift the focus back onto the Fed.

When Greenspan Was King (Feb 15th 1999)

Bernie Madoff will not be sleeping well this weekend. The court appointed trustee attempting to track down the missing billions has sued the Madoff sons, brother and niece for $198.8 million. The trustee accused the family of "enabling the fraud" saying the family was derelict in their duties. As a result "they either failed to detect or failed to stop the fraud." According to the trustee if the family had been doing their jobs the fraud may never have occurred or continued for so long. The trustee claims that Madoff Securities was operated as if it were the family piggybank. The relatives took large amounts out of the company to buy homes, cars and boats. What the trustee fails to admit is that the family worked in the legitimate business in the same building and Bernie seldom let anyone onto the floor where the scam was being operated. The sons were quick to deny the trustee's claims reminding everyone they called regulators the same day Bernie confessed his scheme to them. He was arrested the very next day. Since Bernie has nothing to lose by claiming that he alone knew about the scheme the trustee is going to have a tough fight in proving otherwise. If the supposedly wealthy dad gave his family money for down payments to buy homes that should not have raised any red flags. I have done that several times and I don't have his wealth. Retrieving $200 million from people solely on the premise that they "should have known" because dad gave them money is going to be a tough sell. I hope he finds the missing $18 billion but I would bet the money went to pay earlier returns. That is how a ponzi scheme works.

The markets gave back only about 2% for the week, which is remarkable given the big declines on Thursday. The Nasdaq closed -93 points off its high of 2140 (-4.34%) but because of Monday's gains only gave up -2% for the week. The problem for the Nasdaq was the serious drop in the semiconductor index. I reported on Tuesday night that the index was still holding over support at 320 but that was crushed in trading once October arrived. The SOX declined to close the week at 306 for a -4.5% drop. The next support level is probably 295 followed by 285. We would target 250 if those levels broke. There is no fundamental reason for chips to be this weak with sales improving and chip makers predicting strong PC sales. The only reason for chips and the Nasdaq to be so weak is their gains over the last six months. These were the go to stocks that fund managers expected to lead out of the recession. They logged big gains and now they are taking profits. How long this continues depends on how severe the profit taking gets. Mild selling will have some who don't need to sell simply tightening stops and planning on riding out the storm. If the selling becomes frantic then odds are better that the selling will increase as everyone becomes worried their year-end bonuses are in jeopardy.

So far the Nasdaq is within normal trends for profit taking. Uptrend support at 2050 is still intact. A break there targets 1950 and that would still maintain the longer-term uptrend but begin to worry the bulls.

Nasdaq Chart

The Dow is on the verge of testing 9410 (Fib retracement) followed by 9300 and 9100 if sellers appear in volume. The Dow rallied 14.98% in Q3 and the biggest quarter since 1998. Conventional wisdom suggests that after such a big quarter we should see the markets rest in Q4. Of course that assumes there was nothing special about Q3 and it was a run of the mill bull market. Since that is not the case and it was a rebound after the worst recession since the 1930s there is ample precedent for a continued move higher. Maybe not immediately but eventually.

Bianco Research put together a list of the Dow's greatest quarters since 1904. The average gain the following month was +1.33%, the following quarter +3.46% and the next year +9.95%. However only six of the 23 quarters occurred in the third quarter. If you average all the record Q3 quarters the average gain was +27.25%. The average October following the record was a loss of -0.14%, average Q4 following was +1.21% and year 12.64%. While this is in interesting exercise in market trivia I don't believe it has any impact on our market direction today.

Table courtesy Bianco Research

Dow Chart

The S&P dipped to 1019 on Friday and the 50-day moving average. The initial support at 1035 has broken and uptrend support is around 1000. The lows from August were 978 and should be considered critical support. The break of 1035 suggests we will test at least 1000 before a successful rebound can occur. There needs to be enough fear coupled with enough support to convince the bulls that a real correction has occurred. Of course a real 10% correction would take us to 964 but I am betting against that option. We could see an intraday penetration below 978 but I think there will be too many buyers in cash on the sidelines trying to get in just above that level. I have seen it too many times were some number is defined as a critical level and buyers target a few points above it for an entry and the number is never touched.

SPX Chart

The Russell fell below 600 on Thursday and under 585 on Friday. The Russell came to rest exactly on the 50-day average at 580 with absolutely no signs of a bounce. I could easily see a dip to 558 and a full 10% correction. Small caps are suddenly out of favor but once the profit taking ends they will probably lead us out of the decline.

Russell Chart

Volume has been strong for the last three days and obviously decidedly negative. The 200-point drop on the Dow at Thursday's close was probably traders scrambling to exit before Friday's jobs report as well as end of quarter window undressing. Friday's rebound from the opening lows came on the back of several upgrades to big cap stocks. It was also short covering head of the weekend.

The good news from the Jobs report is a Fed that definitely will not be raising rates any time soon. They will wait until the economy starts adding jobs before starting to remove stimulus. Next week's economics should be ignored with the focus moving to earnings.

The quarterly gain discussion above is not relative because this is a recession rebound market. As long as analysts continue to expect economic improvements the markets should have a bullish bias. That does not mean we won't see a decent decline over the next couple weeks before a Q4 rally appears. If you have been reading my commentaries you know I expect an October low sometime before option expiration on the 16th. Fund managers will finish restructuring their portfolios by then and start adding to positions for the next move higher. At least that is what I am expecting. Louis Navellier has always said "Just when you think you are smart, the market will show you just how dumb you really are." I hope this is not one of those occasions.

I dropped out of dip buying mode when the S&P fell under 1035. Now I am targeting S&P-1000 for my next long trade. If we do move under 1000 then 975 would be my target with 964 as the full 10% dip.

Jim Brown


Index Wrap

Anatomy of a Trend

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The peak of option trader bullishness on a 5-day moving average basis (per my sentiment indicator) on 9/18 coincided quite closely with the recent top. There was one slightly higher Close in the S&P two days later but it was downhill after that.

Yes, Virginia 'overbought' indicators, including my 'sentiment' indicator, do have a fairly high correlation with tops. The problem is of course, peak prices can continue on and stretch out for further days and weeks so such indicators alone don't tell us how soon a correction might hit; AND, how extensive will the next correction be. However, when put together WITH price action, there is a lot we can reasonably or reliably forecast.

When I got back from my trading hiatus in my old Pacific ocean haunts late this past week, a period when I hardly looked at prices but was fairly confident holding some index puts, I of course updated my charts for my weekly mission to make some sense out of the major index trends. Since the leading market has been Nasdaq, I thought I'd start by dissecting the recent Nasdaq 100 (NDX) trend on an hourly chart basis, absent my sentiment model which I've already alluded to.

CHART OF THE WEEK:

You may recall the NDX hourly chart I featured 2 weeks ago as seen below but NOT updated yet. What I was seeing was a slowing of upside momentum coupled with an overbought hourly RSI (length setting at 21). This suggested to me that we were seeing at least an interim top. Again, the below chart ends on 9/18.

As I noted already, on a DAILY closing basis, the indexes did go on to a higher closing high on one subsequent day but that was it. On the continuation of the hourly NDX chart (through the recent 10/2 Friday close) seen below, the trend definitely looks higher after the 9/18 chart seen above. However, as noted the index was losing momentum in the sense that the up trend was 'flattening' out relative to what it had been.

PRICE patterns that suggest trend reversals coupled with things like the price/RSI divergence I've noted on the chart below, that is price action COUPLED with indicator 'confirmation' are potent in forecasting. I've noted the KEY downside reversal on the hourly NDX chart also. This was seen on the daily chart as well.

A 'key' downside reversal, as opposed to a plain vanilla 'downside reversal', is where prices go to new high, often a decisive one, followed by a collapsing trend and a CLOSE that is below the prior period's LOW. This is a fairly strong reversal pattern. They don't always end up leading to sharply lower prices, but the odds of that go UP when coupled with previous overbought indications such as 'extreme' bullishness or overbought RSI readings.

Now of course the big question is where do prices go from here? No doubt the short to intermediate trend momentum is now showing a downward trend. The upside breakout above the dominant weekly down trendline in the S&P has reversed with a weekly close below the down trendline dating from the high of exactly 2 years back. There is not yet a break below a prior downswing low however on the daily or weekly charts.

Prices haven't retraced much of the prior decline so there's more 'room' on the downside as part of what I would consider a 'normal' correction. I'm anticipating an oversold daily chart RSI before this current weakness is over, so anticipate lower prices still. Short-term a rally is due judging by the oversold level seen above in the hourly RSI.

My current favorite trading strategy or system I employ for QQQQ is now long 500 shares; I've set up the trading rules to allow the taking of multiple (100 share) positions if the system keeps getting the same buy 'signal'; caveat: this is a shorter-term trading system.

Sharp eyed observers of my prior columns may notice that well-defined DAILY chart uptrend channels are suggested in ALL the major indexes. The lower parallel line intersects just one prior low, so the upper rising trendline (and typical of a strong uptrend), is the dominant component in forming these uptrend price channels.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) remains in an uptrend as long as prices don't pierce its prior (down) swing low at 992. There is a violation of the normal symmetry of an uptrend by the fall under the prior rally high but this isn't enough to suggest a chart reversal according to how technical analysis would see things here.

An interesting aspect of the chart is whether SPX will now head toward support implied by the lower end of its uptrend channel, which currently would also be approximately a 50 percent retracement of its last major rally as seen on the chart.

If SPX rallied to above 1040-1050 on a closing basis and managed to sustain lows in this area, the index could still mount a rally to around 1100. Absent that, the 1000 area looks like a possible downside objective and a fairly 'minimal' retracement at that.

Obvious potential chart support points are the prior lows at 992 and 978. The key resistance area begins around 1075. On balance, SPX looks headed still lower. Bearish sentiment has only begun to build up. As most options traders seem to be trend followers it has only lately dawned on them that there is a down to the market's up. They should do more study of technical analysis! Well maybe not if we lose our 'edge'!!

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart has the identical pattern to the larger S&P 500 so if you've read the above and see the OEX chart below, the picture for this index should be clear; i.e., that there's more near-term downside potential than upside. 480-485 is the short-term demarcation line. A close above this area, that is maintained, would suggest that the bullish trend had reasserted itself.

The trend is stil UP in technical terms as long as there is no Close that pierces the prior 462 low. I also watch to see that any such close with special 'chart' significance is not just a 1-day affair; e.g., the result mostly due to exiting stops being executed, etc.

The usual tendency (per my chart musings below) have been in recent weeks/months for the 13-day RSI to NOT get fully oversold. Rather, rallies have been setting up 'in what I would call a neutral' RSI range. Stay tuned on that.

Key support is down in the 455 to 465 area. Key near resistance is around 484-485, with much stronger resistance, as wasn't difficult to anticipate, in the 500 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

A short preface here is that I did catch one of the media talking heads speculating on the Dow's potential to again reach 10000. When I heard that I felt a slight bit more confidence in holding puts! Once a contrarian, always a contrarian!!

The Dow remains overall bullish in its pattern. Even a dip to the 9000 area, assuming INDU didn't head still lower, would keep the Average within its anticipated uptrend channel. Actually, a sizable dip like that would be 'healthy' in my opinion, as it would keep traders and investors from going 'too' overboard in their anticipation of a strong recovery.

A recovery may be quite slow as suggested by Friday's unemployment data. No matter how many times traders HEAR that unemployment will probably top out in the 10 percent area, they haven't been acting as though they believed it. We often chose what we want to believe and it's quite often dictated by our position in the market!

I continue to believe that the Dow will see 10000 at some point based on my study of relative trends and upside potential of the 30 Dow stocks. However, near-term I'm focused on how much lower INDU might go. The 9450 area may be some near support, then stronger support at in the 9250 area. Major support begins around 9000.

Key near resistance is in the 9650 area, with tougher resistance around 9850. Major resistance begins at 10000.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) remains bullish in its broad pattern, such as seen in its projected uptrend price channel below, but near-term momentum is down and may continue. A short-term rally is due but may not get very far.

Key near resistance begins in the 2100 area then is seen at 2140, extending up to (new highs) around 2200.

Pivotal near support begins in the 2000 area, extending down to the prior 1958 intraday low.

Bullish sentiment has been declining recently from a quite high and probably 'unsustainable' level; I mean things weren’t looking that rosy in the real world versus on the Street of Dreams!

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) continued its surge higher UNTIL its 9/23 intraday high spiked up to resistance implied by its upper trend channel boundary. The 23rd then say a key downside reversal as I've already mentioned; i.e., a new high, here a decisive new high, followed by a price collapse and a close below the prior day's LOW. When a market is overbought, such a key reversal tends to be especially predictive for a good-sized pullback.

I've noted near support in the 1640 area, but the key or pivotal support looks to be closer to 1600 currently. I didn't note it on the chart but a pullback to between 1617 and 1574 would put NDX between the 38 and 50 percent fibonacci retracement levels relative to the early-July to late-September advance.

Very near resistance begins around 1700, extending to the 1735 to 1750 area.

A move down to the low end of the projected uptrend channel that found buying interest/support in that area, coupled with an RSI that was at or near the oversold area noted would likely be a compelling buy. I favor going into long calls where the underlying index is in a likely strong technical support area and is 'oversold' to boot. In such a support area I'll let a relatively small further decline stop me out of the trade. My old saw about the risk to reward ratio being key on assessing trade entry comes into play in these situations.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

There's not more to say relative to the Nasdaq 100 tracking stock (QQQQ) chart than already said about the underlying NDX index. With the Q's we can see how a study of volume patterns has played out. The last rally up to the recent high just over 43 was accompanied by LOW volume and that's not a related way for volume to 'confirm' what is happening with prices. Low volume rallies are a bit suspect and now we have the correction and now the volume 'comes out', suggesting some bulls getting into fear mode and exiting. Can't blame them if they've had a 3, 5, 7-point ride!

The important On Balance Volume (OBV) indicator is down with prices as seen on the chart. If OBV starts to turn up without much of a rally going on, this may be an early tip off to a recovery rebound.

Near QQQQ resistance: 41.6

Next overhead resistance: 42.6

Major resistance begins at 43.15, extending to 43.7

Near QQQQ support: 40.4

Next support: 39.0-38.5

Major support begins: 35.7-34.5

RUSSELL 2000 (RUT) DAILY CHART:

In my redrawn uptrend channel for the Russell 2000 (RUT) daily chart, the recent high now seems logically to intersect at resistance implied by the top end of its uptrend channel. Previously, without subsequent price action and my re-imagining the trend trajectory, I thought RUT had achieved a more substantial upside breakout. Instead it appears that the index was tracking in line with the Nasdaq chart and when it also returned to the line representing its previous rate-of-change or upside momentum, the strong uptrend was temporarily exhausted.

Near resistance is comes in around 600, at its prior breakout point, then at 625 to 635.

Near support comes in around 575, then at 552 to 547, at the prior swing lows and finally at 543, low end of the current intersection of the lower trend channel boundary. I'll be looking for a buying opportunity if RUT retreats to this lower channel line. If such a low for this move happens, the RSI would likely be registering oversold also.

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

Education, Internet & Biotech

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Capella Education - CPLA - close: 67.80 change: +0.78 stop: 62.40

Why We Like It:
This education stock is showing relative strength. Instead of sliding lower with the market's correction CPLA is breaking out over major resistance near $65.00. This broken resistance should be new support. I am suggesting readers buy calls on a dip at $65.25. If triggered our first target is $69.75. Our secondary target is $74.00 but we'll exit ahead of the late October earnings report. FYI: The Point & Figure chart is bullish with an $82 target.

Trading note: CPLA doesn't have a lot of volume and neither do the options. I would keep positions small.

Suggested Options:
I would use the November or December calls. My preference is the November $65 strike.

BUY CALL NOV 65.00 CQX-KM open interest= 30  current ask $5.50

Annotated Chart:

Picked on   October xx at $ xx.xx <-- TRIGGER $65.25
Change since picked:       + 0.00
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        145 thousand 
Listed on   October 03, 2009         


NEW DIRECTIONAL PUT PLAYS

Amazon.com - AMZN - close: 89.85 chg: -1.19 stop: 93.25

Why We Like It:
This is an aggressive trade. AMZN can be a volatile stock. The close under $90.00 is bearish and it follows a double top near $94-95. Short-term technicals are bearish. I'm suggesting put positions now. We'll exit on a dip at $85.25.

Suggested Options:
This should be a quick short-term move so I'm suggesting the October puts. My preference is the $90 strike.

BUY PUT OCT 90.00 QZN-VR open interest=24716 current ask $2.98

Annotated Chart:

Picked on   October 03 at $ 89.85
Change since picked:       + 0.00
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        6.2 million  
Listed on   October 03, 2009         


BIOGEN IDEC - BIIB - close: 48.89 change: -0.45 stop: 52.15

Why We Like It:
After a four-week consolidation in the $50-52 zone shares of BIIB are breaking down. The recent failed rally near $52.00 is another lower high in its long-term trend of lower highs and the breakdown under support near $50 and its 200-dma is forecasting another leg lower. What makes this play unusual is that I'm suggesting readers actually hold put positions over BIIB earnings report. Normally we exit positions ahead of earnings but this time we're going to hold over earnings.

Our first target to take profits is at $44.50. Our second target is $40.50. FYI: The P&F chart is bearish with a $36 target.

Suggested Options:
I'm suggesting the November puts. My preference are the $45 strikes.

BUY PUT NOV 45.00 IDK-WI open interest=3069 current ask $1.05

Annotated Chart:

Picked on   October 03 at $ 48.89
Change since picked:       + 0.00
Earnings Date            10/15/09 (unconfirmed)
Average Daily Volume =        2.6 million  
Listed on   October 03, 2009         



In Play Updates and Reviews

A Painful Start

by James Brown

Click here to email James Brown

The fourth quarter got off to a painful start but the major indices found support at their 50-dma.


CALL Play Updates

Alcon Inc. - ACL - close: 136.28 change: -1.00 stop: 133.90

ACL has pulled back toward support in the $134-136 zone. I wouldn't be surprised to see ACL retest the $134 area again. We can use a bounce in this zone as a new bullish entry point but keep a wary eye on the $140 level, which could act as resistance again. ACL has already hit our first target. Our second target is $148.00.

Suggested Options:
If ACL provides a new entry point I would use the November calls. We will plan to exit ahead of the late October earnings report.

Annotated Chart:

Picked on September 10 at $136.75
Change since picked:       - 0.47
                             /1st target hit @ 142.50 (+4.2%)
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        299 thousand 
Listed on September 10, 2009         


Allegheny Tech. - ATI - close: 33.67 change: +0.39 stop: 31.70 *new*

We've been talking about support at $32.00 for days. ATI finally hit that support level (actually 31.80) and bounced. Unfortunately, previous support near $34.00 is now acting as overhead resistance. Many of the short-term technicals have turned bearish. I am upping our stop loss to $31.70. More conservative traders may want to exit early instead. ATI is still up more than 10% from our entry point. I'm not suggesting new positions at this time. ATI has 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:      + 3.42 
                               /1st target hit @ 33.85 (+11.9%)
Earnings Date           10/21/09 (unconfirmed)
Average Daily Volume =       2.7 million  
Listed on August 27, 2009         


Caterpillar - CAT - close: 48.83 change: -0.62 stop: 47.49

Whoa! We were almost stopped out on Friday morning. CAT gapped open lower at $48.68 and immediately spiked down to $47.50 before bouncing. Not only is this a bounce from the 50-dma it's also a bounce from the 61.8% Fibonacci retracement of the September rally. If CAT doesn't bounce from here we want out. Let's give CAT a day or two to rebound and if it doesn't we'll exit early.

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:
Wait for a bounce. If we get a new entry point I suggested the October or November $55 calls.

Annotated Chart:

Picked on   October 01 at $ 50.00
Change since picked:       - 1.17
Earnings Date            10/20/09 (unconfirmed)
Average Daily Volume =         10 million  
Listed on September 19, 2009         


Core Labs - CLB - close: 99.90 change: -3.19 stop: 93.90 *new*

We are still looking for a dip to the $96-95 zone and we're keeping the trigger to buy calls at $96.00. Yet we're raising our stop loss to $93.90 to reduce our risk. More conservative traders may want to raise their stops closer to $95.00 and its rising 50-dma, which should offer some technical support. If triggered our first target is $104. Our second target is $109.50.

Suggested Options:
If CLB hits our trigger I'm suggesting the November calls. My preference is the $100 strike.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 96.00
Change since picked:       + 0.00
Earnings Date            10/21/09 (unconfirmed)
Average Daily Volume =        175 thousand 
Listed on September 23, 2009         


Compass Minerals - CMP - close: 59.25 chg: -0.67 stop: 56.40

The correction continues in CMP. We're starting to see more technical indicators roll over into bearish postures. More conservative traders may want to exit early. I would expect a dip toward $57 and its 30-dma. Caution - if you look at a weekly chart of CMP last week looks like a bearish reversal or topping formation.

I'm not suggesting new positions at this time. 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.

Annotated Chart:

Picked on September 03 at $ 55.55
Change since picked:       + 3.70
                               /1st target hit @ 59.75 (+7.5%)
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        415 thousand 
Listed on September 02, 2009         


Consol Energy - CNX - close: 43.04 change: -0.24 stop: 39.45

CNX came close to testing short-term support near $42.00. It looks like the reason it did not get that low was technical support at the rising 30-dma. The short-term trend is down but CNX should find buying pressure in the $42-40 zone. We have a relatively wide stop loss and more conservative traders may want to reduce their risk with a stop closer to $42.00. I would still be inclined to buy calls on a bounce near the 42-40 zone.

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 suggested the January calls but we'll exit ahead of the October earnings report.

Annotated Chart:

Picked on September 25 at $ 43.77 /gap down entry
Change since picked:       - 0.73
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on September 19, 2009         


Danaher Corp. - DHR - close: 64.74 change: -0.55 stop: 63.95

DHR has broken short-term support at $66.00 and the short-term technicals have turned bearish. I'm expecting a dip closer to $64.00. If the market decline really gets ugly DHR might drop toward its exponential 200-dma near $62.00. Of course that would stop us out. We can use a decent bounce near $64 as a new bullish entry point.

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:
If DHR bounces from support I would use the October or November 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:       - 1.63
Earnings Date            10/22/09 (confirmed)
Average Daily Volume =        2.4 million  
Listed on September 05, 2009         


Diamond Offshore - DO - close: 92.45 change: -1.33 stop: 89.75 *new*

Once again DO is testing its trendline of support in the 90-92 zone. I suspect DO will trade near $90 again. We can buy calls on another bounce near $90.00. I am raising our stop loss to $89.75. The plan was to use small position sizes.

More cautious traders may want to consider an early exit for DO. I'm growing more and more concerned about the action in crude oil. Oil delivered a little oversold bounce but failed in such a way to suggest the next move will be lower.

As long as DO holds the up trend 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:
Look for another bounce near $90.00 and use the November calls.

Annotated Chart:

Picked on September 15 at $ 94.69 *adjusted entry point
Change since picked:       - 2.24
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        1.8 million  
Listed on September 12, 2009         


Dril-Quip, Inc. - DRQ - close: 48.31 change: -0.11 stop: 45.90

The trend in DRQ is still up and the pull back last week looks like a normal and relatively mild correction. Unfortunately if the market begins to accelerate lower we can expect DRQ to follow suit. I'm tempted to buy calls on Friday's intraday bounce but I'm suggesting readers wait. More conservative traders may want to raise their stops toward $47.00. Why tighten your stop? Because the action last week has produced what appears to be a potential reversal on the weekly chart.

Our first target is $53.00. Our second target is $57.50. The Point & Figure chart is bullish with a $65.00 target.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on September 28 at $ 48.50
Change since picked:       - 0.19
Earnings Date            11/10/09 (unconfirmed)
Average Daily Volume =        282 thousand 
Listed on September 26, 2009         


Flowserve - FLS - close: 95.20 change: -0.76 stop: 89.40 *new*

FLS delivered a volatile session with a gap down on Friday at $94.04 and a dip to $92.76. I still think it moves lower. Broken support near $96.00 should be new resistance and I expect FLS to slide toward the $91-90 zone.

We want to buy calls at $91.00 but readers could wait for a bounce from $90.00 instead. The 50-dma is at $89.70 so I'm raising our stop loss to $89.40. Our first target is $99.50.

We will plan to exit ahead of the late October earnings report.

Suggested Options:
If triggered we want to use the November calls. My preference is the $95 strike.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 91.00
Change since picked:       + 0.00
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        1.2 million  
Listed on September 19, 2009         


General Dynamic - GD - close: 63.08 change: -0.07 stop: 56.95 *new*

While GD has been holding up pretty well I suspect the correction may be a little deeper than anticipated. I am lowering our trigger to buy calls from $61.00 to $58.50 and I'm moving our stop loss to $56.95.

Our first target is $64.50.

Suggested Options:
We want to use the November calls but we'll exit ahead of the late October earnings report.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 58.50
Change since picked:       + 0.00
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        2.3 million  
Listed on September 09, 2009         


Illumina Inc. - ILMN - close: 42.02 change: +0.71 stop: 37.45

You could argue that Friday's gain in ILMN is relative strength. Indeed there was no follow through on Thursday's bearish reversal pattern. Yet Friday's session produced an "inside day". I'm still expecting a pull back into the $39-38 zone. Our plan is to buy calls on a dip at $39.10.

If we are triggered at $39.10 our first target is $42.40. We plan to exit before the October earnings report.

Suggested Options:
If triggered I'm suggesting the November calls. My preference was the $40 strike.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 39.10
Change since picked:       + 0.00
Earnings Date            10/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on September 26, 2009         


iShares Financials - IYF - close: 50.57 change: -0.07 stop: 49.49

More conservative traders may want to exit immediately! The financials led the market lower on Friday. The IYF gapped open lower and dipped to $49.63 before bouncing back above $50 and its 50-dma. The rebound appears to be technical with the short-term trendline of higher lows. I'd want to see a convincing bounce before jumping into new bullish positions. Our first target is $57.00. Our second target is $60.00.

Suggested Options:
I hesitate to launch new positions.

Annotated Chart:

Picked on September 15 at $ 52.60 *triggered  
Change since picked:       - 2.03
Earnings Date            00/00/00
Average Daily Volume =        5.1 million  
Listed on September 01, 2009         


PPG Inds. Inc. - PPG - close: 56.26 change: -0.30 stop: 54.95

This is a crucial test of support for PPG. Shares violated the $56.00 level and traded under its 50-dma before bouncing back on Friday. If PPG doesn't rally from here it could portend a much deeper correction. P> I'm not suggesting new positions at this time. PPG has already exceeded our first target and we're currently aiming for $63.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   August 28 at $ 55.65
Change since picked:      + 0.61
                             /1st target exceeded @ 60.05 (7.9%)
Earnings Date           10/15/09 (confirmed)
Average Daily Volume =       1.6 million  
Listed on August 27, 2009         


SOHU.com Inc. - SOHU - close: 64.63 change: -1.09 stop: 63.75

The market correction has brought SOHU to technical support at its 50-dma. The stock is also testing its short-term trend of lower lows. A bounce from here would be a new bullish entry point but given the market's recent tone traders may want to postpone new positions.

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

Suggested Options:
I hesitate to open new positions at this time.

Annotated Chart:

Picked on   October 01 at $ 68.24 /gap open entry
                                 (small positions 1/2 to 1/4)
Change since picked:       - 3.61
Earnings Date            10/26/09 (unconfirmed)
Average Daily Volume =        577 thousand 
Listed on September 15, 2009         


Waters Corp. - WAT - close: 53.90 change: -0.24 stop: 51.90

WAT was not immune to the market's recent weakness and many technical indicators have rolled over into bearish formations. The stock is quickly approaching potential support near $53.00. More conservative traders might want to adjust their stops closer to the $53 level. I would wait for a bounce near $53 before considering new bullish positions. Our plan is to use small position sizes (1/2 to 1/4 our normal size).

Our first target is $59.50. We do not want to hold over the mid October earnings report.

Suggested Options:
If WAT provides a new entry point I would use the November calls.

Annotated Chart:

Picked on September 28 at $ 55.43 *new entry
Change since picked:       - 1.53
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: 27.82 change: +0.01 stop: n/a

CI dipped to yet another new low before bouncing back to unchanged. The stock is short-term oversold and due for a bounce. We only have two weeks left and it looks like the move in CI has not been as big as we expected. We can't expect CI to continue sliding lower at its current pace without a correction and that puts our strangle in serious jeopardy. I'm not suggesting new positions at this time.

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:       - 1.58
Earnings Date            11/05/09 (unconfirmed)
Average Daily Volume =        3.8 million  
Listed on September 08, 2009         


CLOSED BULLISH PLAYS

CF Industries - CF - close: 82.95 change: -1.25 stop: 83.65

CF broke support near $84.00 and its 50-dma on Friday. Shares actually gapped open lower at $82.89, which was under our stop loss at $83.65 so our exit was worse than expected. The next level of support looks like the $80 level and its 100-dma.

Chart:

Picked on September 05 at $ 85.93
Change since picked:       - 3.04<-- exit at $82.89 (-3.5%)
                               /gap down exit 
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        653 thousand 
Listed on September 05, 2009         


Helmerich & Payne - HP - close: 37.43 chg: -0.51 stop: 36.65

Our new play on HP did not pan out. With stocks selling off Friday morning HP gapped open lower at $37.27 and quickly slid lower to hit our stop at $36.65. Shares managed to bounce from their 30-dma but the damage was done.

Chart:

Picked on September 30 at $ 38.50
Change since picked:       - 1.85 <-- stopped @ 36.65 (-4.8%)
Earnings Date            11/19/09 (unconfirmed)
Average Daily Volume =        1.2 million  
Listed on September 29, 2009         


NYSE Euronext - NYX - close: 27.31 change: -0.45 stop: 27.75

The NYX confirmed its breakdown of support with Friday's trading. The stock gapped open lower, tried to bounce but failed, and closed near its lows for the session. Readers may want to consider bearish positions. Our stop loss was at $27.75 but the stock opened at $27.19.

Chart:

Picked on September 22 at $ 29.82
Change since picked:       - 2.63 <-- stopped @ 27.19 (-8.8%)
                               /gap down entry 
Earnings Date            10/30/09 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on September 22, 2009         


Oil Service Holders - OIH - close: 111.64 chg: -1.91 stop: 112.99

The volatile oil service sector holders gapped open lower on Friday. The OIH opened at $111.07, well below our stop at $112.99. The play was immediately closed. I'd keep an eye on the 100-dma near $105 as a possible support.

Chart:

Picked on September 28 at $117.40
Change since picked:       - 6.33 <-- stopped @ 111.07 (-5.3%)
                              /gap down exit
Earnings Date            00/00/00
Average Daily Volume =        6.6 million  
Listed on September 28, 2009         


SPX Corp. - SPW - close: 56.77 change: -1.28 stop: 57.45

We patiently waited for the correction in SPW and then when it finally showed up it the stock just kept right on falling. SPW sliced through round-number support at $60.00 and price support at $58.00 and technical support at the 50-dma. The stock gapped open lower on Friday at $57.19, which was under our stop loss. The play was closed immediately.

Chart:

Picked on   October 01 at $ 60.00
Change since picked:       - 2.81 <-- stopped @ 57.19 (-4.6%)
                               /gap down exit 
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        570 thousand 
Listed on September 12, 2009