Option Investor
Newsletter

Daily Newsletter, Saturday, 10/24/2009

Table of Contents

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

Market Wrap

Good News Fails To Impress

by Jim Brown

Click here to email Jim Brown

Despite a week of earnings that beat the street and some major gains in individual stocks the markets gave up their gains on Friday.

Market Statistics

Friday was a light day for economic reports but a big day for earnings reactions and news stories. On the economic front Existing Home Sales for September jumped from 5.10 million to 5.57 million units (annualized) mostly with the help of the homebuyer stimulus program. The +9.4% gain in one month was the strongest since August 2007. Inventories improved significantly to only a 7.8-month supply.

Unfortunately those statistics are misleading. The only homes selling are at the lower end of the spectrum. Those are exactly the ones being helped by the first time homebuyer credit. The $0-$100K price range accounted for 21% of sales. The $100K to $250K range accounted for 48.5% of sales. Homes from $250K to homes in the millions accounted for 30.4% of all sales and the majority of those sales were on the low end. Home inventory in the under $250K level has shrunk to only a three month supply compared to over a year's supply once you move over $500K. The numbers of sales of the very low priced homes are skewing the overall home sales statistics.

The northeast and southern regions led sales with more than an 11% gain while the west only managed a 6% increase. I heard one statistic that illustrated the foreclosure problem. 81% of the homes sold in Las Vegas were bank owned. Obviously Las Vegas is a different market than the rest of the country but you get the picture. Freddie Mac reported the highest ever rate of delinquencies in September at 3.3% of all loans. Freddie's total portfolio of loans now totals $2.243 trillion. On the bright side inventories are shrinking, prices are stabilizing and sales are rising all across the country. These metrics are at their highs for the year. However, the NAR numbers are seasonally adjusted and there is some discussion over their credibility. On a non-adjusted basis home sales actually fell -5.2%. I don't know how we interpret this BS except that the NAR seasonally adjusted numbers are commonly accepted in the marketplace.

The talk about extending the buyer stimulus program is increasing and rightly so. This is keeping the pipeline full of buyers and by stabilizing prices it is keeping marginal owners from letting their homes go back to the bank. As long as there are signs of rising prices many delinquent homeowners will keep trying to make their payments. Some ideas being floated would keep the stimulus program active through November of 2010. I would vote for that one since it gives the economy time to recover and for unemployment to shrink. Once workers lose their fear of being laid off they will be more open to the idea of buying a home.

Next week has a very active economic calendar. Actually the next two weeks are filled with critical economic events including another FOMC meeting. The most critical report for next week is the first look at the Q3 GDP on Thursday. Expectations are for a gain of +3.2% compared to the drop of -0.74% in Q2. Needless to say this Q3 expectation is already priced into the market rebound and a miss on expectations could have a very serious impact on the markets.

On Friday the GDP for the U.K. was released and showed a -0.4% drop instead of the 0.2% gain economists had expected. The European markets fell on the news and the British pound fell -1.5% against the dollar in early trading. The reason this is so critical is that the U.K. is basically a mirror of the USA. They have implemented many of the same stimulus programs as the U.S. and they are still in recession. This made analysts question their predictions for the USA and Thursday's Q3 GDP estimates. This was a material reason for the market weakness on Friday.

The rest of the week is littered with regional Fed reports and sentiment surveys with the really big economic events the following week. Next week is a build up of expectations for the following week's climax with ISM, Fed meeting and Non-Farm Payrolls.

The coming week is also another big bond sale week with $123 billion in debt being sold at auction. With the interest rate on the 10-year note hovering at a six week high just under 3.5% the cost of government borrowing may be moving higher. With a $1.5 trillion annual deficit growing to a $2 trillion by 2019 the cost of money is eventually going to be a problem. Once these auctions start going badly with higher rates and fewer bidders it is going to get ugly in the equity markets. I don't expect that this week because the bid to cover has remained unbelievably high but it will happen eventually.

Economic Calendar

The earnings cycle is in full swing and next week has the most earnings reports of any week in the season. Unfortunately the quality of the earnings will begin to decline because the majority of the big cap blue chips have already reported. In the list below I am sure there are a lot of symbols you may not recognize simply because most of the well-known names have already reported. Next week is primarily small tech and energy with COP, XOM and CVX leading the energy sector reports. On the tech side we have GLW, ADPT, AKAM, LVLT, FLEX and SYMC to name a few. We also get the inside scoop on the retail brokers Ameritrade and Etrade. After this week the quality and quantity of earnings declines even further.

Earnings Calendar

So far the earnings winner for the Q3 cycle is Amazon. AMZN posted amazing earnings that beat the street by a mile and then upgraded guidance for Q4. Amazon earnings rose +68% to $199 million while revenue jumped +28% to $5.45 billion. This was basically a holiday quarter before the normal holiday quarter. This is the kind of performance they previously did only in Q4. Amazon upgraded revenue projections for Q4 saying they could see $9.1 billion compared to analyst estimates for $8.19 billion. The Kindle book reader is selling more units and contributes more revenue than any other item on the website. A Citigroup analyst estimated they will sell 1.5 million in Q4. The Kindle has spawned several copycats but the Kindle still leads the pack. Barnes & Noble (BKS) was downgraded on Friday because analysts believe the impact of the Kindle and other readers will diminish the value of their brick and mortar stores. BKS has already released its own book reader with more features than the Kindle but the Kindle is still way out in front. Amazon's market cap is now 50 times larger than Barnes & Noble. BKS closed at a new 8 month low on Friday.

Amazon shares spiked +27% or $25 to close at $118.51 after the news. That was a new, all time, split adjusted high for Amazon shares. It was a big win for Jeff Bezos. Jeff has undergone years of insults and slurs since Amazon fell off its previous high of $113 in December 1999. Amazon was routinely beaten to a pulp in the press as too big with miniscule margins to ever succeed. Surprise, surprise, it appears they are succeeding and Jeff got better than a $2 billion bonus in his stock account from Friday's gain. He owns 23% of Amazon stock. Looks like Jeff gets the last laugh on his detractors. However, Amazon is now trading at a PE of 78 and that is historically a rich number. It did not concern one analyst who promptly raised his price target to $130.

Amazon Chart - Daily

Amazon Chart - Monthly

Microsoft (MSFT) reported earnings of 40 cents on Friday morning and beat analyst estimates of 32 cents. Revenue fell to $12.92 billion but the majority of that drop was $1.47 billion in revenue deferred to future quarters for upgrades to Windows 7. Microsoft shares rallied to their highest level since June 2008 with an opening spike to $29.35. However, that gain did not hold and MSFT closed at $28 but still a 5.4% gain for the day.

Microsoft did not include any pre-sales of Windows 7 in its results and that suggests Q4 could be another blowout. The CFO gave a characteristically bland outlook saying, "The quarter ending on June 30th may well have been the bottom of the economic reset." He also said they expected PC spending to strengthen in 2010 but they were not yet seeing a large rebound. Profits rose in the server software business and the entertainment business (Xbox) but fell in the online services unit, thanks to development costs for the Bing search engine.

Microsoft Chart - Weekly

In other earnings news Honeywell (HON) reported profits that fell -15% on falling sales but the company still managed to beat the street. Reported earnings were 80-cents per share compared to analyst estimates of 72-cents. The profits came from strong cost cutting efforts. Honeywell affirmed guidance for full year 2009 at $2.85 per share compared to estimates of $2.81 per share. Honeywell reported a somewhat distressing trend. They said sales of spare parts for aircraft engines were declining because airlines were aggressively managing part replacements and increasing the number of flight hours on maintenance parts. That is NOT reassuring to anyone that travels. The company also said municipalities and other government agencies had actually pulled back on purchases while they wait for stimulus money from Washington. Honeywell increased its pension expense forecast to $700 million from $500 million for 2010. HON stock closed flat for the day.

Schlumberger (SLB) put a damper on the energy sector with comments made with their earnings on Friday. SLB revenue fell -25% to $5.43 billion and that was slightly below analyst estimates. Earnings were 65-cents per share and that was a 61% drop in profits. SLB said energy demand would increase but increase slowly as countries recovered slowly from the recession. SLB said demand for oil and gas would be hampered by high unemployment and a worldwide glut in oil and natural gas. While gas drilling has increased in the U.S. SLB warned that the recovery was fragile and service activity and prices won't improve much until late 2010. SLB did say that the move in crude over $80 would likely spur an increase in drilling. The average price paid for crude in Q2 was $59.80 per barrel. SLB was cut to a sell at S&P Equity Research based on the expected low margins for the next three quarters.

Schlumberger Chart - 90 Min

Appliance maker Whirlpool (WHR) reported a sharp drop in profits but raised its outlook for the full year. WHR reported profits of $1.15 per share compared to analyst estimates for 77-cents. That is a major beat and WHR was rewarded with a +5% spike in the stock price to a new 52-week high. Whirlpool had been scaling down over the last couple years and now feels it is competitively positioned for the rebound.

Broadcom also reported earnings and was responsible for a large part of the Nasdaq loss. Earnings beat the street but the company warned that revenue should remain flat in Q4. The CEO said there was some concern on whether Santa would show up this season for consumer electronics sales. An analyst at Baird said order growth should slow until mid 2010 when the rebound would likely turn bullish for chips. A Jefferies analyst said Broadcom remained his favorite pick but he did lower estimates based on the earnings. BRCM lost 7.2% on the report and succeeded in tanking the entire chip sector.

Broadcom Chart

Semiconductor Index Chart - Daily

Financial tanked -2% for the week despite some positive comments from Capital One and American Express. Capital One (COF) rallied +7% after posting a surprise 14% increase in Q3 profits. COF did raise loan loss provisions but they were positive on the trend in consumer credit accounts. American Express (AXP) said earnings fell -21% but they reported progress in cleaning up their accounts. Loan loss provisions actually decreased at AXP.

Unfortunately there were seven more banks that were closed on Friday bringing the total to 106 for the year. Before the closures on Friday the total assets of failed banks year to date was $107.14 billion. The banks closed on Friday were all small and the estimated cost to the FDIC fund was only $357 million.

Closed Banks: (http://www.fdic.gov/)

Bank Closures By State in 2009

It was not a sunny day for SunPower (SPWRA) after they posted a 48% drop in profits and lowered their 2009 full year outlook. SPWRA lost -15% or -$4.94 to close at $28.33. A Barclay's analyst reiterated his buy on SPWRA saying the drop was over done and they saw limited downside from here. He reminded investors that the company's production in the residential and commercial segments was sold out. He said the lowered outlook came from lowered tax incentives in Germany.

The transportation sector has been a train wreck for the last couple of days. Burlington Northern and Union Pacific were both derailed after posting double digit profit declines. UNP said they expected a pickup in traffic in the spring but lower volumes of new cars and no real rebound in industrial shipments cost them in Q3. BNI fell -$7 since Wednesday and UNP fell -$8.

The drop in the railroads and some cautious comments from the airline sector knocked the Dow transports back to support and odds are good we will see a retest of 3600 given the pessimistic forecasts by the railroads. This was a shocker because I told James on Tuesday it looked like the Transports were about to breakout if their earnings were at least decent. Obviously they were not decent and resistance held.

Transportation Index Chart

So far in this earnings cycle 37% of the S&P has reported and 81% of those companies have beaten estimates by an average of 18%. That would be an astounding number except that the majority of it came from additional cost cutting and some companies are still announcing layoffs. Earnings for the entire S&P are only expected to be $14.79 per share for the quarter. That is well below the $23-$24 per share for Q3 in 2006/2007. It is also below the $15.96 actually reported in Q3 2008. Companies are beating estimates but estimates are still so low a snake could crawl over them. Revenue has improved since Tuesday with an average beat of 3.65% over estimates compared to the 0.7% as of Tuesday. That was due to a couple big beats by companies like Amazon.

Volume was still working against us with the largest volume day in three weeks of 10.1 billion shares on Wednesday's decline. Thursday's rally was actually decent at 9.2 billion but Friday's decline was also in the 9 billion range and continued the trend of higher volume on down days. MSFT and AMZN traded more than their average daily volume in the first 30 minutes of trading on Friday. The spike in price boosted the combined market cap of those companies by $25 billion.

I have tried to be open minded about the market over the last couple weeks but it is becoming harder with every day that passes. The volatility this week is confirmation to me that we are probably going to face some market weakness before we escape October. We have had some really big earnings surprises but other than the initial short covering spike there has been no follow through.

The major indexes are showing the kind of volatility that normally appears at market tops. I don't mean a long-term top but just a top in general. Investors become less committed and more cautious. Everybody wants the market to move higher but all the bulls are already fully invested. The strong earnings surprises are opportunities for the bulls to exit rather than buy more. Would you buy Amazon on Monday? The Q3 earnings cycle is fully priced in and there is no upside to being fully invested until some of the profit is wrung out of the market.

The Dow has failed at 10100 three separate times over the past week. It tested the 10100 resistance and fell back to trade under 10,000 each time. It closed at 9973 on Friday and close to the low for the day. It is like going to a fireworks show. After the final burst of awe-inspiring airbursts the operators walk around relighting all the duds that failed to fire during the program. There are still sparks and random flashes but the excitement has passed. Sightseers are all heading for their cars to beat the traffic to the exits.

That is exactly where we are today in the market. The big shooting stars of AMZN, GOOG, IBM, INTC, MSFT, YHOO, AAPL, etc have already flamed out and are poised for profit taking. The rest of the earnings cycle becomes less exciting and less important as each day passes. Fund managers should be heading for the exits to complete their portfolio restructuring before their fiscal year end on Oct 31st.

Meanwhile the Dow may have failed at 10100 three times but it also held support at 9550 three times. The bulls are not ready to call it a day but they should be getting close. If we see 9950 break convincingly on heavy volume then the stampede for the exits may be underway. The markets are up +60% from the March lows and I read last week that fund manager bonuses are going to be down -35% to -50% from 2008 and 2008 was a bad year. If I had a bonus at risk next week I would be running for the exits. If we do get some needed profit taking the Dow has support at nearly every 50-point increment starting at 9850 through 9400. Dow 9410 is the 38% Fib retracement of the rally from the March lows.

Dow Chart

Dow Chart - 180 Min

Dow Chart - 30 min

The S&P-500 tested 1100 twice and then failed to reach that level on Thursday's rally. This is a lower high and Friday's close was a lower low. Twice it tested support at 1075 and both times it held but the lower close on Friday has bearish implications. A break of support here could test 1050 in a blink with 1020 easily possible.

However, the S&P has duplicated this setup at different levels on numerous Fridays for the last several months. Every Monday it rises refreshed and ready to rock. You have to wonder how long this trend will continue. Personally I would love to see the uptrend support tested again because it would be a great entry point for November. Note that the downtrend line from the October 2007 highs was touched on Wednesday and not on Friday. This should be decent resistance. Decliners were 10:1 over advancers (448:46) on the S&P.

S&P-500 Chart - 60 Min

S&P-500 Chart - Daily

The Nasdaq gave up 10 points on Friday despite the gains by Microsoft and the +$25 spike by Amazon. If the Nasdaq could not remain positive with those heavyweights posting solid gains it gives you an idea of investor sentiment. However, decliners were 4:1 over advancers on the Nasdaq and only 3:1 over advancers on the NYSE. That was much better than the 10:1 on the S&P. Tech stocks may have been out of favor on Friday but not nearly as bad as banks, energy and transports.

Chip stocks led the Nasdaq decline thanks to Broadcom but I believe it was simple profit taking rather than a change in sentiment. The volatility in the Nasdaq has been strong all week with 50-point ranges more than once. I believe 2100 will be tested without any material Nasdaq earner to push it higher next week.

Nasdaq Chart - Weekly

Nasdaq Chart - 60 Min

The Russell was much weaker than the other major indexes and lost -2.5% for the week with the Dow and Nasdaq down only fractionally. This is not a good sign. On the first chart note that the Russell has two lower highs and closed at a two week low. Decliners were 6:1 over advancers on Friday. The Russell appears ready to test support at 575 and possibly 550. A break under 550 is lights out and I don't see that in the near future.

If the Russell is falling faster than the other indexes it means fund managers are moving out of positions and they are favoring large caps with any excess cash because of the extra liquidity. This is typical of behavior at market turning points. It may only be temporary and just October profit taking but we should be able to tell when it is over by watching the Russell for signs of life.

Russell Chart - 60 Min & Daily

More than one Friday in recent weeks I have leaned to my bearish side because the markets gave the bears a perfect setup of failed highs and a close on Friday at the low for the week. Nearly every Monday the situation was reversed because of some event that "supposedly" was a savior for the bulls. I don't know what that would be on this Monday.

The next couple weeks are going to be tough economically with major reports and events and none of them are likely to be bullish for the market. With earnings excitement beginning to fade I believe the markets are going to struggle to make any gains.

Jim Brown


Index Wrap

A Mixed Picture

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

This is one of those, 'on one hand...but on the other hand' takes on the market. It looks like a mixed picture in terms of which way for the next move in the near-term. For those who like to think there's always a way to figure out a next price target for the market, sometimes you just have to wait and see more price action for more of a clue as to what comes next.

Generally, a move to new highs such followed by a sideways consolidation at or above prior highs is bullish, as seen with the S&P and Dow. When this price action comes after an index or stock gets 'overbought' in terms of various technical indicators and after traders got extremely bullish it also injects a cautionary note about a continued bullish stance. The fact that the Nasdaq indexes are struggling to hold above their prior swing highs, also suggests that a deeper pullback may lie ahead in the overall market.

In terms of the S&P 500 (SPX) which I'm looking at currently as the 'lead' index, I don't see much upside potential above current resistance in the 1100 area in the near-term; e.g., perhaps to around 1120-1125. The odds of an SPX pullback to the 1050 area, or even to a retest of the prior 1120 downswing low, are about equal to the potential for a move to 1125 in my estimation. With this equation, upside potential relative to downside possibilities looking roughly the same, I don't want to gamble on a direction here.

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) did meet my 'bullish test' for the index to at least hold above the index's prior high at 1075. I also noted last week that the bullish best case would be for a move above and beyond this level which has hardly happened. Instead SPX has seen more recent intraday volatility.

Key near resistance is in the 1100 area. I often have written about the tendency for the major indexes to sometimes struggle to break out above, or to hold as support, key round numbers. SPX fluctuated above and below the 1000 for a time you will recall. Above resistance implied by the cluster of recent highs in the 1100 area, I've noted a next potential resistance at the upper boundary of the index's uptrend channel, which currently intersects at 1118 and will rise gradually over time.

An important support is 'defined' at the 50-day average, currently at 1046. Next support is suggested at the prior downswing low at 1020.

While prices have been trending sideways, the RSI has been in a declining trend. There are two ways of looking at this aspect also. One is that the recent lateral move is 'throwing off' the recent overbought reading in the RSI. And, once the 13-day RSI at least gets to a neutral reading at or below 50-45, SPX will start to rally again. The bearish case is that with prices drifting sideways on a declining RSI, this is a type of bearish price/RSI divergence. All in all, doubt about the near-term direction of the index is suggested. Old trader saying, "when in doubt, stay out!"

SENTIMENT

In terms of my sentiment indicator seen above at the bottom of the daily S&P 500 chart, bullishness was quite high coming into this recent sideways move and didn't back off much by the end of the week. It suggests to me that traders are not looking at bearish/downside risk overly much at this juncture. This aspect also injects an element of doubt in my mind as to whether there's 'too much' complacency currently.

From a technical perspective, the index is still up near the top end of its uptrend channel, not the bottom. I tend to get more bullish after pullbacks, not after strong upside runs. But traders and investors have as a group manifested the opposite view and get more and more bullish as prices keep going up. 'Too much' bullishness is in fact seen as a bearish warning in the Theory of CONTRARY Opinion.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index also seems stalled not far under the top end of my highlighted uptrend channel on the OEX daily chart below. Near resistance isn't far above the 500 close on Friday. I've long assumed that the 500 area or a bit higher (e.g., 510-515) would offer fairly tough resistance. If there was instead an upside penetration of the upper channel line, hen 520-525 looks a possible further upside objective.

While prices haven't dipped under 500, there's little headway above it either. The recent absence of continued upside momentum doesn't negate the still bullish chart, but if past patterns repeat by prices correcting at or near the top end of its price channel, OEX's upside potential near term looks limited.

Downside risk on a correction may be limited to a pullback to the area of the 50-day moving average at 484; below potential support implied by the average, I'm looking at the prior 473 low as a target or a bit lower to 465, the low end of its uptrend channel.

In terms of the RSI, it's falling toward the midrange 'neutral' area associated with where rallies have set up previously. Stay tuned on that!

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average chart pattern remains bullish, but INDU may struggle some more around the pivotal 10000 level. I anticipate further upside potential for the current move if INDU can get some traction in the 10000 area; e.g., potential such as tacking on another 250 or so points higher (from 10000).

I'd look to exit DJX calls after just such a rally as the odds increase for a correction at the upper channel boundary. Somewhere ahead there's potential for a correction of a few hundred points or simply a 'normal' Dow corrective downswing from peak to trough and where the Average gets closer to RSI oversold areas again.

Pullbacks to the 9700-9660 area could find good buying interest and be supported. A next key support is implied by the prior 9430 intraday low.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Last week I wrote about the Nasdaq Composite (COMP) having potential to form a double top and we may be seeing this. There have been 3 minor Closes over the prior (2168) intraday high but with intraday whip-saw price action since then and an inability for a decisive move above that prior high. Double tops don't always have exact duplicate highs, just an inability to gain more than minor further upside traction above the prior top, leading to a later fall.

Resistance is apparent so far in the 2180-2200 area. If COMP climbs above its cluster of recent intraday highs on a closing basis, it sets up a possible next test of my projected next resistance around 2257 or at the top end of COMP's uptrend channel.

Support should be found around 2100-2080, then in the 2040 to 2030 area. If there was such a pullback which then found renewed buying interest in the tech heavy Nasdaq Composite, the opposite pattern, a potential double bottom sets up.

Bullish sentiment, as seen above with my indicator, was discussed already with the S&P. I'd just also note that there hasn't yet been the pattern of a deeper correction to follow high extremes often seen previously. Nothing says this must happen but I try to keep in mind that although the market's been in a strong bull move the economy and consumer spending, is still quite weak.

Bullish market sentiment tends to get extreme and STAY extreme for prolonged periods when the economy is also roaring along. Based on resurgent oil prices you'd also think the economy was going gangbusters. Something isn't ringing quite true!

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) pattern is bullish but there's been the same stall in the area of NDX's prior peak at 1955. Resistance or selling has been coming in around 1777-1780. If this area can be pierced, there's potential up to around 1830 before technical resistance might again resurface as noted on the chart.

If the recent waning upside momentum continues, a next support is at 1710, then down in the 1660-1657 area. 1650 is currently my maximum downside target. I'd be a buyer in this area if reached provided it wasn't under conditions where there wasn't a knife-edge plunge through it.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The chart or price pattern is of course the same for the Nasdaq 100 tracking stock (QQQQ) as discussed above in the underlying NDX index. The key On Balance Volume (OBV) indicator has continued to point lower as more volume is seen on down days.

I indicated last week that: "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." The fact that prices haven't plunged doesn't mean a lot just yet. The ball always seems to 'hang' a moment at the top of an upward throw.

As to the idea of a possible top and the advent of a correction, I'll be watching 42.5 as one key to further bullish or bearish prospects. A move below 42.5 would suggest that still lower prices may follow; conversely, ability to hold at or above 42.5 suggest only a shallow correction. My QQQQ trading strategy or 'system' is still holding long positions. It would have taken a more extreme 21-hour RSI reading on the recent run up to cause a long exit signal.

Near QQQQ resistance: 43.7

Next overhead resistance: 44.7

Near QQQQ support: 42.5

Next support: 42.0

Second intermediate support: 40.7, extending to 40.4

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT), which has sometimes led the Nasdaq or been a foreteller of what may be coming there, is showing the most clear cut double top so far. Near support is at 600, extending to 592 at the moving average.

576 is a sort of must-hold next support given the prior downswing low at that level. The 560 area is the low end of RUT's broad bullish uptrend channel. A plunge below this area, without a quick rebound to follow, would turn the chart decidedly bearish.

Conversely, if RUT rallied to above its prior highs in the 620-625 area, especially on a closing basis, a next possible target on follow through buying is at resistance around 650 at the top end of its 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

Volatility, Transports, Tech & More

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Volatility Index - VIX - close 22.27 change: +1.58 stop: 19.49

Why We Like It:
The market looks like it's forming a little top here. If the stock market corrects the volatility index could see a big spike higher. I'm going to use a wide stop loss at 19.49 because the VIX itself can be volatile.

We want to use the December calls. These are European style options and are settled for cash. The December options expire on Wednesday, December 16th, 2009.

Our first target to take profits is at $27.25. Our second target is $29.25. I consider this an aggressive trade and suggest readers use small positions.

Suggested Options:
I'm suggesting the December calls. My preference is the Dec. 25 strike. Strikes are available at 1.00 increments.

BUY CALL DEC 25.00 VIX-LE open interest=13626 current ask $2.65

Annotated Chart:

Picked on   October 24 at $ 22.27
Change since picked:       + 0.00
Earnings Date            --/--/--
Average Daily Volume =         -- million  
Listed on   October 24, 2009         


NEW DIRECTIONAL PUT PLAYS

DST Systems - DST - close: 43.73 change: -0.58 stop: 45.25

Why We Like It:
DST is a tech company that provides information processing and software services. The oversold bounce from its October low has failed at resistance near $45.00. I think shares will correct toward support near $40.00. Now there is technical support at its 100-dma and exponential 200-dma near $42.50 so don't be surprised to see an initial bounce from this level. Our target to exit is $40.25.

Suggested Options:
I am suggesting the November puts. My preference is the $40 strike. Do not give into temptation to buy too many puts just because they seem cheap.

BUY PUT NOV 40.00 DST-WH open interest= 143 current ask $0.35

Annotated Chart:

Picked on   October 24 at $ 43.73
Change since picked:       + 0.00
Earnings Date            10/21/09 (confirmed)
Average Daily Volume =        462 thousand 
Listed on   October 24, 2009         


iShares Transports - IYT - close: 68.29 chg: -2.47 stop: 73.20

Why We Like It:
The IYT is an ETF that mimics the Dow Jones Transportation average. Transports have formed a bearish double top. The bearish reversal at resistance combined with a drop under $70.00 and its 50-dma looks like a new entry point to buy puts.

I am suggesting readers open half a position now. We'll use a bounce back to $70.50 to open the second half. I'm going to use a wide stop loss above the recent highs. Our first target to take profits is $65.25 as the 100-dma could be technical support. Our second and final target is $62.00.

Suggested Options:
I am suggesting the December puts. My preference is the $67.00 strike. Strikes are available at $1.00 increments.

BUY PUT DEC 67.00 IHB-XO open interest=6589 current ask $2.60

Annotated Chart:

Picked on   October 24 at $ 68.29
Change since picked:       + 0.00
Earnings Date            --/--/--
Average Daily Volume =        664 thousand 
Listed on   October 24, 2009         


Psychiatric Solutions - PSYS - close: 24.97 change: -1.14 stop: 28.05

Why We Like It:
PSYS has produced a bearish head-and-shoulders pattern that is forecasting a drop toward the $20 level. Friday's sell-off broke support at its 100-dma and its exponential 200-dma. I am suggesting put positions but readers should consider this an aggressive, higher-risk trade. Use small positions about 1/2 to 1/4 your normal size.

Normally we want to avoid holding over earnings. This time we will hold over PSYS's earnings report, due out on Tuesday, October 27th after the market's closing bell. Wall Street is looking for a profit of 56 cents a share. However, traders should note that PSYS already warned for the third quarter back on September 30th so there is a chance that the company could beat these lowered estimates.

The most recent data lists short interest at more than 11% of the 55.4 million-share float. That's above average short interest and does raise the risk of a short squeeze, which is another reason we want to keep our positions small.

Our first target to take profits is at $22.55. Our second target is $20.25.

Suggested Options:
I'm suggesting the November puts. My preference is the $22.50 strike.

BUY PUT NOV 22.50 BYU-WX open interest= 253 current ask $0.55

Annotated Chart:

Picked on   October 24 at $ 24.97
Change since picked:       + 0.00
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        662 thousand 
Listed on   October 24, 2009         



In Play Updates and Reviews

Time to Exit

by James Brown

Click here to email James Brown

Editor's Note:

The market looks fragile here. The S&P 500 has failed to truly breakout over resistance at the 1100 level. The Dow Industrials has failed multiple times at the 10,100 level. The Russell 2000 and the Transports appear to have produced a bearish double top.

We are suggesting an early exit for many of our bullish plays. If you are feeling cautious here I would seriously consider exiting all of your bullish plays. At the very least consider raising your stops or reducing the size of your positions.


CALL Play Updates

AvalonBay - AVB - close: 73.14 change: -0.49 stop: 69.95

AVB is due to report earnings on Wednesday, October 28th after the market's closing bell. That's an updated earnings release date and reduces our remaining time to just three days. AVB doesn't look super weak but it's still stuck under resistance near $75.00.

Given our time frame I am not suggesting new positions and more conservative traders will want to seriously consider an early exit right now (or consider scaling out half now half later). I am moving our target to exit down to $77.00.

Suggested Options:
No new plays at this time.

Annotated Chart:

Picked on   October 08 at $ 72.60
Change since picked:       + 0.54
Earnings Date            10/28/09 (confirmed)
Average Daily Volume =        1.8 million  
Listed on   October 07, 2009         


Canadian Nat. Res. - CNQ - close: 70.81 change: -1.95 stop: 69.90

Warning! CNQ's lack of follow through on Thursday's intraday bounce is bearish. I would seriously consider an early exit right here. The $70.00 level is holding as support for now but if the S&P 500 continues lower on Monday I would expect to be stopped out at $69.90. I am NOT suggesting new bullish positions at this time. Our target is $79.50.

Suggested Options:
No new positions.

Annotated Chart:

Picked on   October 22 at $ 72.76
Change since picked:       - 1.95
Earnings Date            11/05/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on   October 22, 2009         


Ultra Oil & Gas ProShares - DIG - close: 36.88 change: -1.59 stop 31.95

Wednesday's failed rally pattern combined with Friday's bearish engulfing candlestick pattern have definitely cast a bearish pall over the DIG oil ETF. I am expecting a short-term correction. Please note that I am changing our entry point to buy calls. Our new trigger is $34.20. Our new stop loss is $31.95. If triggered at $34.20 our first target is $39.50. Our second target is $43.50.

FYI: The DIG is an ultra-long ETF so it should have twice the volatility as a normal sector ETF.

Suggested Options:
I am suggesting the December calls. My preference is the December $35 strike.

Annotated Chart:

Picked on   October xx at $ xx.xx <--  TRIGGER @ 34.20
Change since picked:       + 0.00
Earnings Date            00/00/00
Average Daily Volume =        4.3 million  
Listed on   October 17, 2009         


Express Scripts - ESRX - close: 80.70 change: -0.78 stop: 79.85

I would seriously consider an early exit out of ESRX calls. However, the stock has been able to hold above support near $80.00 and the bottom of its recent $80-82 trading range. I am not suggesting new positions and readers may want to sell part of their position anyway just to reduce exposure. Of course our initial plan was to keep positions small to begin with. Our second target is still $84.95. We plan to exit ahead of the October 28th earnings report.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 06 at $ 77.42 /gap down entry
                              /originally listed at $78.04
Change since picked:       + 3.28
                             /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: 105.15 change: -1.04 stop: 102.45

So much for optimism. FLS failed at $107.40 on Friday morning. The stock's trend is still bullish and FLS looks better than most but I'm still seeing bearish signals develop in the RSI and MACD indicators. Just to be safe I would sell half my position to limit risk. If we get stopped out I'd still watch for support near $100. I am not suggesting new positions at this time. Our first target is $109.75.

We will plan to exit ahead of the October 28th earnings report.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 12 at $102.60
Change since picked:       + 2.55
                           /sell half @ 105.15
Earnings Date            10/28/09 (confirmed)
Average Daily Volume =        1.2 million  
Listed on September 19, 2009         


Gold ETF - GLD - close: 103.49 change: -0.43 stop: 97.40

Gold has not been able to make any real progress even though the dollar has been sinking to new 14-month lows. That's a little concerning but overall the trend is still very bullish for gold and the GLD. Short-term I would look for a dip back toward $100. Readers can use a dip near $100 as a new bullish entry point but I would only buy January 2010 or longer-dated options as the GLD doesn't move very fast. Our first target is $109.90. We are still contemplating a second, longer-term target.

Suggested Options:
Wait for an entry point and use the 2010 January calls.

Annotated Chart:

Picked on   October 06 at $102.28
Change since picked:       + 1.21
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


Intercontinental Exchange - ICE - close: 104.54 chg: -2.02 stop: 94.90

ICE produced a failed rally under $110 on Wednesday and we're starting to see shares correct. The $100 level should be support.

I am updating our trigger and moving it down to $100.25. 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 am suggesting the November calls. My preference is the $100 strike.

Annotated Chart:

Picked on   October xx at $ xx.xx <-- TRIGGER @ $100.25
Change since picked:       + 0.00
Earnings Date            11/03/09 (confirmed)
Average Daily Volume =        1.3 million  
Listed on   October 17, 2009         


PUT Play Updates

BIOGEN IDEC - BIIB - close: 43.81 change: -3.42 stop: 48.55 *new*

Target achieved. BIIB fell more than 7% on Friday with the stock hitting $43.58 on huge volume. Our first target to take profits was at $44.50. The reason shares fell so hard was bad news regarding the drug Tysabri, a treatment for multiple sclerosis. BIIB is a partner with Elan (ELN) who developed the drug. The European Medicines Agency has opened an investigation into the safety of Tysabri over concerns it may be linked to a deadly brain infection. Shares of ELN fell 20% intraday on Friday.

I am lowering our stop loss on BIIB down to $48.55. Our second and final target is $40.50. I'm not suggesting new positions at this time.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 03 at $ 48.89
Change since picked:       - 5.08
                               /1st target hit @ 44.50 (-8.9%)
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on   October 03, 2009         


Netease.com - NTES - close: 37.40 change: -0.15 stop: 41.65

NTES didn't move much on Friday. The trend is down but shares still look a little oversold and due for a bounce. The 10-dma and the $40.00 level should offer some overhead resistance.

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:
If NTES provides a new entry point I would use the November puts.

Annotated Chart:

Picked on   October 17 at $ 38.47
Change since picked:       - 1.07
Earnings Date            11/12/09 (unconfirmed)
Average Daily Volume =        2.7 million  
Listed on   October 17, 2009         


CLOSED BULLISH PLAYS

Apollo Group - APOL - close: 74.03 change: -0.78 stop: 71.90

Considering the market's recent weakness and our remaining time before APOL reports earnings I am suggesting an immediate exit of any bullish positions.

Chart:

Picked on   October 14 at $ 75.25
Change since picked:       - 1.22<-- early exit @ 74.03 (-1.6%)
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        2.6 million  
Listed on   October 13, 2009         


Dril-Quip, Inc. - DRQ - close: 53.56 change: -1.04 stop: 49.45

I am seeing a familiar bearish reversal pattern in shares of DRQ. It's time for us to get out. I would keep DRQ on your watch list for a new entry point but only after its earnings report (Nov. 10th).

Chart:

Picked on September 28 at $ 48.50
Change since picked:       + 5.06 <- exit 53.56 (+10.4%)
                              /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: 89.16 change: -2.29 stop: 89.15

The action in EOG has definitely taken on a bearish tone. Friday's session failed at its 10-dma and produced a bearish engulfing candlestick pattern. Shares hit our stop loss at $89.15 on Friday afternoon closing the play.

Chart:

Picked on   October 07 at $ 85.24 /gap higher entry
                               /originally listed at $84.71
Change since picked:       + 3.91 -stopped @ 89.15 (+4.5%)
                              /1st target hit @ 89.90 (+5.4%)
                             /2nd target hit @ 94.75 (+11.1%)
Earnings Date            11/03/09 (unconfirmed)
Average Daily Volume =        2.9 million  
Listed on   October 07, 2009         


Mobile Telesys - MBT - close: 51.90 change: -1.80 stop: 49.75

MBT hit new 2009 highs over $55.00 last week but shares have been struggling and the stock looks poised to move lower. The $50.00 level should be significant support but at the moment I'm not willing to bet on it holding. More aggressive traders may want to let it ride. I am suggesting early exit now.

Chart:

Picked on   October 12 at $ 50.15
Change since picked:       + 1.75 --exit @ 51.90 (+3.4%)
                            /1st target hit @ 54.50 (+8.6%)
Earnings Date            11/05/09 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   October 10, 2009         


Transocean Ltd. - RIG - close: 89.86 change: -2.89 stop: 89.45

We raised the stop loss on RIG Thursday to $89.45. The oil service stocks tend to be more volatile and RIG dipped to $89.05 on Friday afternoon. Our play is closed. RIG could easily find support in the $85-80 zone so keep it on your watch list. We might see a new bullish opportunity soon.

Chart:

Picked on   October 15 at $ 90.94 /gap down entry
                             /originally listed at $91.48
Change since picked:       - 1.49 <-- stopped @ 89.45 (-1.6%)
Earnings Date            11/04/09 (confirmed)
Average Daily Volume =        4.1 million  
Listed on   October 15, 2009         


Waters Corp. - WAT - close: 56.99 change: -0.31 stop: 55.90

We don't have much time left with WAT reporting earnings on October 27th. I'm suggesting an early exit now. The plan was to use small position sizes (1/2 to 1/4 our normal size) to minimize risk.

Chart:

Picked on September 28 at $ 55.43 *new entry
Change since picked:       + 1.56 <-- early exit @ 56.99 (+2.8%)
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        809 thousand 
Listed on September 12, 2009