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Newsletter

Daily Newsletter, Saturday, 11/14/2009

Table of Contents

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

Market Wrap

Friday The 13th, Not A Problem

by Jim Brown

Click here to email Jim Brown

Investors avoided black cats, broken mirrors and walking under ladders as they shook off the date with a decent rebound off Thursday's lows and the second week of strong gains.

Market Statistics

The markets shook off some bad news at the open with the Consumer Sentiment for November falling sharply to a three month low at 66.0. This is only 0.3 over a seven month low at 65.7. Both the components experienced nearly identical declines. The present conditions component fell from 73.7 to 69.6 and the expectations component dropped from 68.6 to 63.7. Analysts claim the constant press over the last week about possibility of 10% unemployment coupled with higher gasoline prices were the main drags. The employment number was not released until after the survey was completed but the press was full of expectations for a 10% number during the survey period. The markets dipped when the news was released but quickly recovered.

Consumer Sentiment Chart

In other economic news the Trade Deficit rose to $36.5 billion for September. This was up from the $30.7 billion in August. Imports increased +2.9% to $132 billion and exports increased by 5.8% to $168.4 billion. Both of those are highs for the year. Imports of petroleum products increased by 24% but that was due to rising prices inflating the numbers not increased demand. However, imports are at the highest level since fall of 2008.

This report was very good news since it showed an increase in both exports and imports. That means business activity is rebounding more sharply than previously thought. This report also suggests that oil prices are reacting to an increase in global demand as well as the decline in the dollar. For September the dollar declined -3% against the Euro and the Canadian dollar and -4% against the yen. Since this is a lagging September report and oil averaged around $70 for the month it means that the October trade deficit will be even larger once $80 oil is factored in.

Trade Deficit Chart

Last week had a very light economic calendar but next week is heavy with a couple important events. The inflation reports (PPI/CPI) will show the Fed that inflation is non-existent and they can maintain low rates for a "considerable period." The Philly Fed survey on Thursday is the first of the major regional manufacturing reports. On Monday Bernanke will speak at the Economics Club of New York at noon and the topic is "Economic Outlook." Needless to say all eyes will be on the Fed chief on hopes he will slip and give us some indication of what he is really thinking. This could end up being the most important economic event for the week.

Economic Calendar

The natural gas storage report was released on Friday due to the holiday. Gas in storage rose by 25 billion cubic feet (BCF) to 3,813 BCF. Inventories are now 9.8% above year ago levels and another record. The old annual record for gas in storage was 3,545 BCF in 2007. The stated maximum for gas storage is 4,231 BCF but that has never been tested. As more gas is pumped in under greater pressures nobody knows when those pressures will cause a leak or failure of the equipment. Storage locations are varied and include caverns, pipelines and constructed storage tanks. Higher pressures in storage create higher pressures in pipelines and many marginal producers can't generate enough pressure to inject their gas into the pipeline. This excess gas is pushing prices lower every day. The December contract hit a contract low of $4.28 on Friday.

December Natural Gas Futures Chart

Crude prices have been on their own roller coaster of late. Inventory levels have been rising since August with only a sporadic weekly decline. The EIA reported on Wednesday that inventories rose +1.8 million barrels and refinery utilization fell to 79.9%. That is near record lows on utilization for this time of year. Distillate inventories like heating oil, diesel and jet fuel are an astounding 30.7% over last years levels. Gasoline inventories rose +2.5 million barrels for the week. This suggests there is no incremental demand building and refineries are still cutting production and closing facilities to cut costs. Demand is actually weaker today than it was last December when oil was $35. Oil demand in October was at lows not seen since 1997. The CEO of Exxon said on Friday that $20-$25 of the price of oil was due to dollar speculation. When oil was nearly $82 three weeks ago I said in these pages that I expected $70 before $85 and the trend is going in the right direction.

FYI, we are making great progress on my new daily energy newsletter. I will be including links in the next couple weeks where you can sign up to get the daily emails.

Crude Oil Chart 120 min

Crude Oil Chart Daily

Tanker company Teekay Corp (TK) posted a loss of $43 million or -.60 cents for Q3 and that was much better than the -.75 cent per share estimates. The CEO said the spot market rate for oil tankers fell to a multi-year low in Q3 due to reduced oil demand and more tankers entering the market. TK closed at $22.69 and well off their $63 high during the oil bubble.

Frontline (FRO) was upgraded by FBR Capital to buy on expectations the supply of tankers would move closer to demand as older single hull tankers are phased out. FBR said 2009 was the worst year for tankers and 2010 appears to be the beginning of the recovery. FRB said the IEA was expecting oil demand growth to resume in 2010 with recent demand revisions creating further positive implications for the tanker market. Day rates for VLCC tankers are expected to rise to $33,000 per day from the current $29,000 per day. FRB also upgraded Nordic American Tanker (NAT) to a buy. Both have crummy charts and move at a snails pace so I am not showing them here.

While on the topic of shipping the Baltic Dry Index, the index that tracks how much it costs to ship anywhere in the world is in strong rally mode. The BDI is up +32% in the last two weeks and nearly 100% in the last two months from 2200 to the close at 4111 on Friday. It is poised to break out over the June high. Shipping rates have risen +357% in the last 12 months. The only reason this index goes up is due to more people trying to book ships for transport. This is the strongest indicator of increasing global production and demand. As proof of this China's retail sales rose +16% in October. Once the BDI moves over the June high I believe it will explode higher. Shippers are probably still trying to negotiate rates today but once it breaks out I think we could see a short squeeze of sorts as manufacturers and buyers begin to make additional commitments farther into the future to lock in prices. A corresponding play on the BDI would be Dry Ships or (DRYS) but there are others available. DSX, EXM, EGLE, GNK and NM. I like DRYS as a lotto type play and GNK as more of a sure thing.

Baltic Dry Index Chart

In the stranger than fiction category Intel and AMD agreed to shake hand and bury the hatchet. Since Intel is going to pay AMD $1.25 billion in the agreement, that hatchet is not going to be buried in AMD's back. Basically they entered into a deal where Intel would pay them $1.25 billion up front and agree to share some chip technology with AMD. In return AMD would drop all pending antitrust lawsuits and quit defaming Intel in the press. I read this as win for AMD but it is also a win for Intel. AMD gets a cash infusion and cutting edge technology from Intel in order for AMD to compete on a more even basis with Intel. They will also drop all their expensive, cash draining antitrust suits worldwide. It was the best of all deals for AMD.

Intel wins because AMD remains in business thereby avoiding monopoly concerns as the only surviving chipmaker. Intel avoids potentially billions in antitrust judgments worldwide and the billions in legal fees to fight the cases for the next decade. There was the risk of treble damages if Intel lost. Just in the current cases the companies have been compelled to produce over 200 million documents and endure over 2,200 hours of depositions. Intel's technology sharing agreement will almost guarantee that AMD lags Intel products by 12-18 months but there are indications that suggest they could both make chips to run on the same platforms. That would really help AMD since currently an AMD chip requires a completely different motherboard to function. This would help motherboard manufacturers and cut down on inventory models. It remains to be seen if Intel is going to allow this but more than one commentator suggested it was part of the deal. AMD spiked +26% when the deal was announced on Thursday and it held those gains on Friday. Intel spiked 3% but then lost its gains and traded sideways on Friday. That should give you a clue which company actually won in the agreement.

Chart of AMD

It was definitely Friday the 13th for Genzyme. The company just can't get a break. The FDA reported it found tiny particles of trash in drugs made by Genzyme. This is the second time this year that Genzyme has been cited by the FDA. The FDA said it found pieces of steel, rubber and other substances in the drugs it tested. This contamination was found in drugs used to treat rare enzyme disorders and the FDA said the drugs would remain on the market because there were no replacements and the contamination existed in only 1% of the products. This is the second time this year that Genzyme has been hit with contamination claims.

Genzyme Chart

Microsoft a buy? After a 100% rally in Microsoft since the March lows UBS added them as a buy on Friday. Analyst Brent Hill said IT spending was stabilizing and PC and server sales were expected to go up +10% in 2010. He said Windows 7, Windows Server and another Office cycle would benefit Microsoft. Here is the catch. Microsoft hit $30 intraday on Friday and Hill was so bullish he put a $34 price target on MSFT for 2010. Wow! That is really going out on a limb. He also added ADSK with a $35 target, now $27 and ADBE with a price target of $43, now $36.50. He kept neutral ratings on MFE, CRM and SYMC.

MSFT Chart

It was also Friday the 13th for three more banks as the FDIC shut them down. The Orion Bank, Naples Florida, with 23 branches was closed and assumed by IberiaBank. The Century Bank in Sarasota was also taken over by IberiaBank. Coast National Bank in San Clemente was taken over by Sunwest Bank. The total hit to the FDIC was $1.361 billion. This brings the FDIC fund to less than $10 billion remaining and well below the $45 billion balance a year ago. This brings the total to 123 banks with over 1,000 branches closed in 2009. For reference 534 banks were closed in 1989 for the most in recent years.

Abercrombie & Fitch (ANF) reported earning that fell -39% but were still better than expected. The retailer raised guidance and said it was adding new items at lower cost to combat the slumping U.S. sales and was expanding internationally where sales were stronger than the U.S. Same store sales fell -22%. ANF said Q4 sales were not expected to be better than prior seasons. ANF stock rallied +11% on the news to a new 52-week high.

I wonder how this holiday season is going to work. Almost all retailers have already downplayed expectations for holiday sales. Warren Buffett said businesses have bottomed but said Thursday that a buoyant holiday season is unlikely. We continue to get news of additional layoffs nearly every day. For instance the Adobe and Electronic Arts announcements last week. Adobe cut 680 full time workers or 9% of its workforce. ERTS said it was cutting 1,500 jobs or 17% of its workforce. Applied Materials (AMAT) said it was cutting an additional 1,500 jobs. Sprint (S) said on Monday it was cutting another 2,500 jobs. Even AOL said it was cutting more jobs on top of the previously announced 700. I could go on with layoffs from TM, LYG, SI, RBS, NWS, AMR, LCC, DGX, LMT, BMY and JAVA but you get the picture. How "buoyant" in Buffett's words is the holiday season going to be with a new round of job cuts causing consumers to fear unemployment even more?

If it is Friday it must be a Palm takeover rumor day. The rumored suitor this time around was Nokia. Cell phone giant Nokia has been missing the love from consumers due to its lackluster phones using the Symbian operating system. Meanwhile Palm has generated some market hype around its new smart phones with the highly regarded Web OS system. Some feel that Nokia could drop about $4 billion to acquire Palm and it would be a bargain and revitalize the Nokia offerings. Nokia could easily sell far more Palm phones than Palm can so it would pay off quickly. Palm was also up on Friday in anticipation of the Sunday launch of the new Pixi phone. That is a smaller version of the Palm Pre and priced at $99. The main drawback to a Palm acquisition is the new Nokia N9000, which could be seen as a viable competitor in the smart phone market. That may be the snag that keeps Nokia on its private path. The smart phone market is still growing due to constant new products by the majors. Phone maker HTC is the hottest maker because of the Android operating system in HTC phones. This chart shows smartphone sales gains by maker over the last 12 months. Obviously Nokia needs help, a lot of help!

Smart Phone Sales Chart

The Dow rallied +2.46% last week and tested resistance at 10,300 three times. Each time it failed but Friday's close at 10,271 shows the bulls have not given up. Dow 10,300-10,350 is strong resistance and I did not expect it to breakout on the first test. Actually I did not expect it to break out at all until the S&P conquers resistance at 1100. The Dow should have run its course with a +600 point gain over the last two weeks. It is time to rest and wait on the rest of the market to catch up. However, Thursday's decline was bought faster than wrapping paper on Black Friday. It is tough to make a market call when the bad news bulls are back in action. Support for next week appears to be 10,200 after two tests last week. A break there should only be profit taking and 10100 should be the backstop.

The red downtrend resistance line from Oct 2007 has not changed on my chart in over a month. The dead stop at that line at 10,300 also corresponds with the 50% retracement resistance at 10,318 and the upper boundary of the uptrend channel. This is serious resistance that "should" result in some profit taking but the bulls appear determined to avoid that event.

Dow Chart - Weekly

Dow Chart - Daily

I have not redrawn any lines on the S&P chart since last week. As you can see the overhead resistance at 1100 was a brick wall but the prior uptrend support was solid. Also the prior downtrend resistance (red) has also turned into support. What we have for next week is a tightening range that will eventually produce a dramatic breakout or breakdown. It will not likely be a slow mover. The trick is knowing which way it will break. If you had asked me on Thursday night I would have bet on the downside. After Friday's bad news rally I would like to bet on the bulls but that resistance has proven strong in the past.

SPX Chart - Daily

The Nasdaq is a picture of contradictions. The composite is still showing a possible head and shoulders but the Nasdaq 100 is showing a bullish breakout. This contradiction is due to the money flowing into big cap techs as I described last week. Small caps are out of favor again and big cap techs are leading.

The Nasdaq 100 has broken over prior resistance at 1775 and is now using that resistance as support. If the NDX can move over that level next week the target becomes something around 1900. That could be a strongly bullish move. The red downtrend from Oct 2007 was broken long ago and is no longer relative.

Nasdaq 100 Chart - Daily

The Nasdaq Composite is a completely different picture from the Nasdaq 100 or NDX. Resistance from March 2008 continues to be a challenge and the composite is at risk of falling back out of the channel and forming a potential head and shoulders top. Obviously the composite can't fail while the NDX is in rally mode so something has to change on one or the other. Either the NDX has to fail or the composite find enough traction to get over the October highs. Moving over the highs would turn the chart bullish again.

Nasdaq Composite Chart - Daily

The Russell remains my biggest cause for concern for the overall market. The velocity has failed completely and the Russell gained only 1% for the week when the NDX gained +3.3% and the Dow +2.46%. Volume died on the Russell and fell from days with over a billion shares traded back around Nov 1st to less than 650 million on Friday. Friday was the lowest volume on the Russell since Sept-28th.

Volume is a weapon of the bulls and fund managers appear to be out of ammo. It appears as though managers are scared of an impending sell off and are putting money in the big caps where it can be extracted quickly. This is a serious negative for the overall market unless the Russell finds some buyers soon.

Russell 2000 Chart

My bias for next week would be cautiously bullish. I stated my fears about the Russell and the Dow and S&P have come to a dead stop at resistance. The NDX is the only index that appears to be attempting a breakout and it is feeble at best. The Bernanke speech on Monday is going to be a hurdle but I expect it will turn into a positive event. Think about it. He can do more good for the market and the economy by saying positive things than dwelling on the potential negatives. He is faced with the Fed holding over a trillion dollars in debt it does not want to own. If he talks down the market/economy then he is burning his own assets. If he provides a positive and upbeat view on the economy then the market will rally and he will be that much closer to unloading those assets. With Senator Dodd and Barney Frank on the warpath against the Fed and his nomination coming up for consideration soon I doubt he will turn into Chicken Little on Monday. The sky is not falling and it is his job to paint a rainbow on it.

Jim Brown


Index Wrap

Some Struggle at Prior Highs

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

New weekly closing highs were seen in all the major indexes save the Russell 2000 (RUT), maintaining bullish charts in general. Currently the most bullish weekly charts are seen with the Nas 100 and the Dow. These charts look the most like they're in possible breakaway moves.

The big cap S&P 100 (OEX) and Nasdaq 100 (NDX), as well as the Dow 30 (INDU) have all have decisively cleared their prior intraday (mid-October) highs. The more broadly based S&P 500 (SPX) and Nasdaq Composite (COMP) indexes look to be struggling to clear the line of their prior intraday tops, reflecting a still somewhat overbought situation. This may result in only a limited further up leg in OEX, NDX and INDU and/or a choppy sideways trend ahead that further 'throws off' an overbought condition.

The Russell 2000 (RUT) is a special case in its struggle to gain traction not far above prior lows. Rut could be a harbinger for an overall choppy sideways market trend that goes on for awhile.

Regardless of some choppy sloppy trends, the long-term bull market is intact and points to higher prices for the intermediate to long term. If long calls in NDX, OEX or DJX, there may not be a whole lot more upside to be gained in the near-term; at least relative to the move that's already occurred off the late-October bottom. Next week's expiration may contribute to further volatility.

Speaking of the long-term trend, a look at the weekly SPX chart is of interest here.

CHART OF THE WEEK:

SPX broke out above its long-term down trendline in the week ending 10/9, so it's been a month now since that breakout. Somewhat predictably there was then a pullback to this prior line of resistance, where support developed. The subsequent rebound, as prior resistance 'became' new support, suggests to me that at least a 50% retracement (to 1120) of the late-2007 to early-2009 decline is in the offing and that 1225 is also a possible SPX target in the coming weeks.

The longer-term 8-week RSI recently pulled back to a more 'neutral' reading as the sideways trend in the past month threw off the prior overbought extreme associated with the major run up from the March lows.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) looks like it's consolidating just below 1100 prior to a push above its line of prior highs. The recent 3-day pattern looks like a bull flag consolidation but this pattern also implies that there should be a continued advance within the next 1-2 trading days. Further upside potential for SPX may be to resistance implied by the top end of its uptrend channel, currently intersecting in the 1140 area.

Pivotal technical support is at 1070, then down at the prior recent low in the 1030 area.

SPX got near, but not into or above, the 'overbought' RSI zone that it has so often hit in recent months. Every time that the index has gotten to such an overbought reading, a correction has followed although not always immediately. This indicator/price pattern suggests that after another rally, watch for an ensuing correction to follow.

SENTIMENT

Another indicator that does not make me wildly bullish at this juncture is what I'm see with my sentiment model. As suggested by the daily CBOE equities call to put volume ratio, trader's got quite bullish on this last run up. If all options traders were smart technical operators they might get more cautious as the market approaches prior highs, but it's never or rarely that way.

This tendency for traders to get more bullish the further along in a rally that we get is helpful for us. Just as occurred at the last bullish daily extremes (above 1.9) seen in my sentiment indicator, one more upswing should preface or 'set up' a next correction. I'd like to be out of remaining calls I hold prior to any such correction.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index has broken out above prior resistance at 509-e 510 and a further move higher should be in offing, perhaps again to the top end of OEX's uptrend channel, currently intersecting around 524. One more such upswing and I'll be looking for a next correction/pullback to set in.

Key near support is 496, at the low end of upside price gap that occurred over 11/6-11/9. Next pivotal support is in the area of the prior low at 479 extending to around 473, at the low end of the current uptrend channel.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average achieved a decisive upside penetration of it's prior top in the 10200 area and gotten the financial media talking heads in a bullish lather. INDU's chart action is impressive here and probably accounts for the upsurge in bullish sentiment recently. I suspect also that INDU is good for one more rally into expiration, perhaps to around 10470-10500; this, assuming INDU pierces its recent 10342 high. After any further surge higher I'd be looking to take profits in Dow Index (DJX) calls.

What was its line of resistance around 10200 should now be a first level of Dow support. Next support is the 'magic' 10000 level; further support then lies at 9840-9800; lastly, significant technical support/buying interest should be found in the area of the Average's prior (down) swing low at 9679.

The Dow did hit the lower end of what is usually INDU's overbought zone in terms of the 13-day RSI which I follow. One more shot up and the Dow will either be 'fully' overbought or will have an RSI reading that doesn't confirm a new price peak. In either case, I'd be looking for a pullback to occur thereafter. A number of key Dow stocks are approaching their prior highs, with the concomitant possibility of their making double tops, at least on an interim basis.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) appears to be consolidating prior to a challenge to resistance in the 2190-2200 area. I think there's good potential for another upswing that carries above 2200, possibly to as high as into the 2250-2300 price. Currently however I have to rate the chart as mixed until or unless COMP pierces the prior cluster of intraday highs that show tops at or just under 2190. The 100 biggest cap Nas stocks have been of course outperforming the Composite which includes the portion of tech stocks that are not bouncing back by having the latest and niftiest tech gadgets.

Key near resistance is at 2190-2200. Above that I can only clearly judge 2300, at the top end of COMP's broad uptrend channel, as a significant technical resistance based on the daily chart. Based on certain hourly chart projections, by the end of this coming week, the 2250 area is an area of suggested technical resistance.

Pivotal near support is at 2112, extending to 2100. The low end of the uptrend channel, currently intersecting around 2060, is a next technical support. The prior 2024 low should offer some major support/buying interest.

As noted with the S&P, bullish sentiment hit 'overbought' extremes on a couple of days recently but could get to a further more bullish 'extreme' before I'd start anticipating a next top.

NASDAQ 100 (NDX) DAILY CHART:

After the 'picture perfect' double low that developed recently, it was no-brainer to buy the heck out of the NDX calls. The upside chart gap that developed about mid-way in the most recent rally to date, a typical so-called 'measuring gap', gave further credence to the prior bullish double bottom low.

A double bottom (or double top) is thought to be 'confirmed' as a major trend change indication when the prior swing high (or low) is pierced, as is the case in NDX with its 1788 Close which clears its prior 1781 intraday high.

Resistance in next projected for the 1830 area, with a next upside key resistance at the top end of the uptrend channel, currently intersecting at 1882.

Pivotal support is at 1733, the low end of the aforementioned upside gap chart gap from 11/6-11/9. I've highlighted next lower support at 1695 as implied by the low end of NDX's broad uptrend channel. Major support/buying interest should be found in the area of the 1652 recent low.

I'd again note the past months' tendency for corrective pullbacks to set in after the RSI get near, to or above the overbought zone highlighted with the 13-day Relative Strength Index graph on the NDX chart. Moreover, one more rally such as to 1830-1840 or a bit higher, would fulfill a 'minimum' upside objective implied by the recent bull flag formation.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

There's not much more to say on the Nasdaq 100 chart pattern not already indicated for the underlying NDX index. The recent sideways 3-day move suggests an even more clear cut bull 'flag' pattern and a breakout above the top end of the flag would suggest a 'minimal' further advance to as high as 46, resistance implied by the top end of the Q's broad uptrend channel.

The On Balance Volume (OBV) indicator has surged with the recent rally even as the daily volume trend has been declining. With QQQQ, I've found that a rising OBV is a better ancillary indicator for continued price strength than an expanding (daily) volume trend. Normally, rising daily trading volume tends to 'confirm' a bullish move for a stock. QQQQ is a different animal so to speak and has some differences from a 'normal' stock (of a company).

Near QQQQ resistance: 44.2

Next overhead resistance: 45.0

Major resistance begins: 46.0

Near QQQQ support: 42.6

Next support: 41.35

Major support begins: 40.6

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) is not finding the favor that the big cap tech or S&P indexes are enjoying. RUT normally tracks Nasdaq more closely that has been the case recently. After failure of RUT to piece its 55-day moving average and make it above 595-600 resistance, RUT saw renewed selling late in the week.

To date no 'major' top is indicated as long as RUT doesn't pierce its prior 552 low. The Index could now be settling into a 553-625 trading range for the balance of this year. Time will tell on this. Meanwhile, key support begins around 572 and extends to the prior 553 low.

Pivotal near resistance is 594-597, extending to 600. Next resistance, as implied by a rebound to the previously broken up early-Sept/early-Oct up trendline, comes in around 610. Major resistance can be anticipated in the 625 area.

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

Luxury Retail and Scientific Instruments

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Coach Inc. - COH - close: 35.56 change: +0.56 stop: 33.75

Why We Like It:
Investors are completely ignoring the recent bearish readings on consumer sentiment. The normal thought process suggests that nervous consumers don't spend a lot of money, which would be bad for the retailers. No one is expecting any fireworks for this coming holiday shopping season. Most expectations are for a flat fourth quarter with a few hoping for improvement only because last year's numbers are so bad the comparisons will be easy to beat.

Yet that's not stopping shares of COH from hitting new 2009 highs. This is a pure momentum trade. The recent breakout over resistance at $35.00 is a bullish entry point. I'm suggesting traders keep positions relatively small since we're fighting what should be a bearish consumer spending environment.

Our first target is $38.00. Our second target is $39.85. My time frame is a few weeks. FYI: Traders should note that this week will bring several high-profile earnings reports in the retail sector. That could create volatility for stocks in this industry.

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

BUY CALL DEC 35.00 CKO-LI open interest=2445 current ask $1.95

Annotated Chart:

Picked on  November 14 at $ 35.56
Change since picked:       + 0.00
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        4.9 million  
Listed on  November 14, 2009         


Waters Corp - WAT - close: 60.72 change: +1.24 stop: 58.75

Why We Like It:
WAT is a scientific instrument company with a stock that's closing near its 2009 highs. I'm tempted to buy calls right here. However, with the S&P 500 still under 1100 I want to see a little more strength. I'm suggesting a trigger to buy calls at $61.50. If triggered our first target is $64.90. We'll cautiously set a secondary target at $67.45.

Suggested Options:
If WAT hits our trigger at $61.50 I'm suggesting the December calls. My preference is the $65.00 strike.

BUY CALL DEC 65.00 WAT-LM open interest= 69  current ask $0.55

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 61.50
Change since picked:       + 0.00
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        1.2 million  
Listed on  November 12, 2009         



In Play Updates and Reviews

Hovering At Resistance

by James Brown

Click here to email James Brown

Editor's Note:

I would be very cautious here about opening either bullish or bearish positions. The S&P 500 is struggling with resistance near 1100. If this index can produce a solid close over this level then my bias will turn a lot more bullish. Unfortunately we cannot immediately assume that bearish plays are the better bet here. The longer-term trend of higher lows is making it tough to launch new bearish trades. Although with stocks near resistance this would be considered a "lower risk" entry point for bearish plays because you can set your stop loss relatively tight.


CALL Play Updates

Arch Cap Group - ACGL - close: 69.95 change: +0.03 stop: 67.40 *new*

Momentum in ACGL has stalled near $70 as the S&P 500 stalls near the 1100 level. The trend is bullish but if shares reverse here it will look like a bearish double top. At this point I'd prefer to open positions on a bounce near the rising 50-dma near $67.85. I am raising our stop loss to $67.40. Our target is the $74.00 level and our time frame is several weeks.

Suggested Options:
If ACGL provides a new entry point I would use the December calls.

Annotated Chart:

Picked on  November 07 at $ 68.81
Change since picked:       + 1.14
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         


Canadian Nat. Res. - CNQ - close: 66.75 change: +1.05 stop: $63.95

I'm still bullish on CNQ but last week's failed rally near $69.00 is still casting a bearish shadow on the stock. The low on Friday was $65.33. More conservative traders might want to raise their stops toward $65.00 to reduce their risk. Our upside target is $74.00. If you are holding November calls we have to exit before Friday's closing bell.

Suggested Options:
November options expire in one week. I would use December calls for new positions.

Annotated Chart:

Picked on  November 09 at $ 67.74 *gap open higher entry
                          /original trigger was $66.05
Change since picked:       - 0.99
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  November 07, 2009         


Chevron Corp. - CVX - close: 77.94 change: +0.52 stop: 76.75

Crude oil looks like it could breakdown from here. If it does CVX will probably follow it lower. More conservative traders may want to consider an early exit right here. You could re-enter on a close over $80.00. I'm not suggesting new positions at this time. Our first target is $84.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on  November 11 at $ 78.87 /gap higher entry point
Change since picked:       - 0.93
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =       10.6 million  
Listed on  November 10, 2009         


Deere & Co - DE - close: 47.58 change: +0.17 stop: 46.85

The long-term trends in DE are unchanged. The stock has built a huge base under resistance at $50.00. We want to buy calls on a breakout over $50.00 so I'm suggesting a trigger to open positions at $50.25. If triggered our first target is $54.90. Our second target is $59.00. Keep in mind that we'll plan to exit ahead of DE's earnings report later in the month. More aggressive traders willing to hold over DE's earnings report will want to consider January 2010 calls.

Suggested Options:
If DE hits our trigger we want to buy the December $50 calls.

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 50.25
Change since picked:       + 0.00
Earnings Date            11/25/09 (unconfirmed)
Average Daily Volume =        6.2 million  
Listed on  November 09, 2009         


Essex Property - ESS - close: 81.56 change: +0.14 stop: 78.90 *new*

ESS has been consolidating sideways the last couple of days but the overall pattern is still bullish. Broken resistance near $80.00 should offer some support. Therefore I'm raising our stop loss to $78.90. More conservative traders may want to edge their stops closer to $80.00. I would consider buying calls on another bounce from $80.00 but readers may want to wait for the S&P 500 to breakout over the 1100 level first. Our first target is $86.00. Our second target is $92.50.

Suggested Options:
If ESS provides a new entry point I would use the December calls.

Annotated Chart:

Picked on  November 10 at $ 80.65
Change since picked:       + 0.91
Earnings Date            02/03/10 (unconfirmed)
Average Daily Volume =        500 thousand 
Listed on  November 09, 2009         


Gold ETF - GLD - close: 109.74 change: +1.53 stop: 103.90 *new*

The U.S. dollar continues to sink and gold hit new highs on Friday. The GLD rallied to $109.80. I am raising our stop loss on this play to $103.90. I'm not suggesting new bullish positions at this time. Any November positions need to be closed before expiration this week. The newsletter's remaining position are the January $110 calls. Our second target to exit is $119.00. Our time frame is still several weeks.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 06 at $102.28
Change since picked:       + 7.46
                               /1st target hit @ 109.50 (+7.0%)
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


Parker Hannifin - PH - close: 55.00 change: -0.29 stop: 52.90

The larger trend in PH is up but short-term the stock has been showing relative weakness. If they close under $55.00 it's almost a sure bet that PH will hit its 50-dma near $53.50. A bounce from $55.00 or its 50-dma could be used as a new bullish entry point but I'd use small positions (with December options).

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 would use the December calls.

Annotated Chart:

Picked on  November 03 at $ 55.25
Change since picked:       + 0.04
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009         


UltraShort Treasury ETF - TBT - close: 47.02 change: -0.63 stop: 45.40 *new*

TBT is moving slowly, which is what we expected and why I suggested the January calls. I would still consider bullish positions in the $48-46 zone but I'm starting to think a better plan would be to wait for a close over its 200-dma near $48.60. I am raising our stop loss to $45.40.

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

Suggested Options:
I'm suggesting the 2010 January calls.

Annotated Chart:

Picked on   October 26 at $ 47.89 (1/2 position)
Change since picked:       - 0.87

2nd entry on   October 30 at $ 45.50 (1/2 position)
Change since picked:          + 1.62

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


Volatility Index - $VIX - close: 23.36 change: -0.88 stop: 21.90

Our VIX play is not off to a great start. There wasn't any follow through on Friday. The Wednesday-Thursday move still looks like a bullish reversal but if the S&P 500 can breakout over the 1100 level I wouldn't be surprised to see us get stopped out. I would still consider small bullish positions here but readers may want to wait and see if the VIX bounces from 22.00 again before initiating new positions. Our exit target is $30.00. This should be a relatively quick trade. I'm suggesting small positions.

Suggested Options:
I'm suggesting the December calls.

Annotated Chart:

Picked on  November 12 at $ 24.24 
Change since picked:       - 0.88
Earnings Date            --/--/--
Average Daily Volume =         xx million  
Listed on  November 12, 2009         


PUT Play Updates

Baidu Inc. - BIDU - close: 432.50 change: +5.35 stop: 441.00

BIDU is an aggressive, higher-risk trade. Shares managed a bounce on Friday but the stock remains under resistance near $440.00. Readers may want to wait for another failed rally pattern under $440 before initiating new positions. I'm suggesting very small positions. We'll use a stop above the 2009 highs. Our target to exit is $360.00.

Suggested Options:
I'm suggesting the December puts. Options are very expensive. This is already an aggressive trade and I'm making it more speculative with a deep, out of the money put. I'm suggesting the $370 put.

BUY PUT DEC 370 BPJ-XN open interest=1129 current ask $4.40

Annotated Chart:

Picked on  November 12 at $427.15
Change since picked:       + 5.35
Earnings Date            02/18/09 (unconfirmed)
Average Daily Volume =        2.7 million  
Listed on  November 12, 2009         


Bank of Montreal - BMO - close: 48.93 change: +0.34 stop: 50.15

Financials have been lagging the broader market but if the S&P 500 can breakout over the 1100 level I would expect them to try and catch up. That makes new bearish positions a little hazardous here even though BMO still has resistance at the $50.00 level.

I would look for two things. A clearly defined failed rally/bearish reversal in the S&P 500 and the same in shares of BMO before launching new positions. Our first target is $42.75. Our second target is $40.50.

Suggested Options:
If BMO provides a new entry point I would use the December puts.

Annotated Chart:

Picked on   October 27 at $ 47.37
Change since picked:       + 1.56
Earnings Date            11/24/09 (unconfirmed)
Average Daily Volume =        539 thousand 
Listed on   October 27, 2009         


Russell 2000 iShares - IWM - close: 58.73 change: +0.56 stop: 60.55

The small caps have continued to under perform its large cap rivals. Last week saw the Russell 2000 and the IWM roll over under resistance. I remain bearish but it looks like the IWM is going to bounce back and retest resistance near $60 and its 50-dma again. Look for another failed rally as a new entry point.

Our first target is $55.50. Our second target is $52.00 or the 200-dma, whichever the IWM hits first.

Suggested Options:
If the IWM provides a new entry point I would use the December puts.

Annotated Chart:

Picked on  November 09 at $ 59.00
Change since picked:       - 0.27
Earnings Date            --/--/--
Average Daily Volume =       54.5 million  
Listed on  November 02, 2009         


Northern Trust - NTRS - close: 48.04 change: -1.14 stop: 52.25

NTRS continues to under perform the banking sector and the S&P 500. Shares posted another loss on Friday with a 2.3% decline and a new multi-month low. I would still be tempted to buy puts here but readers may want to wait for a bounce toward the $49-50 zone and launch positions there. Our first target to take profits is at $45.25. Our second target is $41.00. The Point & Figure chart is bearish with a $39.00 target.

Suggested Options:
We were suggesting the December puts.

Annotated Chart:

Picked on  November 12 at $ 49.18
Change since picked:       - 1.14 
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on  November 12, 2009         


Research In Motion - RIMM - close: 62.69 change: -0.29 stop: 65.26

Our new play in RIMM has been opened. We set a trigger to buy puts at $61.80 and shares hit $61.79 on Friday morning. The oversold bounce appears to be rolling over. My only concern, aside from recent strength in big cap stocks, is the low volume on RIMM's recent pull back. I remain bearish here but readers may want to see more confirmation. Consider using a trigger at $61.49 to launch positions instead. Our first target is $55.25. Our second target is $50.50. RIMM can be a volatile stock so I'm suggesting smaller position sizes.

Suggested Options:
I'm suggesting the December puts. My favorite was the $60 strike.

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER 61.80
Change since picked:       + 0.00
Earnings Date            12/17/09 (unconfirmed)
Average Daily Volume =       18.9 million  
Listed on  November 12, 2009         


Strangle & Spread Play Updates

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

Ultra(Long)-S&P500 - SSO - close: 36.73 change: +0.40 stop: n/a

A bounce in the S&P 500 and the SSO is giving us another entry point to launch strangles. I was suggesting traders buy a strangle in the $36.50-37.50 zone.

Suggested Options:
The options suggested for this strangle were the December $40 calls (SUC-LN) and the December $34 puts (SOJ-XH). Our estimated cost was $1.70. We want to sell if either option hits $3.00 or higher.

Annotated Chart:

Picked on  November 11 at $ 37.08
Change since picked:       - 0.35
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         


CLOSED BEARISH PLAYS

BIOGEN IDEC - BIIB - close: 46.72 change: +0.22 stop: 47.05

On Wednesday we lowered our stop loss down to $47.05. The oversold bounce in BIIB continued on Friday and shares hit $47.06 closing our play.

Chart:

Picked on   October 03 at $ 48.89
Change since picked:       - 1.84 <-- stopped @ 47.05 (-3.7%)
                               /1st target hit @ 44.50 (-8.9%)
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on   October 03, 2009