Option Investor
Newsletter

Daily Newsletter, Saturday, 11/7/2009

Table of Contents

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

Market Wrap

Uncertain Markets

by Jim Brown

Click here to email Jim Brown

The Dow crept a little higher over 10K but the gain was as timid and uncertain as a schoolboy's first kiss.

Market Statistics

We should be glad that the markets finished in the green regardless of the amount of the gain. After the Friday morning employment report showed that the unemployment rose to 10.2% the positive close shows that investors felt the news was not that bad.

The actual jobs lost in October were 190,000 and that was slightly worse than the final consensus estimate of 175,000. This was also better than the 263,000 jobs lost in September but that number was revised to a loss of only 219,000 in this report. The August number was also revised lower from -201,000 to -154,000. That was the second revision to August from the initial 216,000 reported. Essentially we picked up 91,000 jobs due to higher revisions in the prior two months. All in all this was a "less bad" report despite the jump in the unemployment rate.

The official unemployment rate jumped to 10.2% but that only counts those recently unemployed and looking for work. The broader U6 unemployment rate rose to 17.5% from 17.0% in September. The actual number of unemployed workers rose to 30.5 million people. That consists of 15.7 million officially unemployed, 9.2 million working part time or in temporary jobs because full time jobs in their field are not available and another 5.6 million workers no longer looking for jobs but willing to work if jobs were available. How likely is a strong economic recovery when more than 30 million people are out of work?

Since the vast majority of workers are losing jobs permanently as opposed to simply being laid off, it will take longer for the unemployment rate to decline. Workers must find new employers and more than likely in new industries other than their prior experience. This means lower wages as they enter the new industry in need of training. The labor market in the U.S. is changing with the manufacturing, financial services and retail sectors shrinking. Continued increases in productivity through computer utilization and decreased office space requirements and support systems from Internet commuting are shrinking the work force. Moody's projects that the unemployment rate will peak at 10.3% around June of 2010. I think their estimates are low and it could be several years before a return to a more normal labor environment.

Non-Farm Payroll Chart

We saw last week that the ISM Services composite index fell in October with the employment component slipping from 44.3 to 41.1. This is still in contraction mode for employment and services were thought to be the part of our economy that was thriving. This goes back to the shrinking office and Internet commuting comment above. As offices grow smaller it takes fewer coffee carts on the street and the need for dry cleaning diminishes. If you work in your bathrobe rather than a Brooks Brothers suit then demand for suits, retail clothes stores and salesmen shrinks along with the supply chain servicing that sector. Add to that with a reduction in people stopping for a donut or drive through breakfast somewhere and you get the picture. Obviously this is just an example and new businesses will eventually sprout to replace old but the process is going to be slow.

I heard a statistic on Friday that 25% of all new employment comes from new business creation. Carl Schramm, CEO of the Kauffman Foundation, in an op ed in the WSJ on Friday was suggesting we give an immediate green card to anyone wanting to come to the USA and start a new business. Schramm said over the last decade 25% of high tech startups in the U.S. were started by people who immigrated to the USA. Those same people accounted for 24% of international patent applications. Because of the high percentage of new business startups from immigrants getting their education in the USA he suggests giving permanent residency to anyone completing a scientific or engineering degree from qualified university in the USA. There is already an "entrepreneurs" visa that requires immigrants to bring $1 million with them to immigrate into the country. He recommends adding a "renewable jobs" visa for immigrants that can start a new business and prove they hired employees.

I may get some flack on this but I think that could be a good idea. New immigrants require housing, cars, furniture, appliances, etc. Starting a new business requires a location with employees and generates new tax revenue. The census bureau claims that 81.6% of new businesses "with employees" employ 20+ people with 63.6% employing more than 100. Put a restriction on the visa application that requires a new business with 20 paid employees within 12-18 months of arrival to qualify for a permanent green card. You could also require that English be the required language of the new business and prohibit them from filing for welfare or unemployment for five years. There are hundreds of thousands of people who want to immigrate to the U.S. and start a business. I would bet you there are dozens if not hundreds or even thousands that would eventually grow some very large businesses. This would jump start employment and require no Federal stimulus other than the funding the red tape to get it going. To me this sounds like a win-win situation. Let me know how you feel.

The only other report of note on Friday was Consumer Credit for September. The report showed that credit balances are continuing to shrink at rapid rate with a -$14.8 billion decline in September. That was a -7.2% decline on an annualized rate. 12.5% (-$9.9B) was a decline in revolving credit like credit cards while non-revolving credit like home equity loans fell -3.7% (-$4.9B). Balances are expected to continue declining until the job market improves.

For next week the economic calendar is slim with consumer sentiment the most notable economic report. That should give you a clue as to how little information will be available for the markets. I added the Treasury auctions because it will be a record refunding event. The $81 billion being offered is $6 billion over the last quarterly refunding. The auction will raise money to pay off $38.5 billion in maturing securities and raise another $42.5 billion in new cash. The Treasury said last Monday that it would need to raise an extra $276 billion before year-end. They also said they could hit the legal debt ceiling as early as mid December. Since the Fed said it had completed its debt purchases this will be the first auction without the Fed as an underlying silent buyer. That makes the auctions more noteworthy because the government put on yields has expired. Expect to see plenty of market commentary next week on the auction results.

Economic Calendar

The FDIC closed five banks on Friday bringing the total for 2009 to 120. The banks closed were United Security, Sparta GA, Prosperan Bank, Oakdale MN, Gateway Bank of St Louis, Home Federal Savings, Detroit and United Commercial Bank, San Francisco. UCB had 63 branches that will be taken over by East West Bank. The closings will cost the FDIC $2.93 billion.

Those banks still operating are hoarding cash at record rates. They claim to be preparing for "adverse conditions." Bank regulators, the Treasury Dept and the Fed are all leaning on them to accumulate more capital in order to avoid future problems. Citigroup has doubled its cash hoard to $244.2 billion since Oct 2008. Richard Bove said in his 44 years in business he has never seen a company with this much cash. Citi still has not paid back the last $20 billion of the $45 billion in bailout money. They claim they can't pay it back out of cash because it would put them under the current capital guidelines from regulators. They are making almost no money on these funds with interest rates at less than 1%. They are afraid to lend it because of the near death experiences from 2008. Nearly following in the path of Lehman and Bear Stearns has put the fear of failure into first place on their list of things to worry about.

Citi's total liquidity as of Sept 30th was $450.3 billion. Liquidity includes cash, deposits at other banks and debt securities that can be pledged as collateral at the Fed's overnight borrowing window. JP Morgan has accumulated $453.6 billion in liquidity including $80.7 billion in cash. Bank America increased liquidity as of Sept 30th to $422.6 billion. Wells Fargo is holding $201 billion. Wells Fargo has more customer deposits and requires less liquidity. Still Richard Bove placed a sell recommendation on them due to that lower liquidity.

Banks are worried about the rising delinquencies and foreclosures in commercial real estate. You may remember Wilbur Ross and George Soros teaming up to warn about the impending disaster a couple weeks ago. Commercial property sales are the lowest in more than 20 years and prices are down an average of 41%. Office vacancies have hit a five-year high of 17% while shopping center vacancies are at a 17-year high. These large banks have very high exposure to commercial loans and analysts believe they are preparing for the worst.

Its official, the homebuyer tax credit has been extended until April-30th. The $8,000 credit for new buyers was set to expire on Nov-30th but that has been extended until April 30th. There is a new wrinkle to the extension. Now current homeowners can get a $6,500 credit towards a new home if they can prove they lived in their current home for five of the last eight years. To qualify for the new buyer credit you cannot make more than $75K individually or $150K as a couple. To qualify for the existing owner move up credit you can't make more than $125K or $225 as a couple. I am glad they added the existing buyer credit since there are more home owners today than new buyers.

You may have heard last week about the plan for Goldman Sachs and Warren Buffett to buy the $5.2 billion in unused tax credits owned by Fannie Mae. Well Fannie can kiss that idea goodbye. The administration nixed the sale on Friday even though it would have provided Fannie with much needed cash. The administration said it would cost the government too much in taxes that Goldman and Buffett or their investors would not have to pay if they got the credits. Instead Fannie will see them expire worthless.

Fannie posted a loss of $18.9 billion for Q3 and said it would need a further infusion of $15 billion from the government. That will bring the total bailout for Fannie to $60 billion. $22 billion of the Q3 losses came from credit-related expenses from buying back mortgages under President Obama's foreclosure prevention plan.

Google (GOOG) posted a minor gain of +$2 on Friday. This was the 2-year anniversary of its all time high of $747 and it closed about $200 under that level on Friday. Google should get a bounce next week as more people get their hands on the Motorola Droid phone. Verizon should also get a bounce. One of my sons replaced his dying Motorola Razor on Friday with a new Motorola Droid from Verizon. I had a chance to play with it and this phone is really slick. It may not be an iPhone killer but it is definitely an iPhone competitor. The price of entry may be a killer to demand. At $199 and a 2-year plan for $79 a month it is steep enough already but everyone appears to be going for the "all in" package for $120 a month. That is a little steep for me but I have to admit it was very slick with high appeal for tech fans. Two of my kids have iPhones and love them but the new Droid in the house is producing some interesting "can your phone do this" conversations. They are going for $600 on Ebay on Friday night.

Tech reviewer Walt Mossberg said "The best super-smart phone Verizon offers, the best Motorola phone I’ve tested and the best hardware so far to run Android -- Like the iPhone, the Droid is really a powerful hand-held computer that happens to make phone calls, and is a platform for numerous third-party applications." Note he did not say it was better than the iPhone. However, lines at Verizon stores did not live up to expectations and Motorola's stock ended the day with a -5% drop. Motorola had been moving higher over the last week on expectations for a big opening.

Ebay scored big on Friday when they sold Skype for just over $2 billion. They bought it for $2.6 billion so there must be some kind of weird accounting trick here to make a profit. Actually Ebay only sold 56% of Skype, gave 14% to the original founders to settle a lawsuit and Ebay kept 30%. Skype now has 520 million registered users who make free calls between each other and pay a small fee to call regular phones. Skype brought in $185 million in revenue for Ebay last quarter and was the fastest growing part of its business. Over 40 million new users signed up in Q3. Netscape founder Marc Andressen is one of numerous investors who partnered to do the deal. Now Ebay can worry about its core business and let somebody else run the phone company and eventually getting a return on their investment. Andressen expects over a billion users and billions in annual revenue. Ebay finished flat on the news.

Amazon just keeps getting upgrades after their Q3 earnings surprise. Amazon garnered four separate upgrades on Friday from Bernstein, Oppenheimer, RBC Capital and Barclays. Bernstein raised their price target to $160 saying Amazon should see faster sales growth in 2010.

Amazon Chart

Travelers (TRV) also got an upgrade from Bernstein and that led the Dow stock +2.5% ($1.26) higher. Oppenheimer upgraded Dow component GE to an outperform producing a +6% (90-cents) jump in the stock price. Travelers, GE and IBM were the three best performers in the Dow representing about 28 Dow points. The worst performer was American Express with a loss of 53-cents. That gives you a basic idea of how lackluster trading was on Friday when the spread between the biggest Dow winner and biggest loser was only $1.79. Still it was a good finish with the Dow gaining +3.2% for the week.

Starbucks rallied +7% after reporting earnings Thursday night that beat the street. Starbucks also raised guidance for earnings growth to 15-20% in 2010, up from 13-18%. Starbucks closed 900 stores and cut costs to raise profits. Now they are looking overseas for growth opportunities. CEO Howard Schultz said they would be opening thousands of stores in China. That is in addition to the 700+ they already have there. Starbucks is trying to combat the rollout of the McDonalds coffee offerings by inking a deal to sell coffee in 9,000 Subway stores. SBUX closed at a new 52-week high on Friday at $21.

The earnings cycle is over for all practical purposes now that Cisco has reported. We still have HPQ (11/23) and Dell (no date) but we already know how those stories will play out. With 440 of the S&P-500 already reported we saw 80% of those companies beat estimates. Only 14% missed estimates and 6% reported inline. The average surprise was 14.5% over estimates. As of Friday Thomson/Reuters says total S&P earnings for all companies reported came in at a -14.8% decline. At the end of Q3 analysts were expecting a -25% decline. Obviously everyone feared the worst.

For Q4 the expectations are off the charts with expectations for a +193.1% increase in earnings. Yes, 193.1%. That declines for Q1-2010 to "only" a 34% increase. The Q4 estimate is so large because so many firms lost a ton of money in Q4-2008. If they just break even in Q4-2009 it would be a monster improvement. Statistics can be misleading if you don't understand the context. I am sure this number will change dramatically as the weeks progress and estimates are adjusted for the guidance we got with Q3 earnings. Every time there is an analyst upgrade to a stock like Amazon, GE or Travelers the S&P estimate for Q4 will change.

Crude oil dropped -$2.19 on Friday in response to the job losses and higher unemployment. Workers without jobs use and buy less gasoline and lower demand reduces prices. This was a knee jerk reaction to the jobs number and support at $77 held. Hurricane season is over but somebody forgot to tell Ida. Tropical storm Ida is heading for the Gulf and should be somewhere off the coast of New Orleans on Monday. At present this is a low power storm with winds of 39-73 mph. However, once it enters the gulf the warm water could increase the intensity. Nobody appears to be expecting it to gain much strength since water temperatures have declined from summer levels.

Crude Oil Chart

Tropical Storm Ida

The Dollar declined on the unemployment news but rallied back by day's end. This added to the confusion in the commodity sector. Gold rallied intraday to nearly $1102 before closing at $1095. That still equates to a $55 gain for the week. Gold is becoming the new currency while other commodities weakened on the jobs data.

Gold Chart

The markets are apparently ignoring bad economic news. Primarily because bad economics news means the Fed is going to stay on the sidelines for a long time. Estimates for a Fed rate hike are now closer to June than January. This means the dollar should continue to deteriorate and with the low interest rates banks can keep piling up the cash from the spread on the loans they do have. By the way, did you hear that traders at Goldman Sachs made $100 million a day in trading profits on 36 of the 65 trading days in Q3? I suspect that other banks who shall remain nameless but still have TARP loans outstanding are also making money using the government money but just not on the scale of Goldman.

So, if the Fed is on the sidelines indefinitely and stimulus dollars are still flowing then conventional wisdom suggests the markets should continue higher. The worst is behind us and Q4 earnings are going to be in the range of 150% even after they adjust for Q3 guidance. It is just a mathematical anomaly because earnings were so bad in Q4-2008 but there will be plenty of airtime devoted to the expectations and John Q Public won't understand the complexities. They will hear 150% increase in earnings and get $$ signs in their eyes. There is also quite a bit of money still on the sidelines in funds that for one reason or another are still not invested. Eventually they will have to bite the bullet and buy something. This is obviously a long-term outlook and not specific just to next week.

For next week I don't see any reason for the markets to decline. Earnings are over and they were good even if they were mostly due to cost cutting. The major monthly economic events are behind us and nobody flinched at the bad news. I see no reason for a decline. Unfortunately that is when disaster normally strikes but we will deal with it if and when it happens.

The Dow closed over 10,000 on two consecutive days. You can throw confetti if you want but that is not the key to the markets. The critical level for the Dow is 10,100 but that is still not the key to the markets. The key level that must be crossed is 1100 on the S&P.

Support at 1020 was never tested last week and the S&P has risen to the middle of its range for the last couple of months. A failure at 1075 would begin to form a head and shoulders but a break over 1100 would target 1135-1150 short-term and 1250-1300 long term. It would reinforce the rebound since July and bring another truckload of skeptics off the sidelines. With no material economics to watch next week the 1100 level is going take on almost mythical importance. The S&P closed at 1069 and I personally believe 1075 is going to be a pothole in the rally road but I think we will get past it.

However, and there is always a however, the S&P has some challenges. The bulls will call them a wall of worry to climb. In the chart below the pink line at the 1075 level could turn into the right shoulder if the rally fails at that level. The red line is the long-term downtrend resistance from October 2007 and also a major hurdle. Note how well it contained the rally in October. Lastly the 1100 level is also resistance as a prior high. This was also alternating support/resistance several times back in 2004. "IF" and I made that a big IF, the S&P succeeds in breaking through these levels and moving over 1100 then skeptics will be silenced and bulls will be firmly in control.

S&P-500 Chart - Daily

S&P-500 Chart - Daily H&S

The Dow is showing a more bullish pattern than the S&P but this could be because of the liquidity play in late October. The Dow has already moved over what could have become the left shoulder from September at 9850. The uptrend on the Dow is slightly stronger than the S&P but the downtrend resistance from 2007 is higher at around 10300. That is also the 50% Fib retracement level from the March lows. If the Dow can get over the initial hurdle of the October highs at 10100 then the converging resistance at 10300 is going to be the next challenge.

Dow Chart - Daily

On Thursday the Nasdaq had its best one-day gain in months but it was not strong enough to erase a week of declines. The Nasdaq still has some tough resistance at 2160 dating back to March 2008. It fought for two weeks in October to cross that level but could never hold the gains. 2250 becomes the next target if a successful breakout occurs. With all the big cap tech earnings behind us the next couple weeks are going to be devoid of any big events to power tech higher. It will depend on the investor rather than an event generated short squeeze.

Nasdaq Chart - Daily

Last Tuesday I turned cautiously bullish because of the out performance on the Russell-2000. Wednesday reversed those gains but Thr/Fri the buyers returned. I believe the Russell gave us the early signal that the market was turning. Let's hope that signal continues because it shows a measure of fund manager sentiment. The Russell has major resistance at 585 and again at 623. I could see it getting past 585 but 623 is going to be a major roadblock. If the Russell can clear 623 on its third try in three months then the next hurdle will be 650.

Russell 2000 Chart - Daily

The Dow transports imploded in late October as various freight and package companies reported earnings and guidance that was lackluster or downright ugly. The transports declined -13% from their 4066 high on Oct-21st to the 3546 low on Nov-2nd. The Burlington news recovered about 200 points in a single day and UPS helped fuel the gains on Friday. That was the 10th anniversary of UPS becoming a public company. It was started in 1907 by a 19-year-old named Jim Casey. Today's CEO Scott Davis said on Friday that UPS had been through 20 recessions and this one had clearly bottomed. He said improving industrial production and global activity would fuel the U.S. recovery. The comments did not do much for UPS stock but it helped the transports to a 41-point gain. If the transports are turning positive then the broader market should also improve.

Dow Transports Chart - Daily

I have to qualify my bullish comments above with a warning on volume. The market decline on Oct-30th came on 12 billion shares of volume. The rebound the next day traded 11 billion shares. Since that initial rebound the volume has been declining daily with Friday barely breaking 7 billion shares. That was the lowest volume since Oct-12th. The big gain on Thursday was only 8.6 billion. Volume is a weapon of the bulls and it appears they may be running out of ammo. However, another way to look at it suggests the remaining bulls did not want to buy the initial rebound just in case it proved to be a head fake. Thursday's gains were aided by a short squeeze so real investors probably wanted to get past the jobs report and into next week before putting big money at risk. At least that is my scenario and I am sticking with it. Would you have pulled the trigger on any big money the day before the jobs report? With Friday's market action so lackluster I would have waited as well and planned to take action next week. Hopefully that money will be burning a hole in somebody's pocket on Monday and the dollar will not get in the way with another bounce.

One of our astute readers sent me some comments on a possible play on CIT. As you know CIT filed a pre-packaged bankruptcy last weekend. The common stock is going to be eliminated but according to the 8K LINK the preferred stock has "contingent value rights." With the government owning the D shares they are probably going to squawk if preferred shares get erased. The reader believes that the A shares, which could be bought for 25 cents, or a penny on the dollar of face value, could be an interesting Lotto play. Thanks Joe for the heads up!

There was a lot of talk on Friday about the impending vote on the health care bill in the House. If you don't want to hear about it here then skip the next three paragraphs. Nancy Pelosi is trying to force a vote this weekend before representatives go back home for the Veterans Day recess. Last Tuesday's election wins by conservatives over incumbents has put the fear of failure into house democrats. Voters expressed their opinions and in most cases it was not for those backing the President's policies. Pelosi is trying to force the vote in the house before voters can confront their elected officials at home over the Veterans Day holiday. It was clear on Friday afternoon that House support had slipped and they did not have the 218 votes to pass it. The President and his administration were calling every House democrat on Friday and personally asking them to vote for it. Evidently that did not work because the President actually made a rare appearance on Capitol Hill on Saturday to speak to House democrats and urge passage of the bill.

The current bill will cost an individual making $44,000 before taxes a $5,300 annual premium plus a $2,000 deductible totaling $7,300 or 17.5% of his salary. A family making $102,000 will pay a premium of $15,000 plus $5,300 in deductibles for a total of 20% of their pretax income. If you make more than $100K your premiums will be higher. The Joint Committee on Taxation confirmed on Friday that anyone who does not purchase the minimum policy or pay the individual mandate tax will be subject to civil and criminal penalties with fines up to $250,000 and imprisonment up to five years. LINK

If you make over $500K or more you will be hit with a 5.4% surcharge in addition to your regular premium to offset the subsidies for people who can't afford healthcare. Companies will be forced to provide coverage and pay 72.5% of the cost or be fined 8% of their total payroll. Even more bizarre the CBO said the Pelosi plan assumes 8-to-14 million people will pay the fines rather than the more expensive insurance premiums. This will raise $167 billion while not incurring any health care expense. LINK

There are NO PRIVATE plans. If you currently have a private plan you will be required to switch to a "qualified plan" (government mandated coverage limits and fees) if ANYTHING in your current private plan changes including co-pay, deductibles or benefits. Last but not least the premiums begin in 2010 but the coverage does not begin until after the 2012 presidential elections. That means you will be paying double premiums until coverage starts in 2013. Payments to Medicare Advantage plans will be slashed and doctors will have their payments from Medicare cut if they allow you to have more treatments than the government believes is acceptable.

Call your representative ASAP and voice your opinion. Here is a link to a WSJ article explaining the sections I referenced above. Click Here I am sorry I had to bring this up in this commentary but I feel like Howard Beale in the movie Network. He told everyone to get up, open their windows and yell, "I am mad as hell and I am not going to take it anymore!" I wish I could reprint the entire speech here because it is very appropriate to today's problems. LINK

Jim Brown


Index Wrap

S&P rebound led by Dow; double bottom in NDX

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

There were technical chart and indicator patterns of recent bottom formations that suggested areas to buy calls in the various indexes. These patterns varied from index to index, unlike what is seen sometimes where there's more of consistent pattern. The highlights that I was seeing for the various indexes; these points are also repeated with each individual index commentary:

SPX: A low (1029) not far above the prior 1020 low after the (13-day) RSI fell to its first oversold reading since July.

OEX: Continued its pattern of rallies developing after the RSI has fallen to what I've highlighted below as a 'neutral' zone.

INDU: The Dow maintained the pattern seen at its last (early-October) downswing low where an upside reversal developed in the area of its 50-day moving average.

COMP: The Composite reversed higher after reaching support implied by the low end of its broad uptrend channel.

NDX: I can't claim I was in calls in the above indexes at just the 'right' moment, but the Nasdaq 100 calls were an 'irresistible' buy when it formed a double bottom (within 5 points of its 10/2 intraday low).

QQQQ: My 'favorite' trading system, based on certain 21-hour RSI extremes, is long a boat load of the stock (1000 shares) and never went short at the last top. I 'allowed' multiple entries in the trade rules, without built in stops. A drawback of this trade strategy is that takes at least $50,000 to trade just this system in the Q's; it's very profitable in back-testing so far.

RUT: An EXACT double bottom; a 553 intraday low this past Monday, versus a low of 552 on 9/3. Such indications of a bottom don't get much more 'ideal' than this! Moreover the double bottom formed after the RSI got 'fully' oversold on a 13-day RSI basis, it's first such instance since the March bottom.

Given that the recent pullback has probably run its course, the other question is about upside potential from here. I assume that the major indexes will break out to new highs at some point. The major indexes could also settle into trading ranges for awhile. Upside potential toward and above prior highs will also depend on continued progress toward economic recovery and better earnings prospects. The 'technical/chart' picture at this juncture suggests an intact and ongoing uptrend.

CHART OF THE WEEK:

A check of what Dow Theory is suggesting as to the current long-term investment buy/sell 'signal' that the theory would indicate. There hasn't yet been an instance since the March bottom where the Dow 30 Industrials (INDU) and the Dow Transports (TRAN) have both 'confirmed' a possible reversal in the major (up) trend. As seen in the highlighted weekly chart of the two Averages below:

PIVOT POINTS:

I've studied the 3 and 5 point pivot calculations for the most broadly based S&P and Nasdaq indexes, as written about in my last two Trader's Corner articles (10/22 & 10/29/09) and which are seen via the OIN home page, clicking the Index tab at top and scrolling down.

I find these calculated Pivot and projected support and resistance points to be of some value but not crucial to what I do on a technical basis from week to week. However I'll review here what the 3 points were and are, for the S&P 500 and the Nasdaq Composite for the weeks ending 10/30 and 11/6, so that you might get a feel for some weekly pivot points.

Looking at the 3-point pivot calculation for the week ending 10/30 for the S&P 500 (SPX) and Nasdaq Composite (COMP), this past week had 1053 as the suggested SPX pivot, 1073 as first resistance and 1014 as first support. The SPX 11/6 Close was above this pivot (bullish) and the 1071 weekly High was just under projected 1073 Resistance.

For this coming week for SPX:

1st. 'pivotal' Resistance projected at 1083

SPX Pivot point suggested as 1056

1st. 'pivotal' Support projected at 1041

Looking at the 3-point pivot calculation for the week ending 10/30 for the Nasdaq Composite (COMP), this past week had 2089 as the suggested COMP pivot, 2139 as Resistance and 1995 as Support. The 11/6 Close was above the pivot point (bullish) and the Composite stayed above and below suggested pivot Support and Resistance respectively.

For this coming week for COMP:

1st. 'pivotal' Resistance projected at 2145

COMP Pivot point suggested as 2085

1st. 'pivotal' Support projected at 2051

For those interested in this following such projections for the week (or day) ahead, here's the 3-point pivot formula:

3 POINT PIVOT METHOD:

R1 = (P x 2) - L

P = (H + L + C) / 3

S1 = (P x 2) - H

The 5-point pivot method is more complex and gives a second support and second resistance that are well outside 'normal' expectations for what lies ahead in the major indexes. These additional points can add value when the market ends up moving sharply higher or lower in the day or week ahead. I refer you the aforementioned (Trader's Corner) articles for this additional calculation.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) has regained its bullish footing as indicated by a low that held above its prior (down) swing bottom. An SPX intraday low at 1029 was above its prior 1020 low. This after the 13-day RSI fell to its first oversold reading since July.

I noted last week my anticipation of ... a possible to likely oversold rebound near-term" and that "The recent bearish decline remains within the index's broad uptrend channel." I did think that SPX might get to 1020 or a bit lower, but the index reversed from a somewhat higher level than that.

Key near resistance is at the prior highs made at or near 1100. Next projected resistance is seen in the 1140 area.

Pivotal technical support is now suggested in the area of the recent 1029 low. Next support comes in around 1011, support implied by the low end of SPX's broad uptrend channel.

SPX got to the oversold area identified for the 13-day RSI after many months of not getting to such a more 'fully' oversold condition. This development also bodes well for a latest bottom being in place.

SENTIMENT

Trader's never got extremely bearish, but did start taking out more puts on equities, both on a speculative and investment protection basis. I take the fact that my CPRATIO indicator DIDN'T skyrocket immediately as mildly bullish at this juncture.

S&P 100 (OEX) INDEX; DAILY CHART

I thought last week that the S&P 100 (OEX) Index might retest prior support in the low-470 area and this wasn't far off, given the intraday low this past week at 479.

The S&P 100 has had this tendency in recent months to develop rallies not from a 'fully' oversold extreme in terms of the 13-day RSI, but more this pattern of upside reversals coming after this indicator falls to the highlighted 'neutral' zone in the RSI scale.

Key resistance is in the 500 area again, where the prior top formed, and then at 520, resistance implied by the top end of the uptrend channel.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average chart pattern held up better than the S&P and I've noted before in recent weeks, that a number of this small group of big cap stocks are in solid uptrends. Good buying was seen on this recent pullback in those stocks. I was also anticipating last week a "better than even chance for a rebound ahead of any further slide such as by Tuesday." A bottom set up by Monday and the rally did get underway by Tuesday. INDU maintained the pattern seen at its last (early-October) downswing low where an upside reversal developed in the area of its 50-day moving average.

Key near resistance is in the area of the prior highs just shy of the 10200 area. Next resistance is up in the 10400 area in my estimation.

Pivotal support is suggested at the recent low in the 9680 area. Next key technical support is then seen around 9400.

I would note again, per my last week's comments, that November is a tricky time with many cross currents as portfolio changes get done ahead of year-end statements.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) held key support and rebounded this past week. The Composite reversed higher after reaching support implied by the low end of its broad uptrend channel. Moreover, the bottom it made is close enough to the prior intraday low to suggest a double bottom, which is seen more 'precisely' in the Nas 100, QQQQ and Russell 2000.

Key support is seen at the prior 2024 low, although I think support should be found above that, around 2050.

Pivotal resistance begins in the 2150 area, extending to the cluster of prior highs in the 2180-2190 area. Above the area of these prior highs, I anticipate resistance around 100 points higher on any approach to 2300.

Bullish sentiment dropped back from the prior bullish EXTREMES and this recent price correction is healthy in that respect for the continued prospects for a further climb in the Nasdaq.

NASDAQ 100 (NDX) DAILY CHART:

As I noted in my initial 'bottom line' comments about the Nasdaq 100 (NDX), I can't claim I was in calls in the other indexes at just the 'right' moment, but the Nasdaq 100 calls were an 'irresistible' buy after formation of its double bottom within 5 points of its 10/2 intraday low.

Key resistance is now not hard to figure for the area of NDX's prior highs around 1780. Above this prior top, assuming there is going to be another big up leg, substantial resistance should be found on a move toward the top end of the uptrend channel, currently intersecting in the 1855 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

There was a strong upturn in the On Balance Volume (OBV) indicator line this past week and this volume measure has been reliable for suggesting a continued move in the same direction. The surge in volume at the recent low suggests a capitulation type bottom.

Near QQQQ resistance: 43.0

Next overhead resistance: 43.8

Major resistance begins: 45.5

Near QQQQ support: 41.7

Next support: 41.25

Major support begins: 40.6, extending to 39.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has reversed its prior bearish pattern contrary to my more bearish expectations of last week where I thought that the prior lows might not hold. Hold they did as RUT made an EXACT double bottom; i.e., a 553 intraday low this past Monday, versus a low of 552 on 9/3. Such indications of a bottom don't get much more 'ideal' than this! Moreover the double bottom formed after the RSI got 'fully' oversold on a 13-day RSI basis, the first such instance since the March bottom.

Key resistance begins at the 55-day average, currently intersecting at 594, and extends to the 600 area. Next pivotal resistance is in the area of the current double top around 625.

Near support is at 560, then in the area of recent 553 low.

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

Insurance, Oil, and Appliances

by James Brown

Click here to email James Brown

Editor's Note:

I am urging caution right here. The market is flashing a confusing mix of signals. The jobs data on Friday was bearish and yet stocks closed positive. The recent bounce off the November lows has not been powered by strong volume, which is a concern if you're bullish on the market.

The larger trend is still up but I'm still very suspicious given the damage down back in October. The better trade may be to take a step back and wait for a day or two to see how things shake out. I'm offering a mix of bullish and bearish plays tonight.


NEW DIRECTIONAL CALL PLAYS

Arch Cap Group - ACGL - close: 68.81 change: +0.87 stop: 66.90

Why We Like It:
ACGL is a property and casualty insurance stock that's on the rise. Shares found support at their rising 50-dma twice last week. Friday's move looks like a bullish entry point, especially if you think the market continues to rise from here. More conservative traders may want to wait for a move over $69.00 first. Our target is the $74.00 level and our time frame is several weeks.

FYI: ACGL just recently announced a $1 billion stock buy back program.

Suggested Options:
I am suggesting the December calls. My preference is the $70 strike.

BUY CALL DEC 70.00 UOZ-LN open interest= 382 current ask $1.45

Annotated Chart:

Picked on  November 07 at $ 68.81
Change since picked:       + 0.00
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         


Canadian Nat. Res. - CNQ - close: 65.14 change: +1.78 stop: $61.95

Why We Like It:
The correction in CNQ has been pretty steep. The stock is trying to find support near $62 and Friday's move looks like a bullish reversal. I want to see some confirmation first. I'm suggesting readers use a trigger at $66.05 to buy calls. If triggered our target is $71.25. This should be a short-term two-week trade.

Suggested Options:
I'm suggesting the November options, which expire in two weeks. My preference is the $65 calls.

BUY CALL NOV 65.00 CNQ-KM open interest=1425 current ask $2.35

Annotated Chart:

Picked on  November xx at $ xx.xx <-- trigger @ 66.05
Change since picked:       + 0.00
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  November 07, 2009         


NEW DIRECTIONAL PUT PLAYS

Whirlpool - WHR - close: 70.82 change: -3.03 stop: 74.10

Why We Like It:
WHR has been slowly sinking since it reversed under resistance near $80.00 back in October. Shares almost broke down under important support near $70 and its 50-dma on Friday. The rally looks tired and last week's unemployment data doesn't bode well for consumer spending.

I'm suggesting a trigger to buy puts at $69.75. If triggered our first target to take profits is at $65.25. Our second and final target is $61.50.

Suggested Options:
Aggressive traders could try November options, but they expire in two weeks. I'm suggesting December puts. My preference is the $70 strike.

BUY PUT DEC 70.00 WHR-XN open interest=1016 current ask $4.10

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 69.75
Change since picked:       + 0.00
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        1.7 million  
Listed on  November 07, 2009         



In Play Updates and Reviews

Stocks Rebound Into the Weekend

by James Brown

Click here to email James Brown

Gold hit another new high and stocks continued to bounce off their November lows. We have three new stop losses tonight.


CALL Play Updates

Gold ETF - GLD - close: 107.43 change: +0.45 stop: 99.75

Gold futures hit a new all-time high over $1,100 an ounce on Friday. This lifted the price of GLD to an all-time high of $108.04 on Friday morning. The trend is up but gold and the GLD look a little short-term overbought here. I am not suggesting new positions at this time.

We want to take profits at $109.90. If you have the November calls you will want to exit completely. If you own the January calls I'd sell part of your position. Our second target is $119.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 06 at $102.28
Change since picked:       + 5.15
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


Parker Hannifin - PH - close: 56.14 change: -0.49 stop: 52.39

PH is still marching higher but shares pared their gains on Friday. Volume has been declining on the rally and that's worrisome. I would wait for a new bounce near the $54.00 level or the 50-dma before launching new positions.

Our first target is $58.50. We will cautiously set a second target at $62.00 but the $60.00 level could prove to be strong resistance. I would use small positions.

Suggested Options:
If PH provides a new entry point I'd consider the December calls.

Annotated Chart:

Picked on  November 03 at $ 55.25
Change since picked:       + 0.89
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009         


UltraShort Treasury ETF - TBT - close: 47.69 change: -0.13 stop: 44.90*new*

The trend off the October low is still up but the TBT just failed at technical resistance on Friday. Shares hit the 100-dma and 200-dma near $48.50 and reversed. I would expect another pull back toward the $46.00 level in the next day or two. I'm upping our stop loss to $44.90.

Our first target is $54.50. Our second target is $58.50. Our time frame is several weeks (possibly year end).

Suggested Options:
Use another bounce near $46 as an entry point. I'm suggesting the 2010 January calls.

Annotated Chart:

Picked on   October 26 at $ 47.89 (1/2 position)
Change since picked:       - 0.20

2nd entry on   October 30 at $ 45.50 (1/2 position)
Change since picked:          + 2.29

Earnings Date            --/--/--
Average Daily Volume =        6.0 million  
Listed on   October 26, 2009         


PUT Play Updates

BIOGEN IDEC - BIIB - close: 45.76 change: +1.37 stop: 47.25

Biotech stocks bounced sharply last week. BIIB is no exception. The rally on Thursday and Friday was almost enough to fill the gap down from mid October.

Looking more closely at BIIB something happened on Friday afternoon in the last hour. Shares rallied from $44.75 to $46.50 in just a few minutes on a surge of volume. The high on Friday was $46.47. More conservative traders might want to consider adjusting their stops toward that high.

I'm not suggesting new positions at this time. BIIB has already hit our first target. Our second and final target to exit is $40.50.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 03 at $ 48.89
Change since picked:       - 3.13
                               /1st target hit @ 44.50 (-8.9%)
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on   October 03, 2009         


Bank of Montreal - BMO - close: 46.59 change: -0.80 stop: 50.15 *new*

Financials are still under performing the rest of the market. BMO has failed three times now under its 10-dma. Path of least resistance should be lower but the sector could reverse if the S&P 500 continues to inch higher. Considering the divergence between banks and the market I'm hesitant to open new positions. Our first target is $42.75. Our second target is $40.50. Please note our new stop loss at $50.15.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 27 at $ 47.37
Change since picked:       - 0.78
Earnings Date            11/24/09 (unconfirmed)
Average Daily Volume =        539 thousand 
Listed on   October 27, 2009         


Intuitive Surgical - ISRG - close: 256.00 change: -3.91 stop: 261.00

ISRG surged to resistance near $260 on Thursday. The stock spiked to $260.91 on Friday morning but failed to hit our stop loss. The play is still open. Aggressive traders may want to buy new puts here. I would hesitate to open new positions with the S&P 500 looking poised to march higher this week.

Remember, this is an aggressive trade. ISRG can be very volatile and options aren't cheap. I would use very small positions about 25% your normal trade size. Our first target is $226.00. Our second target is $202.00.

Suggested Options:
I'm not suggesting new positions at this time.

Annotated Chart:

Picked on   October 31 at $246.35
Change since picked:       + 9.65
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        939 thousand 
Listed on   October 31, 2009         


Russell 2000 iShares - IWM - close: 58.08 change: +0.04 stop: 62.55

IWM is getting closer. Shares hit $58.58 on Friday. Our plan is to use a trigger at $59.00 to open bearish positions. More conservative traders may want to wait for a failed rally type of pattern before initiating positions. If triggered at $59 our first target is $55.50. Our second target is $52.00 or the 200-dma, whichever the IWM hits first.

Suggested Options:
I'm suggesting the December puts. My preference is the $60 strike.

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 59.00
Change since picked:       + 0.00
Earnings Date            --/--/--
Average Daily Volume =       54.5 million  
Listed on  November 02, 2009         


iShares Transports - IYT - close: 68.90 chg: +0.77 stop: 70.16 *new*

Transports continue to rally. Friday's gain after Thursday's inside day is bullish. Yet the IYT stalled near its 50-dma. Shares should have resistance near $70.00. A failed rally near here could be a great entry point for new positions. I'm inching our stop loss down to $70.16. IYT has already hit our first target. Our second and final target is $62.00.

Suggested Options:
If IYT rolls over under $70 I'd use the December puts.

Annotated Chart:

Picked on   October 24 at $ 68.29
Change since picked:       + 0.61
                              /1st target hit @ 65.25 (-4.4%)
Earnings Date            --/--/--
Average Daily Volume =        664 thousand 
Listed on   October 24, 2009         


Life Tech. - LIFE - close: 49.64 change: -0.06 stop: 50.10

I'm about ready to give up on LIFE as a bearish candidate but thus far resistance at $50.00 is holding. If I had to place a new bet today I'd bet shares breaking out over $50.00 and thus stopping us out. More conservative traders may want to go ahead and exit early. I'm not suggesting new positions at this time. The $45 and $44 levels remain support. Our target was $41.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 28 at $ 45.83 /gap down entry point 10/29/09
                              /originally listed at $46.61
Change since picked:       + 3.81
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        2.1 million  
Listed on   October 28, 2009         


Precision CastParts - PCP - close: 99.52 change: +0.09 stop: 100.55

PCP has bounced back to resistance near $100 and its 30 and 40-dma. This could be a brand new entry point to buy puts but I'd like to see shares start to roll over first. If you want to see a little confirmation first then look for a dip under $98.00 to launch new positions.

I'm suggesting small positions about 50% your normal trade size. Our only target is $90.25. More aggressive traders may want to aim lower but I'm concerned about the trendline off the March lows, which could be strong support.

Suggested Options:
I was suggesting the November puts but November options expire in two weeks. If you're starting new positions I'd probably opt for December puts.

Annotated Chart:

Picked on   October 31 at $ 95.53
Change since picked:       + 3.99
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        1.3 million  
Listed on   October 31, 2009         


Research In Motion - RIMM - close: 58.72 change: +0.93 stop: 62.65

The trend in RIMM is still down but more conservative traders may want to exit early or adjust their stops down toward Wednesday's high near $60.60. I am not suggesting new positions at this time. If RIMM closes over $60.00 again I'll close this play. The stock has already hit our first target. We're currently aiming for $53.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 28 at $ 62.93 /gap open entry    
Change since picked:       - 4.21
                               /1st target hit @ 58.55 (-6.9%)
Earnings Date            12/17/09 (unconfirmed)
Average Daily Volume =       17.9 million  
Listed on   October 26, 2009         


CLOSED BEARISH PLAYS

UltraDow30 - DDM - close: 40.41 change: +0.22 stop: 41.26

The Dow Jones Industrial Average is probably the most bullish of the major indices. The DJIA's close over 10,000 and the DDM's close over $40.00 is short-term bullish. I'm giving up and suggesting an early exit.

Chart:

Picked on   October 31 at $ 37.82 (1/2 position size)
Change since picked:       + 2.59 <- early exit (+6.8%)
Earnings Date            --/--/--
Average Daily Volume =        3.2 million  
Listed on   October 31, 2009