Option Investor
Newsletter

Daily Newsletter, Saturday, 10/10/2009

Table of Contents

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

Market Wrap

Cotton Anniversary

by Jim Brown

Click here to email Jim Brown

The Dow closed at a new high for the year on Friday. This was also the two-year anniversary, cotton in anniversary parlance, of the all time high of 14,164 on Oct-9th 2007. There has been a lot of water under the bridge since then.

Market Statistics

What a week! The major indexes rallied an average of 4% for the week with the Russell, brokers, oil and commodities gaining 5% or more. (Pardon me for a minute while I back into the kicking machine again.) There are so many surprised analysts that there is an unusual silence emanating from the normally talkative analyst sector. Last week proved the adage that at any given time the market attempts to make fools of the largest number of people possible.


There was minimal economics on Friday and for the week in general. Friday had the Job Openings and Labor Turnover Survey (JOLTS) for August. Jobs fell and layoffs declined. The report was completely ignored as old news.

The International Trade Deficit narrowed to $30.7 billion in August from $32B in July. This report was also ignored.

The economic calendar for next week has a few more reports that are noteworthy. Wednesday we will get the FOMC minutes, which are probably the most important economic event of the week. This is the minutes of the September FOMC meeting and will give analysts some insight into what the Fed is thinking about raising rates. On Friday Ben Bernanke said the Fed will raise rates sooner rather than later and the Fed Funds Futures immediately began pricing in a 25 point rate hike in the March/April time frame.

On Thursday we get the Philly Fed Survey, NY Manufacturing and the Consumer Price Index. Consumer prices are not expected to have risen materially and according to some Fed heads they are still worried about a deflationary threat. The two manufacturing surveys should show how regional economies are improving.

On Friday there is Industrial Production and Consumer Sentiment. Industrial production is expected to be positive but less than the +0.8% from August. Sentiment is expected to rebound to 76.5 from last months dip to 73.5.

Economic Calendar

Most of the economic reports will be overshadowed by the arrival of some major earnings events. Intel will be the headliner on Tuesday and everyone expects the Intel earnings to be strong. There have been some cautiously bullish comments from Intel over the last month but they had the tone of under promise and over deliver rather than warnings not to be too bullish. Most chip companies have guided higher throughout the month and expectations are high. Intel is expected to post 27-cents in earnings.

Johnson & Johnson on Tuesday is also expected to beat estimates due mostly to aggressive cost cutting. Estimates for earnings of $1.13 per share compared to $1.17 in Q3-08. JNJ is supposed to be recession proof and Tuesday we will see if that idea needs a Band-Aid.

JP Morgan is the first of the big banks to report and they are expected to post strong earnings. They have money and not afraid to use it. They are reportedly producing some strong trading profits in this market. Jamie Dimon offered to loan money to the FDIC two weeks ago in an interview where FDIC head Sheila Bair was on the same panel. This should be a great earnings report.

On Thursday there are several important reports. Goldman Sachs (GS) will report an estimated $4.24 per share in earnings. This is 2.5 times their earnings for Q3-08. The financial sector are expected to post strong improvements in earnings with an average of 57% improvement over 2008. Goldman is simply the leader of the pack.

IBM will report on Thursday and investors will be hoping to see if IBM can beat their estimate of $2.38 on the strength of their services division and overseas contracts. IBM hardware revenue fell -39% in Q2 so hopefully services will hold them up. IBM's $3.64 gain on Friday was responsible for nearly 50% of the Dow's 78-point rise.

Google will report on Thursday and has been garnering upgrades for the last several weeks on expectations for a good report. Credit Suisse upped their price target on Friday to $600 from $475 with a close at $515. Unfortunately Google has a bad habit of taking a serious plunge the day after their earnings report. Google declined for two weeks after their earnings in July.

Harley Davidson (HOG) also reports on Thursday and they rallied strong after their July earnings on news that sales were not as bad as investors expected. For the ultimate high dollar toy with financing scarce they were expected to crash and burn. When disaster did not strike they gained nearly 60% over the next month. Can they do that again? I doubt it but it will be interesting to hear their forecast.

Nokia (NOK) reports on Thursday and few U.S. investors will be interested. With Apple and RIMM the rage in the USA we tend to forget that Nokia is still the largest cell phone maker. However, Nokia profits are expected to be less than half what they made in Q3-08.

Bank America reports on Friday and they are the bank to own long term according to analysts. However, they are still expected to post a small loss for Q3. BAC has not yet paid back their $45 billion in TARP funds.

General Electric, the most unloved corporate giant in the U.S., will report on Friday. They never miss earnings and their forecasts are normally lackluster although bullish on America. GE stock is well off its $6 low back in March but is currently struggling to hold $16. GE earnings rarely move the stock price with 11 billion shares outstanding.

By all accounts the earnings for Q3 are expected to be strong followed by an even stronger Q4 despite the lackluster rebound in economic activity. If you look under all the hype you will see that Q3 earnings are still expected to be 25% BELOW the same period in 2008 yet investors are ready to cheer these results. Revenue in Q2 came in 17% below Q2-2008 levels. Revenue in Q3 is expected to improve to ONLY a 15% decline from 2008 levels. Quite a few analysts continue to warn that these earnings will come from aggressive cost cutting not increased sales. This may be a good earnings quarter relatively speaking but it is far from a quarter of good earnings. If you back out AIG's $68 per share loss from last year the overall S&P would be posting a significantly worse comparative performance than 25% below 2008. Adding that $68 per share loss drags down the overall S&P earnings for Q3-08 significantly and that is the comparison the S&P for Q3-09 will be measured against.

Banks continue to show improving earnings despite continued loan delinquencies. Commercial real estate loans equate to 26% of all outstanding loans at banks. Despite the rising delinquencies the banks keep rolling forward as many loans as possible. This is due to the old adage that "rolling loans gather no loss." As long as you keep pushing the date of accountability farther out into the future you avoid having to take the charge off. All the banks reporting earnings this cycle will be heavily scrutinized for increases in loan loss reserves as a leading indicator of future charge offs.

Earnings Calendar

Citigroup unloaded a hot potato to Occidental Petroleum and got $250 million for selling the problem asset. Actually it was not a problem asset since it made money every year since 1997 but the government overseers wanted it to disappear. The asset was the Phibro commodities trading unit. It had averaged a $200 million annual profit for the last five years and $371 million last year. Personally I would love to buy a business that netted $371 million a year for $250 million! What a sweet deal. The problem was the massive commissions due to traders at the unit. For instance star trader Andrew J Hall made an estimated $100 million in commissions in 2008. Phibro made a fortune in 2008 from bets Hall made on the spike in oil prices.

That is a sum that Citigroup has yet to pay him and the government has protested the size of his compensation. As part of the deal Occidental has assumed the liability of Hall's unpaid commissions and reportedly he will be given an ownership position in lieu of some portion of the $100 million. Reportedly Phibro will keep their own funds separate on future deals and commissions. Citi CEO Pandit had been repeatedly asked if Hall's compensation was fair and in recent months has finally agreed that it was too high. Obviously he was under pressure from the compensation Czar and approached OXY with a sales offer to get rid of the problem. OXY had tried to buy the unit before and was rebuffed. OXY said Phibro would continue to make speculative deals in energy commodities as well as find buyers for the oil and gas OXY produces. Hall is a British born, naturalized American who has an extensive collection of contemporary art he keeps in his 1,000-year-old castle in Germany. I guess if I made $100 million a year I could get away with a few eccentric items like castles.

GM finally got a signed deal to sell the Hummer brand to the Chinese. Sichuan Tengzhong Heavy industrial Machinery Corp, try to say that fast three times, will own 80% and Hong Kong investor Suolang Duoji will own 20%. Although terms were not disclosed the reported sale price was $150 million and includes the dealer network. GM claimed in its bankruptcy they expected to get up to $500 million for the division. The CEO of Hummer said the key will be to produce new models that get over 20 mpg. Good luck with that! Only 8,193 Hummers have been sold to date in 2009.

Those hummers are going to be selling a lot slower once oil demand returns. The IEA upped their forecast for 2010 demand by +1.4 mbpd over 2009 to 86.1 mbpd. They based their upgrade on an IMF forecast that global output would grow by +3.1% in 2010. I am attending the annual Peak Oil conference next week and the consensus opinion seems to be that peak oil has already occurred. Peak oil does not mean we ran out of oil but only that we have reached the maximum of global production due to the accelerating decline in existing fields. The 86.1 mbpd estimate for 2010 is of great interest since it will probably be raised higher as the economic rebound picks up speed. However, most petroleum engineers believe we will never pump 87 mbpd. That was the expected high two years ago and it has not changed. If it were not for the recession we would be in serious trouble already. The recession has simply disguised the problem by temporarily reducing demand to a manageable level. Once demand recovers, say late in 2010, there is going to be a major awakening. I will report back from the conference next week.

Oil prices inched up to $72.35 after the close on Friday and oil appears to be getting ready for another attempt on $75. However, despite comments to the contrary OPEC shipments continue to rise. Last month shipments rose by 170,000 bpd to reduce compliance with the production quotas to 62% from 65%. Despite the increase in production the global inventory levels fell from 61.4 days to 60.7 days of supply in September. The next update will be the OPEC monthly production report and forecast on Oct-13th.

Oil Chart

Fed Chairman Ben Bernanke was credited with lifting the dollar off its lows on Friday after he said the Fed has a plan for exiting the current fiscal stimulus program. Bernanke said "the Fed would raise rates when the economic outlook had improved sufficiently" and "possibly even before there are signs of inflation." This relatively hawkish speech followed on Friday by similar comments from Kansas Fed President Hoenig. President Hoenig is one of the more hawkish anti-inflation members of the Fed and he will be a voting member of the FOMC in 2010. The impact to the Fed Funds Futures was immediate and they are now showing a 25-point increase by April. However, most analysts claim that is still too soon and suggest Q3-2010 is the likely start to draining the punchbowl.

However, historically the Fed will not raise rates until 2-3 months after peak unemployment. That is not expected until mid to late 2010 and something the Fed will have to consider when the time comes.

Dollar Index Chart

The chip stocks benefited from a broad sector upgrade from Deutsche Bank on Friday. This pushed the SOX to a +3.3% gain for the day and a 6.5% gain for the week. Tokyo Electron reported that semi equipment orders had risen 94% in Q3 from the levels seen in Q2. Tokyo Electron is the second largest chip equipment maker behind AMAT. From the rebound in the SOX it is hard to believe that last week the index had broken support and was in full crash mode.

Semiconductor Index Chart

Friday was the 2-year anniversary of the all time market highs set on Oct 9th 2007. The Dow closed at 14164.53 and the S&P at 1565.15. On Friday the Dow closed at 9864.94 and a new high for 2009. The S&P closed at 1071.49 and just a few cents away from a new high for the year at 1071.66. Despite the chip rebound the Nasdaq is still about 30 points below its 2009 high of 2167. The major indexes are still 30% off their highs despite a nearly 50% rebound from the March lows.

The Dow closing at a new high on Friday is a bullish sign. I know that sounds like closing the barn door after the horses are already out. The Dow overcame multiple levels of resistance at 9600, 9725 and 9850 to accomplish this. The +377 point rebound for the week came off the lows at 9430 we saw last Friday. The move was amazing and shorts appeared at nearly every spike. There was strong denial but even stronger buying of those dips. However, volume is declining. Friday's volume was only 6.9 billion shares but the A/D line was still 2:1 in favor of advancers. Remember, the Dow benefited from the nearly $4 gain in IBM which added about 35 Dow points on Friday.

Dow Chart

The S&P did not break out to new highs but is very close. Resistance remains 1075 but it appears to be on autopilot towards 1100-1120 with 1116 the 50% retracement level from the March lows. I like the way the S&P rallied off last Friday's lows to resistance at 1060 and then rested for two days before spiking higher. It was just enough of a pause to suck in the shorts one more time and then roast them on the Thursday morning gap well over that 1060 resistance. I believe the same thing could happen at the 1075 level. We could touch it, ease back slightly and then blast through on higher volume if Intel produces good numbers on Tuesday.

SPX Chart

The Nasdaq gained +4.45% for the week but it is still lagging the other indexes. The Nasdaq is facing strong resistance at 2140 and again at 2160. Unfortunately it will be hostage to the Intel earnings until Wednesday. It could languish until Tuesday night on fears Intel might not be as bullish as investors hope. On Wednesday it will be reactive to whatever Intel did report. The same story repeats on Thursday when Google and IBM report. There is ample precedent for the Nasdaq to run up to its resistance highs ahead of earnings and then stall out because the numbers reported were already priced into the stocks. However, should the Nasdaq move over 2150 on strong volume it would be a buy. Just watch for it to stall at those highs.

Nasdaq Chart

Russell 2000 Chart

All the betting is over and it is time for Intel to show its hole cards and let the chips fall where they may. Intel is in the drivers seat for the earnings week. They have raised their forecast twice and then downplayed the outlook several times in various public forums. All eyes are focused and the market is waiting. After the close on Tuesday the direction will be set for the majority of tech earnings since most tech stocks tend to report in the same trend as Intel.

On Thursday Google and IBM will either be the icing on the Intel cake or the Drano that flushes the Intel stink down the drain. Either way it is going to be a big week. The biggest banks and the biggest tech stocks other than Microsoft will confess their sins and traders will go along for the ride.

It is no secret that I was expecting a potential decline in October. The first couple days seemed to confirm my suspicions and then each day found a new excuse to rally. I do believe that we need to buy a breakout over the highs. If the market does move higher from here it could move a lot higher. If the Dow manages a weekly close over 9918, the September high, then Dow 10320 becomes the next target. That is the 50% retracement of the Oct-07 highs to the March-09 lows.

Jim Brown


Index Wrap

Can't keep the Bull down

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Different technical analysis aspects 'work' at different times. An example is support being suggested by a pullback to a particular moving average. Often the 21-day average suggests where support and resistance can be anticipated in the major indexes; sometimes the popular and widely followed 50-day average will indicate support on pullbacks. This past week the major indexes, particularly SPX, the Dow and the Composite, rebounded pretty much exactly from support implied by their 50-day averages.

I often look for support on pullbacks in uptrends to be found at the common fibonacci retracements, with the addition of the 66% 2/3rds retracement in that mix. I put even more stock in chart patterns like trendlines as suggesting where a pullback will end and a trend resume. Last week saw a convergence of an exact key retracement (66%) being reached as well as a touch to a key up trendline, with both suggesting a 'natural' area for a pullback low in the S&P 500 (SPX). The S&P stocks are getting more play now that a recovery is being hinted at in the economic tea leaves.

It is also true that it can be hard to pinpoint WHICH trendline and which prior low and high to use in calculating key retracements. We know which high to use in calculating possible pullback retracement levels in an uptrend; i.e., the LAST one. I got throw off the scent somewhat in my last week's analysis by going back to last MAJOR low (in early-July) and calculated retracement levels relative to the 1075 SPX high.

Sometimes the market is completely simple and the key retracement support, at 66% in SPX anyway, was found simply by using the LAST low in late-August. This brings me to the chart of the week. Technically, two aspects, the hourly support up trendline and the sometimes pivotal 66% retracement, seen on the hourly S&P 500 chart showed exactly where our recent low could or 'should' fall.

CHART OF THE WEEK:

There are other things to look at here and the key one is what the heck happens NEXT!? Bullish sentiment took another huge jump and I'm as usual leery of being in the swell company of a bunch of 'swells', the crowd that is jostling for the next big win. As the major indexes are coming up on their prior highs we have to be leery of a possible double top to cause a stumble even an interim and temporary one.

This idea contradicts with my belief that we WILL see DOW 10000. Actually, these two concepts don't necessary contradict as it’s a question of WHEN we see INDU challenge 10000 if I'm correct in THIS assumption. I base my conviction of Dow 10000 on 1.) the simple psychological 'pull' toward a major number like this and 2.) that enough Dow stocks project higher to take the Average there.

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) remains bullish in its pattern and the next key test of that trend is the ability of the index to pierce its prior (1075) high per the SPX daily chart highlights below.

The key near-term support is now suggested by the recent 1020 low, at the 50-day moving average. SPX remains in its uptrend price channel as do all the other indexes. A tip of to slowing upside momentum is still the same which is any close below a prior (down) swing low. The virtual definition of an uptrend is where prices make higher relative highs and relative lows; i.e., the 'stairstep' effect we see in uptrend like this.

Key support is 1020 as mentioned, than at 992, extending to around 978, support implied by the third last swing low AND the low end of the uptrend channel I've projected for SPX.

Pivotal resistance is at the prior 1075 high, extending to 1100.

I mentioned bullish sentiment taking a big jump last week on my indicator, as seen at bottom. This relatively high level doesn't point to an immediate top but there's a good track record of corrections within 1-5 trading days of such highs.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart remains bullish and is now approaching its prior intraday high and a very key resistance in the 500 area. Currently I don't see OEX going to much more than a nominal new high before pulling back again. If the index instead breaks out to above the top end of its channel, currently intersecting in the 510 area, this action would instead suggest an accelerating advance.

I've noted the tendency before for the S&P when in a strong uptrend to not have many instances of pullbacks that also see an 'oversold' 13-day RSI. Rather, I've highlighted the many instances where rallies occur after this indicator gets back to a more neutral mid-range reading. There is a concomitant association for corrections to occur after rallies carry the RSI into 'overbought' territory and there's more room on the upside so to speak in this regard.

Key support is at the prior 473 low, then at the prior swing lows before that at 462 and 455. Support implied by the low end of OEX's uptrend channel is in the 460 area currently.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow has maintained its bullish chops as the last low at 9430 stayed above the prior low and bounced from the 50-day average. Ahead lies a possible test of the prior 9918 rally high. The major level we'll all be talking about is if and when the Dow can manage to get to a FIVE digit number at 10000 and above.

Key near resistance, beyond 9918 and 10000 already mentioned is suggested by the top end of INDU's uptrend channel, currently intersecting at 10125.

Pivotal near support is at 9430, then at 9253, extending to the 9115 to 9030 area. 9000 continues to look like major support.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) in a switch isn't getting pulled higher to the same degree as the S&P currently. Has tech lost some of its luster? This sector and the Nasdaq market is still quite strong but leadership tends to shift a bit when some of the cyclical stocks start getting picked up by fund managers when they smell economic recovery or a turn of the corner.

Key near resistance is in the area of the prior high around 2168, then up in the 2200 area and a bit higher in my estimation.

Pivotal near support is suggested at the recent low in the 2040 area, with major support in the 2000 area.

Bullish sentiment was discussed with the S&P above but again the indicator at the bottom of the COMP daily chart below tells the story historically at least. Rallies have had difficulty sustaining themselves when traders get as bullish as suggested by my CPRATIO model.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has a bullish chart and awaits a key re-test of its prior intraday rally peak in the 1755 area. Such a retest is a common outcome of a bullish pattern like this one. The expected or common doesn't have to happen of course but I tend to go with the percentages of times that we see similar occurrences. A prior high so often attracts more buying until at least that high or near to it is seen again. A stumble or pullback from the 1750-1755 area would set up the possibility of a double top, even if this was only temporary; e.g.,1-2 weeks.

I've suggested by the trend channel boundaries seen below, that next resistance above the prior high would lie in the 1800 area.

Near support is suggested at this past week's intraday NDX low around 1657, with the next lower support zone at 1610 to 1585. I'm out of any calls I held in NDX but am in the (QQQQ) Nas 100 tracking stock, which offers me NDX participation without worries of a whippy market on a short-term basis. Hey, I want to be long in any 'Santa Claus' rally and with the snow whipping around in the Rockies here I am thinking more like Christmas than I was last week overlooking the Pacific!

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The important On Balance Volume (OBV) indicator has now of course flipped back up and lends support to the bullish possibilities of a new high above 43.17. Stay tuned on that. I'd like it but I'm talking my position.

Near QQQQ resistance: 43.17

Next overhead resistance: 44.0

Near QQQQ support: 40.7

Next support: 39.5-39.0

RUSSELL 2000 (RUT) DAILY CHART:

Gee, if I had only been looking at the 55-day fibonacci average which I find usually 'works' with the Russell 2000 (RUT) in terms of showing the strength or relative weakness of the its trend, I'd have better pinpointed the SPX and COMP low. RUT remains in a strong uptrend but with an important test of the prior 625 high as a possible to likely next move. Next resistance is suggested by the top end of its uptrend channel around 640.

Near support is in the low 580 area currently. My suggested key support last week was pretty close to the actual 576.4 low intraday print in the RUT. Next support in the Russell is at 552, extending to around 549.

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

Telecom, Industrials, Appliances

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Mobile Telesys - MBT - close: 49.07 change: +0.76 stop: 46.80

Why We Like It:
MBT is a European telecom provider. The stock has been consolidating under resistance at $50.00 for weeks. Shares look like they're coiling for a bullish breakout. I'm suggesting a trigger to buy calls at $50.15. If triggered our first target is $54.50. Our second target is $59.00. We do not want to hold positions over the early November earnings report.

Suggested Options:
I'm suggesting the November or December calls. My preference is the November $50 strike.

BUY CALL NOV 50.00 MBT-KJ open interest=309  current ask $3.40

Annotated Chart:

Picked on   October xx at $ xx.xx <-- TRIGGER @ 50.15
Change since picked:       + 0.00
Earnings Date            11/05/09 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   October 10, 2009         


Precision Cast Parts - PCP - cls: 103.32 change: +1.18 stop: 99.90

Why We Like It:
This is a short-term momentum play. PCP has rallied back to resistance near $103.75-104.00. A breakout from here could spark another short-covering rally. I'm suggesting a trigger to buy calls at $104.05. If triggered our target is $109.90. More aggressive traders may want to aim higher but PCP has earnings on October 20th and we don't want to hold over the report.

Suggested Options:
I'm suggesting the November calls. My preference is the $105 strike.

BUY CALL NOV 105 PCP-KA open interest= 373 current ask $4.30

Annotated Chart:

Picked on   October xx at $ xx.xx <-- TRIGGER @ 104.05
Change since picked:       + 0.00
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        1.0 million  
Listed on   October 10, 2009         


Whirlpool Corp. - WHR - close: 70.50 change: +0.89 stop: 65.90

Why We Like It:
WHR has recovered after a three-week correction. The trend of higher lows is back in place. Readers can buy calls on this bounce. More conservative traders can wait for a new move over $71.00 or $71.50 if you prefer a little more confirmation. I'm suggesting positions now. Our first target to take profits is at $73.90. Our second target is $78.50. We will plan to exit ahead of the October 23rd earnings report.

Suggested Options:
I'm suggesting the November calls. My preference is the $70 strike.

BUY CALL NOV 70.00 WHR-KN open interest=2302 current ask $5.00

Annotated Chart:

Picked on   October 10 at $ 70.50
Change since picked:       + 0.00
Earnings Date            10/23/09 (confirmed)
Average Daily Volume =        1.5 million  
Listed on   October 10, 2009         



In Play Updates and Reviews

Earnings Watch

by James Brown

Click here to email James Brown

Investor focus is going to move from economic data to corporate earnings. We need to improving results or the rally could stall.


CALL Play Updates

Apple Inc. - AAPL - close: 190.47 change: +1.20 stop: 184.75

AAPL is up about $5 on the week but shares have been trading sideways for about three days now. I would still consider new positions here but we might get a better entry point on a dip near $186-185.

Our first target to take profits (I'd exit 2/3rds of our position) is at $199.50. We will cautiously set a secondary target at $210. The P&F chart is currently forecasting a $231 target.

Suggested Options:
We will exit ahead of the October 19th earnings report. October options expire after Friday October 16th. Aggressive traders could play the October calls and I'd use the $190 strike. The rest of us will want to consider November calls and I'd use the $200 strike.

Annotated Chart:

Picked on   October 06 at $190.01
Change since picked:       + 0.46
Earnings Date            10/19/09 (confirmed)
Average Daily Volume =       17.8 million  
Listed on   October 06, 2009         


Alcon Inc. - ACL - close: 142.20 change: +1.58 stop: 134.75 *new*

ACL eventually rejoined the rally and shares are back above the $140 mark. The recent low was $134.78 so I'm raising our stop loss to $134.75. Volume has been fading a bit on the rise. Readers may want to look for a dip near $138 soon. ACL has already hit our first target. Our second target is $148.00.

Suggested Options:
If ACL produces another bounce in the $136-138 zone I'd be tempted to buy November calls. Just remember our plan to exit ahead of the late October earnings report.

Annotated Chart:

Picked on September 10 at $136.75
Change since picked:       + 5.45
                             /1st target hit @ 142.50 (+4.2%)
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        299 thousand 
Listed on September 10, 2009         


Amazon.com - AMZN - close: 95.71 change: +0.49 stop: 89.49 *new*

AMZN slipped to $94.26 on Friday morning but traders quickly bought the dip. I would still consider new bullish plays right here but patient traders may want to consider waiting for a dip near $93.00, above the 10-dma, as a new entry point. Please note our new stop loss at $89.49.

Our first target to take profits is at $99.90. Our second target would be $104.95. I'd aim higher but we want to exit in front of the late October earnings report.

FYI: Shares of AMZN didn't seem to react much that rival Barnes & Noble was planning to introduce a competitor to AMZN's e-book Kindle product.

Suggested Options:
I'm suggesting the November calls. My preference is the $100 strike.

Annotated Chart:

Picked on   October 08 at $ 95.05
Change since picked:       + 0.66
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        6.2 million  
Listed on   October 07, 2009         


Allegheny Tech. - ATI - close: 36.14 change: +0.09 stop: 33.75 *new*

ATI finally looks ready to breakout past its September highs. However, we're almost out of time. The newsletter will exit on or before Friday, October 16th to avoid having our October options expire. Speaking of exits I'm adjusting our second and final target from $37.00 to $38.50. More conservative traders may want to keep your target at $37.00 or the September high near $36.90. I'm also adjusting our stop loss to $33.75.

Even though we're planning to close this play ATI looks ready to breakout again. Readers looking for a new entry point could buy calls now or wait for a move over $37.00. Just adjust your stops and targets for your new entry. The $40.00 and $44.00 levels look like potential resistance. Don't forget to exit ahead of earnings.

Suggested Options:
Officially I'm not suggesting new positions given our remaining time (five days) but ATI still looks poised to rally and readers may want to buy November calls.

Annotated Chart:

Picked on   August 31 at $ 30.25 *triggered         
Change since picked:      + 5.89 
                               /1st target hit @ 33.85 (+11.9%)
Earnings Date           10/21/09 (confirmed)
Average Daily Volume =       2.7 million  
Listed on August 27, 2009         


AvalonBay - AVB - close: 73.56 change: +0.29 stop: 68.49

AVB is showing strength. While I would still consider bullish positions now a better entry point would be a dip in the $72-70 zone. Our first target is $77.75. More aggressive traders could aim higher but we don't want to hold over the early November earnings report.

Suggested Options:
I'm suggesting the November calls. My preference was the $75 strike.

Annotated Chart:

Picked on   October 08 at $ 72.60
Change since picked:       + 0.94
Earnings Date            11/04/09 (unconfirmed)
Average Daily Volume =        1.8 million  
Listed on   October 07, 2009         


Caterpillar - CAT - close: 53.64 change: +0.55 stop: 48.59 *new*

CAT was a strong performer last week and shares are nearing potential resistance in the $54.50 zone. I am raising our stop loss to $48.59, just under the 50-dma.

If you are looking for a new entry point wait for another bounce near $50.00.

Our first target is $54.25. Our second target is $59.00 but that may be too optimistic as we plan to exit ahead of the October 20th earnings report. If you bought October options you need to exit before they expire after Friday, October 16th. FYI: The P&F chart is bullish with an $85 target.

Suggested Options:
If CAT provides a new entry point I'd use the November calls.

Annotated Chart:

Picked on   October 01 at $ 50.00
Change since picked:       + 3.64
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =         10 million  
Listed on September 19, 2009         


Core Labs - CLB - close: 104.92 change: -1.08 stop: 97.95

CLB broke out to new 2009 highs last week. This pull back toward $104.00, which as previous resistance should be new support, looks like a new entry point to buy calls. If the market does dip this week then CLB should have extra support at $102.

Our first target to take profit is at $109.90. Our second target is $114.50.

Suggested Options:
I'm suggesting the November calls. My preference is the $110 strike.

Annotated Chart:

Entered on  October 08 at $105.25
Change since picked:       - 0.32
Earnings Date            10/21/09 (confirmed)
Average Daily Volume =        175 thousand 
Listed on September 23, 2009         


Canadian Nat. Res. - CNQ - close: 69.95 change: +0.48 stop: 61.90

CNQ is testing round-number resistance near $70.00. Don't be surprised to see a dip back toward the $68 or $66 levels, which we can use as a new entry point to buy calls. More conservative traders may want to raise their stops a bit.

Currently our first target is $71.50 and I'd exit at least half if not 75% of our position there. I'm setting a secondary target at $74.75.

Suggested Options:
If CNQ provides a new entry point I would use the November calls. My preference was the $70 strike.

Annotated Chart:

Picked on   October 05 at $ 67.01 /gap higher entry
                                /originally listed at $65.04
Change since picked:       + 2.94
Earnings Date            11/05/09 (confirmed)
Average Daily Volume =        6.4 million  
Listed on   October 05, 2009         


Consol Energy - CNX - close: 49.15 change: -0.36 stop: 43.90

CNX has rallied toward its September highs and round-number resistance at $50.00. This would be a good spot to expect a pull back. Watch for support near $46.00 or $44.00.

CNX has already hit our first target at $48.50. Our second and final target is $54.50. We'll plan to exit ahead of the late October earnings report.

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

Annotated Chart:

Picked on September 25 at $ 43.77 /gap down entry
Change since picked:       + 5.38
                                /1st target hit @ 48.50 (+10.8%)
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on September 19, 2009         


Capella Education - CPLA - close: 71.08 change: +1.26 stop: 62.90

Wow! CPLA just refuses to correct. Nothing goes straight up forever and we don't want to chase it. Currently the plan is to buy calls on a dip at $65.75. More aggressive traders may want to raise their trigger.

If triggered our first target is $69.90. 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:
The plan is to use November calls. My preference is the $65 strike.

Annotated Chart:

Picked on   October xx at $ xx.xx <-- TRIGGER $65.75
Change since picked:       + 0.00
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        145 thousand 
Listed on   October 03, 2009         


Danaher Corp. - DHR - close: 67.84 change: +1.28 stop: 63.95

After under performing for days it seems that DHR has decided to join the party. The stock rose 1.9% on Friday and broke out above the three-week trend of lower highs. Unfortunately we're running out of time and will need to exit before October options expire this Friday.

If we see another dip or bounce near $66.00 we can re-load this play with some November options but we will still plan to exit ahead of the October 22nd earnings report.

Our first target is $69.50. The $70.00 level looks like significant resistance but we're going to set a secondary target at $72.50. 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 provides another entry point I'd use the 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:       + 0.19
Earnings Date            10/22/09 (confirmed)
Average Daily Volume =        2.4 million  
Listed on September 05, 2009         


Diamond Offshore - DO - close: 100.11 change: -0.61 stop: 91.95

DO hit new 2009 highs and our first target last week. There should be nothing to stop DO from aiming for the $110 level but if the market dips look for short-term support in the $97-95 zone. We have just less than two weeks before DO reports earnings but October options expire this coming Friday. Your next exit will depend on what options you hold. The newsletter will plan to exit before Friday's closing bell.

Nimble traders looking for a new entry point could look for a dip near $97.00. More conservative traders may want to consider a stop closer to $94.

Our second target is $104.50. More aggressive traders can aim for $110. The P&F chart is forecasting a $110 target. The plan was to use small position sizes.

Suggested Options:
If you're launching new positions I'd use the November calls but I would not hold over the October earnings announcement.

Annotated Chart:

Picked on September 15 at $ 94.69 *adjusted entry point
Change since picked:       + 5.42
                               /1st target hit @ 99.90 (+5.5%)
Earnings Date            10/22/09 (unconfirmed)
Average Daily Volume =        1.8 million  
Listed on September 12, 2009         


Dril-Quip, Inc. - DRQ - close: 52.60 change: -0.61 stop: 46.95

DRQ closed the week with impressive gains and at new one-year highs. I would wait for a dip back toward the $50 or $48 levels before considering new positions.

DRQ has already hit our first target at $53.00. Our second target is $57.50. The Point & Figure chart is bullish with a $65.00 target.

Suggested Options:
I suggested the November calls.

Annotated Chart:

Picked on September 28 at $ 48.50
Change since picked:       + 4.10
                              /1st target hit @ 53.00 (+9.2%)
Earnings Date            11/10/09 (unconfirmed)
Average Daily Volume =        282 thousand 
Listed on September 26, 2009         


EOG Resources - EOG - close: 89.60 change: -0.09 stop: 82.49

EOG looks short-term overbought with a $10 rally in the last week. I would look for a dip back toward what should be new support near $85.00.

EOG has exceeded our first target at $89.90. Our second target is $94.75. We actually have a third target a $99.50.

Suggested Options:
If EOG provides a new entry point I'd use the November calls.

Annotated Chart:

Picked on   October 07 at $ 85.24 /gap higher entry
                               /originally listed at $84.71
Change since picked:       + 4.45
                              /1st target hit @ 89.90 (+5.4%)
Earnings Date            11/03/09 (unconfirmed)
Average Daily Volume =        2.9 million  
Listed on   October 07, 2009         


Express Scripts - ESRX - close: 79.44 change: +1.24 stop: 74.90

ESRX has rallied to resistance near $80.00. We can probably expect a dip back toward $78-77 before shares move much higher. Use a dip as a new entry point. Our first target is $82.50. Our second target is $84.95.

Suggested Options:
I am suggesting the November calls. Our preferred strike was the $80s.

Annotated Chart:

Picked on   October 06 at $ 77.42 /gap down entry
                              /originally listed at $78.04
Change since picked:       + 2.02
Earnings Date            10/28/09 (confirmed)
Average Daily Volume =        2.1 million  
Listed on   October 06, 2009         


Flowserve - FLS - close: 100.77 change: +0.29 stop: 95.90

Instead of looking for a dip we're not looking for a breakout. The plan is to open small positions if FLS trades at $102.60 or higher. If triggered at $102.60 we'll use a stop loss at $95.90. I am suggesting the November calls but my preference is for the Nov 105 calls (FLS-KA). Our first target will be $109.75.

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

Suggested Options:
I'm suggesting the November calls.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 102.60
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: 66.16 change: +0.88 stop: 61.75

GD continues to march away from us. I'm raising our trigger to buy calls to $64.25. We'll raise the stop loss to $61.75. If triggered our first target is $69.90. We will plan to exit ahead of the late October earnings report.

Suggested Options:
I'm suggesting the November calls. My preference is the $65 strike.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 64.25
Change since picked:       + 0.00
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        2.3 million  
Listed on September 09, 2009         


Gold ETF - GLD - close: 102.84 change: -0.80 stop: 97.40

Ben Bernanke's comments on Thursday night gave the dollar a boost and sparked a little profit taking in gold. The GLD gave up 0.77%. If we can get a dip near $100.00 I'd jump on it as a new entry point to buy calls. Our plan calls for small positions to limit risk.

I'm hearing more analysts call for a rally to $1,300 in gold. This lines up with what I said last week. The weekly chart has an inverse head-and-shoulders pattern that is forecasting a huge upward target around $130ish (for the GLD, or $1,300 for gold) but that could take several months to be achieved. Our shorter-term (several weeks) target is a rally to $109.90. We are still contemplating a second target.

Suggested Options:
If GLD provides a new entry point I suggested the November or January calls.

Annotated Chart:

Picked on   October 06 at $102.28
Change since picked:       + 0.55
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


Illumina Inc. - ILMN - close: 43.09 change: +0.87 stop: 37.75

Momentum in ILMN is fading and I'm still expecting a dip back toward prior resistance and what should be support near $40.00. The plan is to buy calls at $40.10. Our biggest challenge right now is timing. We have just over a week before ILMN reports earnings and we don't want to hold over the announcement.

If we are triggered at $40.10 our first target is $44.00. We plan to exit before the October earnings report.

Suggested Options:
If triggered we want to use the November calls.

Annotated Chart:

Picked on September xx at $ xx.xx <-- TRIGGER @ 40.10
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: 53.72 change: +0.49 stop: 49.49

The banking stocks are on the rise again. This week we could see an acceleration or a reversal thanks to third quarter earnings. There are several high-profile reports with JPM on Wednesday, GS on Thursday, and BAC on Friday. Results or management comments from any of these companies could have a major impact on the financials.

I suspect the IYF will see a lot more volatility this week. If you're looking for a new entry point consider dips or bounces from $52.00. Our first target is $57.00. Our second target is $60.00.

Suggested Options:
I would use the November calls.

Annotated Chart:

Picked on September 15 at $ 52.60 *triggered  
Change since picked:       + 1.12
Earnings Date            00/00/00
Average Daily Volume =        5.1 million  
Listed on September 01, 2009         


PPG Inds. Inc. - PPG - close: 59.75 change: +0.53 stop: 55.95 *new*

PPG is bouncing back toward its 2009 highs and resistance near $60.50. We only have three days left before PPG reports earnings. The company announces on October 15th before the opening bell. We will plan to close this play on Oct. 14th at the close. I'm raising our stop loss to $55.95. If PPG reverses again under $60.50 we'll want to exit early.

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:      + 4.10
                             /1st target exceeded @ 60.05 (7.9%)
Earnings Date           10/15/09 (confirmed)
Average Daily Volume =       1.6 million  
Listed on August 27, 2009         


Waters Corp. - WAT - close: 57.75 change: +0.53 stop: 53.25

WAT spent another session trading sideways under $58.00. I would expect another dip toward $56.00, which should offer some short-term support. The plan is to use small position sizes (1/2 to 1/4 our normal size) to minimize risk.

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

Suggested Options:
We're quickly running out of time with WAT. I would hesitate to open new positions.

Annotated Chart:

Picked on September 28 at $ 55.43 *new entry
Change since picked:       + 2.32
Earnings Date            10/20/09 (unconfirmed)
Average Daily Volume =        809 thousand 
Listed on September 12, 2009         


PUT Play Updates

BIOGEN IDEC - BIIB - close: 49.01 change: +0.41 stop: 52.15

It's tough to be bearish with the market hitting new highs for the year. The overall trend in BIIB continues to look bearish but traders may want to limit their position sizes given the positive market environment.

Don't forget - this is a higher-risk play because we're choosing to hold over the earnings report!

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 suggested the November puts.

Annotated Chart:

Picked on   October 03 at $ 48.89
Change since picked:       + 0.12
Earnings Date            10/15/09 (unconfirmed)
Average Daily Volume =        2.6 million  
Listed on   October 03, 2009         


Strangle & Spread Play Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

Cigna Corp. - CI - close: 29.52 change: +1.19 stop: n/a

Sadly I think our CI strangle play is doomed. The sector has been volatile but it's not going anywhere up one day down the next. While I expect the health reform debate to heat up again we're running out of time. (Traders may want to reconsider this trading idea with December or January options.)

October options expire in five days. I'm adjusting our exit to $0.75 hoping to recoup some of our capital.

The options I suggested were the October $35 calls (CI-JG) and the October $25 puts (CI-VE). Our estimated cost was $1.20.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on September 08 at $ 29.40
Change since picked:       + 0.12
Earnings Date            11/05/09 (unconfirmed)
Average Daily Volume =        3.8 million  
Listed on September 08, 2009         


CLOSED BULLISH PLAYS

SOHU.com Inc. - SOHU - close: 64.51 change: -1.85 stop: 63.75

What happened to SOHU? The bounce was just starting to look good. Then shares produced a little bearish reversal on Thursday. Friday's session saw follow through on the reversal and SOHU broke down under several layers of support in the $65-64 region.

I couldn't find any news to account for the relative weakness. I don't see any similar weakness in the other major Chinese stocks. Our play was closed when SOHU hit our stop at $63.75 on Friday.

Chart:

Picked on   October 01 at $ 68.24 /gap open entry
                                 (small positions 1/2 to 1/4)
Change since picked:       - 4.49<-- stopped @ 63.75 (-6.5%)
Earnings Date            10/26/09 (unconfirmed)
Average Daily Volume =        577 thousand 
Listed on September 15, 2009