Option Investor
Newsletter

Daily Newsletter, Saturday, 10/17/2009

Table of Contents

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

Market Wrap

Volatility Hits 12 Month Low

by Jim Brown

Click here to email Jim Brown

The Dow shook off an early morning dip and some expiration volatility to rebound +60 points off the lows and close right at 10,000 once again. Given the factors that could have pushed it lower this was a bullish recovery.

Market Statistics

The Dow had a significant headwind at Friday's open after IBM disappointed investors with their earnings. Dow component IBM gave up -$6.34 for the day and that equates to about -60 Dow points. Add in another 9-point Dow drag with GE losing a buck and another -9 points from JPM losing a buck and it was a minor miracle that the Dow clung to the 10,000 level.

The economic reports were also working against the market at least in the case of Consumer Sentiment. Sentiment fell to 69.4 from 73.5 and well below estimates for a gain to 76.5. The decline was caused by a sharp -5.9 point drop in the expectations component. Expectations for inflation rose sharply from 2.2% to 2.8%. Consumer fundamentals remain weak and job losses are continuing but at a marginally slower pace. The stock market may be hitting new highs for the year but the week this survey was taken the market was trending lower. Every day some new high profile analyst is calling for a correction given the strong gains since March. We also saw on Thursday that foreclosures hit an all time record high in Q3 with 937,840 homes receiving foreclosure letters.

Actual foreclosures are unknown because the delinquency rate is so bad that many lenders are only going through the motions to file the preliminary paperwork but are not following through with the actual foreclosure. They would rather have someone living in the home than having tens of thousands of vacant home falling into disrepair, vandalism and theft of components. The odds are much better that vandals will not strip out all the copper wiring to sell for scrap if someone is living in the home. In some areas the appliances are disappearing within days of the former owner vacating the property. The foreclosure problem will remain with us for a long time until employment returns.

Consumer Sentiment Table

Consumer Sentiment Chart

Industrial Production for September rose +0.7% marking the third consecutive gain. This is also the first period of sustained gains since 2007. Most of the gains came from the restart of the automakers and the ramping up of new models. The annualized rate of increase in Q3 was +5.2% compared to drops of -19% in Q1 and -10.3% in Q2. Manufacturing output increased by +7.7% in Q3 and the biggest increase since 1999. Again, automakers were the reason. To put it into perspective business equipment rose only +0.1%. However upward revisions to prior months project an annual rate of +3.5%. Total manufacturing output rose nearly 8% annualized in Q3 and the fastest pace in nearly three years. Overall capacity utilization rose from 69.9% to 70.5% and the highest level since January but still well below pre recession levels of 79%.

Industrial Production Chart

Next week has a busy economic calendar but only a couple of reports will distract analysts from the earnings parade. The PPI on Tuesday and the Fed Beige Book on Wednesday are the reports that will attract the most attention.

Economic Calendar

The true focus for the week will be earnings. This is the second busiest week of the quarter and over a third of the Dow components will report. A total of 61 S&P companies have already reported and 79% have beaten street estimates. We could quit the reporting cycle now and know how the earnings for Q3 stacked up. However, everybody gets their 15 minutes of fame or blame as the case may be.

Next week the most watched companies are listed in orange, next most important in green then yellow then everyone else. I listed a company like Black & Decker (BDK) in green because they sell tools into the retail/wholesale market and should be a good read on consumer activity. They have already preannounced better expectations. Caterpillar (CAT) should be an excellent reading of global business. I am expecting CAT to provide lackluster guidance. Over 65% of CAT's business is from outside the USA.

Apple (AAPL) reports on Monday, which is unusual for them. With ever increasing price targets and earnings estimates they are eventually going to disappoint. Friday Microsoft (MSFT) reports earnings before the open. This is a dramatic departure from the normal Thursday after the bell report. They are expected to beat the street and say positive things about Windows 7, which goes on sale next Thursday.

Amazon reports after the close on Thursday and their stock price has been relatively stagnant for the last month as though traders are unsure what to expect. Wal-Mart started a price war with Amazon last week on the price of books. Since Wal-Mart only carries a few this should not impact future Amazon earnings. Ebay (EBAY) reports on Wednesday and I am expecting some decent results. They have been changing their pricing structure and adding extra cost features and this could have produced some extra revenue over the quarter. Also, with school out many housewives use the summer months to sell kids clothes and toys on Ebay while buying clothes and toys in the next size higher. My daughter is always buying and selling clothes as her son goes through about 3 sizes a year. It always amazes me what an active market there is for kids clothes on Ebay. It appears the soccer moms turn into shopper moms over the summer.

Yahoo reports on Tuesday and YHOO stock has also been stagnant since mid September. It appears all the drama has left Yahoo and lacking a new story traders moved on to something else.

UPS reports on Thursday and will give us an update on the status of the shipping business. Based on what UPS says we can extrapolate economic health for the U.S. and to some extent the world. If the package business is picking up then there is a rebound underway.

Juniper (JNPR) reports on Thursday and will give us an idea on what to expect from Cisco several weeks from now. Actually F5 Networks reports on Tuesday and the two combined reports will be a good indication of health in the tech sector.

Several energy stocks report throughout the week including Occidental (OXY) and Schlumberger (SLB). I could not list all of the energy stocks and this week is just a trickle compared to the following week. However, after Haliburton's earnings on Friday and SLB next Friday there will be little doubt how the energy sector will fare.

Earnings Calendar

Haliburton (HAL) reported earnings on Friday that fell 61% to 31-cents per share. Although revenue was down sharply from the comparison quarter it was up compared to Q2 and the first gain in four quarters. Haliburton said it appeared the worst was over although market conditions remained difficult. Many wells are being drilled but completions postponed until prices firm. This allows firms to continue developing reserves but postpone the costly completion process until it makes economic sense. HAL hit a new 52-week high at $31 on the news.

General Electric (GE), the old faithful of earnings reporters, turned in a dud of a report. GE's Q3 profit fell -45% on a decline in orders of 18%. They beat the street on earnings through cost cutting but revenue fell sharply. Their outlook was far from exciting. GE blamed the slump on a lack of an event to offset the Olympics revenue from 2008 and because of the depressed real estate market. It was a lackluster report.

Google (GOOG) reported earnings that beat the street and garnered a $20 boost in its stock price on Friday to $550. Google has become the poster child for elevated price targets. Current targets include Canaccord Adams $700, UBS $635, Goldman $635 and FBR $680 to name a few. With only 242 million shares outstanding a good 5:1 split would probably be rocket fuel for prices. Most investors can't afford to belly up to the bar to buy a couple hundred shares at the current price. Split that price down to about $100 and thousand of investors could afford to partake in the next rally.

Google Chart

Bank America (BAC) reported a loss of $2.2 billion in Q3 and wrote off about $10 billion in bad loans. That was $1 billion more than the prior quarter. The higher than expected loan write offs from BAC, C and JPM stimulated fears that consumers are still in a downward spiral. The combined earnings reports from the major banks knocked about 7% off the Banking Index since Wednesday's close. Ironically the banks were supposed to post the strongest earnings of Q3 and instead they are proving to be the biggest disappointment.

The FDIC closed the 99th bank of the year on Friday. The San Joaquin Bank of Bakersfield CA was the last to be closed. Banks insured by the FDIC have set aside $338 billion for loan losses during the past six quarters. The FDIC has spent nearly $27 billion on bank closures so far in 2009 and has less than $10 billion left in the emergency fund.

Foreclosures are proving a hard pill to swallow for MGIC (MTG) as it posted its ninth consecutive quarterly loss. MGIC is the largest mortgage insurer and record foreclosures are crushing the insurer. MGIC lost -$4.17 per share in Q3 and much more than the $1.62 loss expected by analysts. Revenue fell more than 10%. MGIC is going to cease operations of the current company in January and start a new company in an effort to revitalize its business. Evidently the old losses and liabilities will stay with the old company and the new MGIC will be reborn. Good trick if you can manage it. MTG stock fell -12% on the earnings news. If they can succeed in splitting the company in two at year end the odds are good the current MTG will return to its lows without any new revenue to cover old losses.

MGIC Chart

Crude prices seem to be possessed. For no particular reason other than the falling dollar the price of crude has taken off over the last couple of weeks. After hitting a low of $65.21 on Sept 25th the price of crude has gone nearly vertical to close at $78.52 on Friday. Crude inventories rose slightly last week but gasoline inventories unexpectedly fell by 5.2 million barrels. Also, refinery utilization fell to 80.9% from 85%. October is the month refineries use to switch over from summer fuels to winter fuels and this was the reason for the nearly 5% drop in capacity. Also, the pace of crude imports at 8.7 mbpd is exceptionally low.

At the Peak Oil Conference last week we heard from experts from around the world that production capacity was continuing to decline although it was still more than current demand. OPEC's level of compliance with their stated quotas is shrinking every week as OPEC countries cheat on the quotas in order to capture income from the rising prices. We heard the prior week that the IEA and EIA had raised their demand estimates for Q4 and for 2010 but this should not have any impact on the current price of crude given the excess OPEC production capacity.

We also learned that China is still buying up every block of reserves they can find and using dollars to pay for it. This diversifies them out of dollars and into commodities with the emphasis on crude oil. You may have heard that Exxon had bid $4 billion for the Kosmos Energy stake in the Jubilee field. This field is estimated to hold 1.4 billion barrels of oil. Exxon thought it had completed a deal with Ghana National Petroleum for the stake in the field when China's CNOOC showed up unexpectedly with a rival bid. Kosmos had already announced it had entered into an exclusive binding agreement with Exxon but that "binding agreement" appears to no longer be binding.

This competition for reserves and production between national oil companies like CNOOC, Petrochina, Exxon, Occidental, Conoco, Petrobras, etc, is going to raise the price of oil regardless of the global production capacity. I have been warning about China for years. They are not buying up reserves and production to be an international oil production company but to acquire the reserves for their own use at some point in the future. They are NOT buying to produce and resell. They are buying to hoard and take off the market.

None of this explains the rise in oil prices last week. The initial rally came on the falling dollar at a new 52-week low but once over $75 it continued higher on short covering. Oil prices hit a new 52-week high at $78.52 at the close.

Crude Oil Chart

The price of oil is going to be a problem for the economic recovery. Economists at last week's conference believe that once oil goes over $85 the economy will begin to decline. There were many discussions on the part that high oil prices played in 2008 to accelerate the credit declines. The theory is that 90% of Americans spend every dollar they make with only a very small cushion of cash at month end. With heating oil prices hitting $4 a gallon and gasoline prices going to $4.50 the average consumer was out an extra $250-$300 every month for fuel. Since most U.S. families have two wage earners that high gasoline price was a double whammy.

The second recessionary pressure was the new credit card rules from 2007/2008 that significantly increased the minimum payment due. With an average of five credit cards and payments doubling or in some cases tripling the extra monthly outgo between credit cards and fuel bills was more than $500 per family and more than the available cash. This caused people to be late on their house payments at the same time the home equity line of credit evaporated.

The economists did not believe rising crude prices were the sole culprit for the recession but were a significant contributor. They pointed to gasoline price hikes in prior decades and the recessions that followed as evidence for their assertions.

The bottom line to this discussion is that they believe $85 oil prices will stifle the fledging rebound and push the economy back into recession.

The other big topic was the ballooning debt. Debt at a Peak Oil conference? Absolutely since they are uniquely intertwined. Rising debt produces a falling dollar and higher oil prices. Eventually the rising debt will cause inflation since the government has no choice but to print more money to keep the wheels turning. Inflation produces higher oil prices and higher oil prices will eventually produce another recession.

They say you can line 1,000 economists up side by side and still never reach a conclusion. That was not the case last week. EVERY economist, both professional and amateur, agreed the U.S. was never going to be able to pay off its rising debt. At the current 12.6% of debt to GDP it puts the U.S. in the category of a banana republic and actually worse than quite a few. People don't realize how big a $12 trillion debt really is.

There are 3600 seconds in an hour, 86,400 in a day, 31,536,000 in a year. A trillion seconds is 31,688 years. A trillion $1 bills weighs 1.1 million tons, yes tons. It would take more than 10,000 18-wheelers to transport $1 trillion in dollar bills. A trillion is a very big number and the U.S. currently owes $11,947,621,824,058 or nearly $12 trillion dollars.

If you could pay off the current $12 trillion in debt at $1000 per second it would take you 3,805 years to pay off the debt assuming there was no interest. The U.S. currently incurs $500 million a day in interest on its various debts. That is expected to quadruple over the next decade. In addition to this the U.S. also has over $56.4 trillion in unfunded liabilities to social security, Medicare and Medicaid, according to the CBO. ($184,000 for every man, woman and child in the U.S.) That means all the baby boomers who are about to retire will go from paying taxes into the system as wage earners to taking money out of the system as retirees. They will get a check every month and M/M will cover their rising medical bills. The government does not have this money because they borrowed it to pay other bills. The social security trust fund has IOUs from the government.

The economists are literally running around like a flock of Chicken Littles warning that the sky is falling. They believe this massive debt is more dangerous than peak oil. I am not an economist and I was shocked to see the fervor being expressed. They believe the collapse of the dollar is imminent. They expect the dollar index to decline from the current 52-week low of just under 75 to something in the 25-40 range. This will result in the dollar being dropped as the world's reserve currency. This has tremendous implications to the stock market, job market and your retirement plans. Needless to say I came back from the conference severely depressed. The economic landscape in our future looks more like Death Valley than the Ponderosa.

The Dow crossed over the 10,000 barrier for the 26th time this week. If it does it next week it will be the 27th time after the close at 9995 on Friday. I thought the minor decline on Friday and the rebound was bullish. After a couple days of gains the markets needed a rest. The move over 10,000 did not come without a price. Wednesday and Thursday saw higher volumes but very little movement. On Thursday the markets posted gains BUT the A/D line was negative. There were more decliners than advancers but the markets eked out a gain and volume was rising. This is NOT a good sign. Higher volumes at critical levels with internal divergence is a sign of a topping market or at least a market where the indecision is high.

I want to give the market the benefit of the doubt especially since this was an option expiration Friday. The recent rallies have been built on the backs of shorts that refuse to believe the market can go higher. However, large round numbers tend to be magnets and once there the visible target disappears. There is no direction and the troops need to fall back to regroup in order to make another charge.

This would be the perfect place to consolidate. The Dow is pressing upside resistance and nearing downtrend resistance. The SPX is facing strong resistance at 1100 and the Nasdaq is stalled at 2160. Expiration is over and Monday will be the test. In 1987 the Monday after expiration was black Monday.

If the Dow does cool we could see 9850 as support and the launching pad for the next leg higher. However, remember, this is October and the fiscal year end for most funds. There are still two weeks left in October and now that expiration has passed there is nothing preventing fund managers from making year-end changes.

Dow Chart

The S&P is facing strong resistance at 1100 and financial stocks are weakening after some of the less than spectacular financial earnings last week. Energy stocks helped push the S&P higher and they are due to ease after the big run in oil prices last week.

S&P-500 Chart

The Nasdaq is fighting resistance at 2160 and barely managed to post gains after the Intel spike at Wednesday's open. The spike took it to 2167 and that remained resistance the rest of the week. There were opening spikes over that level but the hang time was measured in seconds rather than hours. If we did get a material pullback I would expect 2063 to be support.

Nasdaq Chart

The Russell and to some extent the Nasdaq could be forming a double top. Russell 622 was solid as a rock on Wed/Thr and support should be back at 600. The Russell only managed a .2% gain for the week compared to 1.5% for the S&P. This suggests fund managers are fading the Russell as we head into the last two weeks of October.

Russell 2000 Chart

The Volatility Index (VIX) spiked to 89 back in Oct 2008 as the markets crashed and big banks failed. That was the highest level ever for the VIX. It never moved over 50 before Lehman's failure and never over 40 before that. The VIX endured 9/11, Long Term Capital Management, Russian Debt Crisis, the Asian Debt crisis and the Worldcom bankruptcy with levels under 40. The VIX traded as low as 21 on Friday and extended its longest losing streak ever. The VIX at 21 is cautionary but given the recent volatility of the last 12 months I don't believe it is flashing a warning sign. Back in 2006 it traded as low as 9.39 and for four months analysts warned of impending doom. That doom came in Feb/Mar 2007 when the markets finally corrected after eight months of solid gains.

Obviously 89 is an extreme we may not see again soon as is the opposite extreme of 9. I would simply caution that numbers under 20 suggest some very bullish sentiment, maybe too bullish. Many times over the years we have seen the markets rally into earnings, even good earnings and then experience a sell the news event. If you are holding longs today I would definitely consider using a tight stop and not be too eager to jump back into the market if your stops get hit. I believe we will move higher eventually and I will feel much better once that calendar says November instead of October.

I met an investment banker at the Peak Oil Conference that is staffing up a new energy consultancy group. He is looking for a trader to manage the firms excess cash and trade stocks, options and energy futures. If you feel like sticking your head in the lions den send me your contact information and I will make the introduction. Geographic location is not important as long as you are in the USA.

Jim Brown


Index Wrap

Dow 10,000 but double tops elsewhere

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

It could be anticipated that the Dow would get to 10,000 and make a new high for it's move and this was the outcome, but the Nasdaq and the related Russell 2000 have formed potential double tops. Unexpectedly, this makes last week's prediction for Dow 10000 AND a warning of a possible double top both true!

The S&P and the Nasdaq rarely diverge for long so the inability at least so far for Nasdaq to accompany the Dow 30 (INDU) and the S&P to new relative highs suggests that there's risk to ALL the major indexes of a correction. It looks to be time to take profits on long calls. That isn't to say that I will turn around and short or buy puts in this powerful bull trend. The best money to date has been made on buying pullbacks, especially when accompanied by the 13-day RSI falling back to into at least it's 'neutral' range as highlighted on the S&P 100 (OEX) chart.

There's a warning sign of another type that suggests an extreme akin to being 'overbought' given that my sentiment indicator reached another and higher extreme of bullishness, as seen graphically on both the S&P 500 (SPX) and Nas Composite (COMP) charts further on below.

While SPX, OEX and INDU could go on to further nominal new highs, the upper boundaries of their current uptrend channels suggest these indexes could begin to run into technical resistance at around 1108, 510 and 10188 respectively. If in calls and I hope you are or are otherwise profiting from this strong trend, you may well be 'playing' for the last 5-10 percent of overall profit potential. Relative to the risk of a shakeout, especially now that the pundits have all trumpeted the mighty 10000 in INDU, further upside potential looks limited relative to, as I say, to possible downside risk.

On a long-term chart basis, the S&P and finally joined COMP as having pierced long-term down trendlines. At 1119 SPX reaches a 50% retracement of its bear market decline dating from its October 2007 top. COMP at 2246 would achieve a fibonacci 61.8% retracement. These are the kind of retracements where I begin to look for at least a slow down of the first-half advance.

Moreover, we're in a seasonal period (October) where shakeouts notoriously occur. All in all a still strong bullish trend, even with Nasdaq faltering here, but I'm not of course talking about holding longer-term stock investments but whether this is an area of significant risk of a short to intermediate-term shakeout of importance to holding derivities.

CHART OF THE WEEK:

The S&P (500) has achieved a clear cut move through and above its long-term down trendline as seen on its weekly chart below. The index is also up in an overbought area in terms of the 8-week Relative Strength Index (RSI). It may hit overbought levels a second time, as it did back at the 2007 top. The primary point in this is that we're not in the low oversold or even mid-range 'neutral' area of this indicator any longer. It gets to be tougher to tack on those very big further gains when we start hitting these higher readings in terms of the RSI. Moreover, the recent new closing weekly high was 'unconfirmed' by a similar new high in RSI which also presents a future shakeout potential.

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart difference this week is the index's upside penetration of its prior high at 1075. A bullish best would be if SPX can STAY above this level. Resistance may be seen (again) if the index reaches the high end of the uptrend channel I've highlighted below.

So, very near support is suggested at 1075, then at 1065-1067 and next at the 50-day moving average (again), currently intersecting at 1038. Key chart support is at the last downswing low at 1020. A close below this level lasting more than a single day would suggest further downside potential, even back to the 1000 area.

Pivotal resistance is at the 1096 high, then up in the 1100-1110 area.

I've discussed the 'overbought' situation suggested by high/extreme bullish sentiment and the high 13-day RSI, as seen below. Given what I suggest may be limited further upside potential, take profits and run. If you don't have any (profits) but have trades on that WOULD be profitable on another up leg and hope that there will be a next and further upside run, I don't like the odds here. I don't rule out further upside progress of course, but I try to only calculate or consider trades having probabilities of gain that are substantially greater than potential loss. Hope is a good thing in most spheres but in trading, not so much.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart by my analysis doesn't have a lot of upside potential left given its tendency in recent weeks/months for it to correct once it hits the rising trendline seen at the upper end of its bullish uptrend channel. The chart pattern is bullish otherwise as it keeps going to new highs for this move and its pullback lows also stay above its prior lows.

I've projected technical resistance around 510. Key nearby support is in the 500 area. Next support may come in around the 50-day moving average at 480 and especially then at the prior recent (down) swing low at 473. Pivotal next support is in the 462-455 area.

On this chart, I've noted a more or less mid-range RSI zone, I've called the 'neutral' area. There have been multiple prior rallies when the index pulls back such that the RSI falls in this area. In strong bull moves like this one, it's much more likely that the RSI will merely 'throw off' an overbought situation rather than getting 'fully' oversold. For this reason, I've noted this mid-range area, rather than the high and low extremes as one to watch for with the 13-day RSI.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow chart pattern remains bullish, but I have also noted the Average's nearness to potential technical resistance at the upper trend channel line.

I don't consider it so important for INDU to stay ABOVE 10000 as much as in its ability to hold above its prior 9918 prior top; resistance once overcome, tends to 'become' subsequent support on pullbacks in strong bull moves.

Next support in INDU is in the 9840 area, then around 9590, extending to 9430. I've projected potential technical resistance in the 10188 area currently.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has a potential double top going but this wouldn't actually be technically 'confirmed' unless it also then closed (for more than a day) below its last swing low in the 2040 area. I noted the potential for a double top in the major indexes last week. Stay tuned on that!

If COMP can close above its prior intraday high at 2168 a next technical resistance is suggested currently around 2240, at the upper channel line.

Near support is in the 2120 area, then might next be found around 2063, at the 50-day average and most definitely 'should' be seen next at the prior 2041 intraday low. Support implied the LOW end of COMP's uptrend channel is at 2010 currently.

Bullish sentiment was discussed already but I would note the TWO consecutive daily spikes above a CPRATIO reading of 2. Two back to back days like this are rare. It suggests that traders read MORE into a rally above Dow 10000 than is warranted.

The foregoing is especially true if you know, as I do from having worked for Dow Jones, how imperfect or imprecise the methods employed are for dropping one stock(s) and adding others to the Average; affecting its ultimate rise or fall of course. It's not like the objective method of the S&P whereby the biggest cap stocks are the sole criteria for being in the two main S&P indices.

Meanwhile, COMP which has an objective means of what stocks are in this Index (ALL Nasdaq listed stocks!), is not following this move to new highs and that should be worrisome to the bulls.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has the same potential double top pattern that has formed in the Composite, suggesting pivotal near resistance lies at the prior 1755 intraday top. If there is a decisive upside penetration of this prior top, I've pegged next resistance as coming in around 1813, at the current intersection of the upper end of its broad uptrend channel.

Near support is in the 1700-1690 area. I'll note again that a 'major' double top would only be 'confirmed' on a technical basis IF the Index subsequently fell below its prior 1657 low, which is a pivotal or key support currently for NDX. Another pivotal support comes in at 1625 currently, at the lower boundary of the uptrend channel highlighted on the daily Nas 100 chart.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Daily trading volume is a related technical aspect that can be studied for the Nasdaq 100 tracking stock (QQQQ). The key On Balance Volume (OBV) indicator has turned down as volume as picked up some on the recent decline. Volume here is adding some support to the idea of a possible double top of significance. It's still a bit soon to say that the Nas 100 index is headed substantially lower but right now I rate the chart as showing a possible interim top.

An aside to what we're seeing on the daily chart is that my QQQQ trading 'system' that has shown great profitability to date remains long the stock. This trade strategy or system requires a 21-hour RSI extreme (above 72) before an exit long position could occur and this indicator rose to a peak 67.4 at the highest hourly close of last week.

Near QQQQ resistance: 43.17

Next overhead resistance: 44.0-44.3

Near QQQQ support: 42.5

Next support: 40.7

Major support: 40.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) is showing the same chart pattern as the Nasdaq in that a potential double top has formed in the 625 area. A decisive upside penetration of 625 would renew the bullish possibilities, especially on a closing basis and for more than a day. Next technical resistance is suggested, also at the top end of its bull channel, at 644 currently.

Near support is in the 606 area, then at 588, extending to the prior intraday low at 576. 554 is support implied by the low end of RUT's uptrend channel.

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

Trading, Jewelry, and the Internet

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Intercontinental Exchange - ICE - close: 105.84 chg: +7.59 stop: 94.90

Why We Like It:
Shares of ICE spent almost four months consolidating under resistance at the $100.00 level. Shares finally broke out on Friday with a 7.7% rally on strong volume. The rally stalled near its long-term trendline of lower highs so I'm expecting a dip. Broken resistance near $100 should be support.

Use a trigger at $101.00 to buy calls. We'll use a stop at $94.90. Our first target is $109.75. Our second target is $114.75. More aggressive traders could aim higher but we want to exit ahead of the November 3rd earnings report.

Suggested Options:
I'm suggesting the November calls. My preference is the $100 strike (on a dip with a trigger at $101.00).

BUY CALL NOV 100 IHH-KT open interest=2134 current ask $9.30

Annotated Chart:

Picked on   October xx at $ xx.xx <-- TRIGGER @ $101.00
Change since picked:       + 0.00
Earnings Date            11/03/09 (confirmed)
Average Daily Volume =        1.3 million  
Listed on   October 17, 2009         


NEW DIRECTIONAL PUT PLAYS

FUQI Intl. - FUQI - close: 25.30 change: -0.58 stop: 28.75

Why We Like It:
You may not have heard of FUQI. It is a Chinese company selling jewelry. The stock exploded higher back in May but the rally has run out of gas. The new path of least resistance appears to be down. It remains a very volatile stock and I would feel much more comfortable buying puts (limited risk) than shorting the stock.

I'm suggesting bearish positions now but the $25.00 level could be round-number support. A better entry point is probably a bounce toward $27.00. We'll use a stop above last week's high. I would consider this an aggressive trade so lets use small positions (1/2 to 1/4 our normal trade size). Our first target is $22.00. Our second target is $20.25. The P&F chart is currently bearish with an $18.00 target.

We'll plan to exit ahead of the mid November earnings report.

Suggested Options:
I'm suggesting the November puts. My preference is the $25 strike.

BUY PUT NOV 25.00 QXF-WE open interest= 540 current ask $2.25

Annotated Chart:

Picked on   October 17 at $ 25.30
Change since picked:       + 0.00
Earnings Date            11/12/09 (unconfirmed)
Average Daily Volume =        1.3 million  
Listed on   October 17, 2009         


Netease.com - NTES - close: 38.47 change: -1.32 stop: 41.65

Why We Like It:
NTES is another Chinese stock that is breaking down. The failed rebound last week confirms the new trend is down. We'll use a stop loss at $41.65. Our first target is $35.25. Our second target is $33.00, just above the simple 200-dma. We want to exit ahead of the mid November earnings report. FYI: The P&F chart is bearish with a $25 target.

Suggested Options:
I'm suggesting the November puts. My preferred strike is the $35 put.

BUY PUT NOV 35.00 NGH-WG open interest=2015 current ask $1.35

Annotated Chart:

Picked on   October 17 at $ 38.47
Change since picked:       + 0.00
Earnings Date            11/12/09 (unconfirmed)
Average Daily Volume =        2.7 million  
Listed on   October 17, 2009         



In Play Updates and Reviews

Time Is Running Out

by James Brown

Click here to email James Brown

Several companies on our newsletter will be reporting earnings soon. We plan to exit ahead of their earnings announcement.


CALL Play Updates

Amazon.com - AMZN - close: 95.32 change: -0.69 stop: 92.75

I was expecting more strength out of AMZN given GOOG's results last night but the stock fell this morning as the rest of the market plunged. Overall the stock held up pretty well considering the fact that Wal-Mart (WMT) has just started a price war with AMZN over several new books coming out. WMT wants to be the cheapest online retailer and said they would sell several new books for just $10. AMZN dropped their price to match it. WMT fired back with a new price of just $9 per new book and AMZN has now matched the $9 price.

I'm still bullish here but we're running out of time. AMZN is due to report earnings on Oct. 22nd. If you buy calls on the afternoon bounce then consider a stop loss close to Friday's low of $93.61.

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.

Suggested Options:
Previously I suggested the November calls. We have four days left before we plan to exit this trade.

Annotated Chart:

Picked on   October 08 at $ 95.05
Change since picked:       + 0.27
Earnings Date            10/22/09 (confirmed)
Average Daily Volume =        6.2 million  
Listed on   October 07, 2009         


Apollo Group - APOL - close: 73.98 change: -0.62 stop: 71.90

APOL's trend of higher lows is still in place. Yet I would wait for a new move over $75.00 before considering new bullish positions.

Our first target is $79.90. This should be a short-term play as we plan to exit ahead of the October 27th earnings report. FYI: The Point & Figure chart is bullish with a $95 target.

Suggested Options:
I suggested the November calls with a preference for the $80 strike.

Annotated Chart:

Picked on   October 14 at $ 75.25
Change since picked:       - 1.27
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        2.6 million  
Listed on   October 13, 2009         


AvalonBay - AVB - close: 72.05 change: -2.31 stop: 68.49

We've talked about waiting for a dip near $70.00 to launch new positions. It looks like AVB has started to correct a bit and could hit the $70 area soon. More conservative traders may want to wait for a bounce from the $70 zone before launching positions.

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 suggested the November calls with a preference for the $75 strike.

Annotated Chart:

Picked on   October 08 at $ 72.60
Change since picked:       - 0.55
Earnings Date            11/04/09 (unconfirmed)
Average Daily Volume =        1.8 million  
Listed on   October 07, 2009         


Caterpillar - CAT - close: 54.57 change: -0.20 stop: 51.90 *new*

Monday is our last day to hold CAT options. The company reports earnings on Tuesday morning. We're planning to exit at the close on Monday to avoid holding over the announcement. Given our time frame I'm raising the stop loss to $51.90. CAT has already hit our first target at $54.25. I'm lowering our second target to $57.45.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 01 at $ 50.00
Change since picked:       + 4.57
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =         10 million  
Listed on September 19, 2009         


Core Labs - CLB - close: 107.77 change: -1.25 stop: 103.95

Oil has been showing a lot of strength and that fueled some big gains for the oil services last week. We've got three days left for this CLB play. The plan is to exit at the close on Wednesday to avoid holding over earnings.

Look for short-term support at $106 and $104. Our first target to take profit is at $109.90. Our second target is $114.50.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entered on  October 08 at $105.25
Change since picked:       + 2.52
Earnings Date            10/21/09 (confirmed)
Average Daily Volume =        175 thousand 
Listed on September 23, 2009         


Consol Energy - CNX - close: 49.65 change: -1.37 stop: 44.99

Short-term momentum indicators are suggesting the rally in CNX has run out of steam and the next move will be down. I would expect a dip toward $48.00, maybe the $46.00 level. More conservative traders may want to exit completely right now. We only have three days left for CNX. The company reports earnings on October 22nd before the opening bell. That means we need to exit on Wednesday at the closing bell.

CNX has already hit our first target at $48.50. Our second and final target is $54.50.

Suggested Options:
No new plays at this time.

Annotated Chart:

Picked on September 25 at $ 43.77 /gap down entry
Change since picked:       + 5.88
                                /1st target hit @ 48.50 (+10.8%)
Earnings Date            10/22/09 (confirmed)
Average Daily Volume =        3.0 million  
Listed on September 19, 2009         


Dril-Quip, Inc. - DRQ - close: 54.47 change: -0.27 stop: 49.45

DRQ continues to hold over very well. Traders bought the dip this morning before shares even hit the 10-dma. The stock is short-term overbought and I'm not suggesting new positions at this time.

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:
No new positions at this time.

Annotated Chart:

Picked on September 28 at $ 48.50
Change since picked:       + 5.97
                              /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: 92.81 change: -0.33 stop: 84.90

EOG is another oil stock that's been showing a lot of relative strength. Shares do look overbought and due for a minor correction soon. I'm not suggesting new positions at this time.

EOG has exceeded our first target at $89.90. Our second target is $94.75. We actually have a third target a $99.50 but that might be too optimistic given our time frame. We do not want to hold over the early November earnings report.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 07 at $ 85.24 /gap higher entry
                               /originally listed at $84.71
Change since picked:       + 7.57
                              /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: 81.35 change: -0.32 stop: 77.75

Broken resistance near $80 acted as new support and traders bought the dip near $80 this morning. The move looks like a new entry point but keep in mind our second target is only $84.95. If you're launching positions now you may want a tighter stop loss.

Suggested Options:
Aggressive traders might want to buy calls on Friday's intraday bounce. We're planning to exit ahead of the late October earnings report.

Annotated Chart:

Picked on   October 06 at $ 77.42 /gap down entry
                              /originally listed at $78.04
Change since picked:       + 3.93
                             /1st target hit @ 82.50 (+6.6%)
Earnings Date            10/28/09 (confirmed)
Average Daily Volume =        2.1 million  
Listed on   October 06, 2009         


Flowserve - FLS - close: 105.01 change: -0.73 stop: 99.45

FLS is holding up pretty well. I'd prefer to launch new positions on a dip (or better yet a bounce) in the $102.50-100.00 area. Our first target is $109.75.

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

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

Annotated Chart:

Picked on   October 12 at $102.60
Change since picked:       + 2.41
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        1.2 million  
Listed on September 19, 2009         


Gold ETF - GLD - close: 103.18 change: +0.32 stop: 97.40

Gold futures managed a minor bounce in spite of a small rebound for the dollar. I'm still expecting a correction toward $100 and that's where I would initiate new positions. Be sure to give yourself enough time for the move to play out. Our plan calls for small positions to limit risk.

Our first target is $109.90. We are still contemplating a second, longer-term target.

Suggested Options:
I am suggesting the November or January 2010 calls. I prefer the November $105s or the January 110s.

Annotated Chart:

Picked on   October 06 at $102.28
Change since picked:       + 0.90
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


Mobile Telesys - MBT - close: 52.59 change: +0.13 stop: 47.90

MBT has been holding on to its gains but shares look like they could dip toward $50. As broken resistance the $50 level should offer new support and I'd use a dip near $50 as a new entry point to buy calls.

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:
If MBT provides a new entry point I'd use the November calls with a preference for the $50 strike.

Annotated Chart:

Picked on   October 12 at $ 50.15
Change since picked:       + 2.44
Earnings Date            11/05/09 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   October 10, 2009         


Martin Marietta - MLM - close: 94.10 change: +2.70 stop: 91.19

MLM gapped open lower on Friday but bounced back to a 1.1% loss. I don't see any changes from my comments on Thursday night so I'm reposting most of them here:

"MLM looks poised to breakout higher after a two-week consolidation. Shares just bounced from their rising 50-dma but failed to push past the $95.00 level. I'm suggesting a trigger to buy calls at $95.15. We'll use a stop under Thursday's low. Our first target to take profits is at $99.90. More aggressive traders could aim for the September highs."

Suggested Options:
I'm suggesting the November calls. My preference is the $100 strike. We want to exit ahead of the early November earnings report.

BUY CALL NOV 100 MLM-KT open interest= 225 current ask $1.75

Annotated Chart:

Picked on   October xx at $ xx.xx <-- TRIGGER @ 95.15
Change since picked:       + 0.00
Earnings Date            11/06/09 (unconfirmed)
Average Daily Volume =        418 thousand 
Listed on   October 15, 2009         


Precision Cast Parts - PCP - cls: 102.51 change: -0.07 stop: 99.90

Time is almost up. We plan to exit our PCP play on Monday at the closing bell but that's assuming shares don't hit our stop loss at $99.90. The company reports earnings on Tuesday morning. I'm not suggesting new positions. Our target is $109.90.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 12 at $104.05
Change since picked:       - 1.54
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        1.0 million  
Listed on   October 10, 2009         


Transocean Ltd. - RIG - close: 91.08 change: -0.40 stop: 86.85

RIG held up pretty well. The stock recovered from its gap down on Friday morning and only lost 0.4%. Oil service stocks continue to look strong thanks to a rally in oil. The 10-dma is rising and near $88.99. I'd consider new positions right now but readers could use a dip in the $90-89 zone as a new entry point. Our target is $99.50.

Suggested Options:
I'm suggesting the November calls but we'll plan to exit ahead of the early November earnings report. My preference is the $95 strike.

BUY CALL NOV 95.00 RIG-KS open interest=10208 current ask $2.30

Annotated Chart:

Picked on   October 15 at $ 90.94 /gap down entry
                             /originally listed at $91.48
Change since picked:       + 0.14
Earnings Date            11/04/09 (confirmed)
Average Daily Volume =        4.1 million  
Listed on   October 15, 2009         


Waters Corp. - WAT - close: 57.47 change: -0.80 stop: 54.90

The rally in WAT is losing stream and a few of the short-term technical indicators are suggesting the next move is lower. I would expect a dip toward $56.00, or possibly the 30-dma. I'm not suggesting new positions at this time. The plan was to use small position sizes (1/2 to 1/4 our normal size) to minimize risk.

Our target is $59.50. We do not want to hold over the October 27th earnings report.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on September 28 at $ 55.43 *new entry
Change since picked:       + 2.84
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        809 thousand 
Listed on September 12, 2009         


Whirlpool Corp. - WHR - close: 73.40 change: +0.54 stop: 68.45 *new*

Hmm... looks like I should have made the first target $73.50 and not $73.90. WHR has hit the $73.50 level several times this week but can't quite seem to get past it. We're down to our last four days. WHR reports earnings on Friday morning. The plan is to exit on Thursday at the closing bell (Oct. 22nd). More conservative traders may want to take profits now. The way shares have stalled lately I would expect a dip back toward $70.00. I'm raising our stop loss to $68.45.

We'll keep the first target at $73.90 for now and our second target remains at $78.50.

Suggested Options:
We have four days left. I'm not suggesting new positions.

Annotated Chart:

Picked on   October 10 at $ 70.50
Change since picked:       + 2.90
Earnings Date            10/23/09 (confirmed)
Average Daily Volume =        1.5 million  
Listed on   October 10, 2009         


PUT Play Updates

BIOGEN IDEC - BIIB - close: 49.20 change: -0.59 stop: 52.15

The BTK biotech index looks poised to bounce higher but BIIB is under performing its peers. Shares dove lower this morning but produced an equally sharp rebound. Fortunately the midday bounce failed and shares were starting to reverse into the closing bell.

I remain bearish but readers may want to consider a tighter stop loss closer to $50.50. Earnings are expected Tuesday morning (Oct. 20th). Wall Street is looking for a profit of $1.04 a share. This is a high-risk, aggressive play because we're choosing to hold over the 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'm suggesting the November puts. I'd use the $45 strike to really limit our risk.

BUY PUT NOV 45.00 IDK-WI open interest=3861 current ask $0.60

Annotated Chart:

Picked on   October 03 at $ 48.89
Change since picked:       + 0.31
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on   October 03, 2009         


CLOSED BULLISH PLAYS

iShares Financials - IYF - close: 53.65 change: -1.22 stop: 49.49

A disappointing earnings result from BAC sparked some profit taking in the financials. The IYF gapped open lower at $53.90 and closed with a 2.2% decline. We needed to close the position given our October options.

Chart:

Picked on September 15 at $ 52.60 *triggered  
Change since picked:       + 1.05 <-- exit @ 53.65 (+1.9%)
Earnings Date            00/00/00
Average Daily Volume =        5.1 million  
Listed on September 01, 2009         


CLOSED STRANGLE & SPREAD PLAYS

Cigna Corp. - CI - close: 28.37 change: -0.56 stop: n/a

The healthcare debate didn't produce as much volatility as we expected. Shares of CI have been churning sideways the last couple of weeks, which didn't help our strategy. Our strangle has expired. The options I suggested were the October $35 calls (CI-JG) and the October $25 puts (CI-VE). Our estimated cost was $1.20.

Chart:

Picked on September 08 at $ 29.40
Change since picked:       - 1.03
Earnings Date            11/05/09 (unconfirmed)
Average Daily Volume =        3.8 million  
Listed on September 08, 2009