Option Investor
Newsletter

Daily Newsletter, Saturday, 11/21/2009

Table of Contents

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

Market Wrap

Pause To Reload Or Running Out Of Steam?

by Jim Brown

Click here to email Jim Brown

The bears are coming out of the forest again after only a couple days of market declines. We are facing that age-old question of market top or market rest?

Market Statistics

Friday was a boring day for economic reports with Mass Layoffs for October and State Employment the only two reports and neither are really watched by the market. Unemployment rose in 29 states in October and fell in 13 states. California unemployment rose to 12.5% and Michigan is 15.1%. However, both California and Michigan joined with Texas to produce the most new jobs for the month. That sounds like a contradiction of terms to have unemployment rates rise but also produce the most new jobs but that is what the reports said.

The Mass Layoff report was more encouraging with the number of layoffs involving 50 or more workers dropping to 2,127 in October compared to 2,561 in September. The number of workers affected fell to 217,182 from September's 248,006. This report is showing a significant improvement and is at the lows for all of 2009. The business sector seems to be producing more jobs but the government sector is still losing jobs at a dramatic rate as tax revenue projections continue to decline. The number of state and local government layoffs has more than doubled since Oct-2008.

Layoff Chart

Next week is a holiday week and there are no reports on Thr/Fri. All the normal reports have been moved forward to Tue/Wed making both days very busy. The key reports for the week are the Chicago Fed National Activity Index on Monday, GDP revision, the Richmond Fed Survey and the FOMC minutes on Tuesday. Wednesday has the Kansas Fed Manufacturing Survey. The two most important events for the week are the GDP revision and the FOMC minutes.

The GDP revision is now expected to fall to +2.9% growth in Q3 from the initial estimate of +3.53%. Any material decline worse than 2.9% would be negative for the markets. The FOMC minutes for the November meeting will be released at 2:PM on Tuesday. These will probably provide the most market volatility of the entire week. This is the inside look at what the Fed was thinking when they met to determine rate policy on Nov-3rd. We know what the FOMC statement said but the thinking behind it will be released on Tuesday.

Economic Calendar

Friday's option expiration trading was dominated by the pall Dell Computer cast over the market with their earnings miss. Dell missed on both earnings and revenue and gave less than exciting guidance. For Dell to miss earnings estimates by a nickel and not prewarn means there is trouble in Austin. Dell either thought they would suffer less in the stock market with a miss rather than a warning or the situation is deteriorating so fast that the gravity of the earnings decline caught them off guard. They are losing market share, their margins are suffering and they are way behind on their previously announced billions in cost cuts. Dell used to be a well-oiled machine but now it appears they have sprung a leak and lost traction in that spreading oil slick. Dell stock fell -10% on Friday and succeeded in tanking the Nasdaq.

Dell is also experiencing difficulty in its acquisition of Perot Systems and there are rumors they will try to make some more acquisitions to combat their falling market share. Nearly a dozen analysts released cautious comments on Dell suggesting that the current failure to execute could last for several quarters. However, analysts from Citigroup, Wells Fargo, Raymond James and Bernstein made somewhat favorable comments suggesting Dell would be a late cycle performer because they were heavy in enterprise computing and Windows 7 was a retail product. However, Michael Dell said Windows 7 would produce a large upgrade cycle with PC sales well into the mid teens of growth but it could be long term over the next 18 months.

Dell Chart

Hewlett Packard is the new Dell. Dell beat HP like a drum for years and eroded HP market share every quarter like a flesh eating bacteria that could not be eradicated. Now the tables have turned and HP is regaining that market share at twice the rate they lost it. HP is executing on all cylinders and expanding in multiple segments. They recently announced an acquisition of 3Com and bought EDS, Perot's original company, in 2008. HPQ has already preannounced their earnings of $1.14 per share beating estimates by a penny. Their official earnings announcement is Monday after the close. You can bet they will pick apart the Dell comments over the weekend and craft an earnings release announcement that says all the right things to keep Dell investor sentiment in the dumpster.

S&P said last week that HPQ is gaining market share in PCs, servers, printers and IT services. In other words they are eating Dell's lunch. HP's 2010 revenues are expected to be $119 billion compared to Dell's $60 billion. Dell is not even number two in the PC business any more with that spot being claimed by Acer last quarter.

HPQ Chart

It was a tough week for tech stocks with Dell's disaster following a major downgrade of the chip sector by Merrill Lynch on Thursday. BAC/Merrill downgraded INTC, TXN, MRVL, LSI, MXIM, NSM, POWI and MCHP to underperform from neutral. Underperform is typically equated to a sell rating. BAC said inventories have been replenished and inventory levels in the supply chain were approaching an overshoot condition. The semiconductor sector was knocked for a loss on Thursday and again on Friday thanks to Dell but the actual damage was not that bad.

Semiconductor Index Chart

The homebuilder sector was also knocked for a loss on Friday after DR Horton (DHI) reported a 73-cent loss and far worse than analysts expected. DHI took a $192 million charge for impairments and writedowns on land contracts it canceled. In one breath they were whining about pricing power, the high unemployment rate and weak economy. A paragraph later they bragged that Q4 orders rose by +26% and cancellations were no longer increasing. The confusing earnings statements saw DHI stock fall -15% for the day.

DHI Chart

The homebuilders got a bump higher from the Toll Brothers earnings in early November and Friday's DHI miss may have knocked them for a loss but the sector held that loss to a minimum with the HGX down only -2.5% for the day.

Housing Index Chart

Homebuilder ETF Chart

Rumors over an Etrade/Ameritrade wedding gave ETFC a big boost this week. Well, it may have been only 10-cents but to a $1.50 stock that is a big boost. Ameritrade CEO Fred Tomczyk told Reuters late Wednesday that he would consider acquiring Etrade if the price was right. That is old news, very old news. Ameritrade has said for several years that they would be interested if Etrade was willing to meet them at the altar. The problem is Etrade's $10 billion in mortgages and $8 billion in home equity loans. If you bought Etrade you would have to mark down the value of those loans and put up reserves to compensate. That would tie up billions in capital until the loans matured or were sold. Analysts believe that home equity loans would have to be marked down to 60-cents on the dollar.

Since the mortgage bankers association said on Friday that 10 of every 100 home loans was now delinquent there is little interest on the part of any financial company to acquire loans for more than pennies on the dollar. Citadel Investment Group owns 20% of ETFC and bought $3 billion in asset-backed securities from ETFC for $800 million in late 2007. Maybe they are in the market to take the mortgages of their hands as well if the price is right. That would free up AMTD to make an offer for ETFC. Time will tell.

Etrade Chart

Only one bank was closed on Friday. That was the Commerce Bank of Southwest Florida and it became the 124th fatality of 2009. The cost to the FDIC fund was $23 million.

Is it time to unwind the dollar trade? That is what many analysts are saying as the dollar refuses to break support at 75 on the dollar index. The "short the dollar, long commodities" trade has lasted for several months and analysts are warning that unwinding this trade could be violent because of the untold billions at risk. Currencies and commodities can move exceptionally quickly and those traders who don't pull the trigger at the first sign of trouble could take huge losses. Personally I believe the dollar will fall further but there could be several periods of adjustment where weak players are jostled out by violent short squeezes. Any short squeeze in this trade will crush commodities like oil and gold.

You may remember the Exxon CEO last week saying that $20-$25 of the price of oil is related to the dollar trade. If that dollar support was suddenly removed we could easily see $60 as the price of oil. I would personally be thrilled because it would produce some excellent long-term entries for energy plays. I am going to be recommending some long-term portfolio entries beginning January 1st and $65-$67 oil would be a perfect entry point. Unfortunately the equity market would also implode on a short squeeze in the dollar so be prepared.

Dollar Index Chart

Crude Oil Chart Expired December Contract

Offshore drillers were down on Friday after Mexico's Pemex said output had declined -7.5% since January. Exports have fallen -13% since January. The oil company contracts 44 offshore drilling rigs and they are running out of places to drill. Diamond Offshore (4), Ensco (5), Nabors (9), Noble (13) and Seahawk (2) are the major rig providers to Pemex. I suspect it is not that they are running out of places to drill but running out of cash to pay the drillers. More than 50% of Mexico's budget comes from oil exports and -13% is a huge drop for a country already in the red. Add to that the drop in price from $125 in Q3 of 2008 and the red ink really begins to flow.

Chart of HAWK

The high unemployment and low gasoline demand is crushing refiners. Valero said on Friday it was permanently closing the Delaware City refinery in New Jersey due to lack of demand. They had been attempting to sell the refinery but found no takers. The refinery had a 210,000 bpd capacity and had been operating a 40% of capacity just to keep the systems operating. The plant employed 550 and Valero will take a $1.8 billion charge. The plant was started in 1956 and specialized in heavy, high sulfur crude.

The DOE said consumption of gasoline fell -3.2% for 2008. Tony Haywood, CEO of BP said last week that the U.S. will never return to the peak gasoline demand of 2007 because of mandated higher efficiency engines and greater use of biofuels. Tony, I disagree simply because we add 150,000 new workers every month and add 20 million to the population every ten years. Efficiency will save some gasoline but adding nearly 2 million workers a year will also create additional demand. Valero also idled the 145,000 bpd Eagle Point refinery and closed indefinitely the 275,000 bpd refinery in Aruba.

Valero Chart

I wrote last week about the 400% rally in the Baltic Dry index since the December lows. The Baltic Dry index is how shippers calculate costs to move products by ship around the world. It is really an indicator of China's economy rather than the health of other countries. China ships in raw materials and ships out products all around the world. The spike in shipping rates is directly related to the demand for ships. However, and you knew there was a however, I heard a new wrinkle to the story on Friday. The rate is determined purely on supply and demand. Over the next 18-24 months the available ships will rise from about 400 to over 1000. These new ships are currently being built in shipyards around the world in response to the peak in shipping rates because of lack of supply in 2008.

The rate to charter a Capesize ship hit $234,000 per day in May 2008. That same rate declined to less than $40,000 in December and is now back over $81,000. That spike in rates caused a flood of orders for new ships and those ships will start delivering in mid-2010 through 2011. The Capesize ship is a specific size vessel and just an example here. At the beginning of 2009 there were only 35 new ships available with 170 on order. That on order total has risen to over 300 to date. How many will actually be delivered is uncertain given the drop in rates. The point to this story is this. The Baltic Index is an indicator of China's economic activity BUT I would love to have a way to short that indicator as we move into mid-2010. Depending on how many new ships will be delivered, roughly 800 of all sizes according to best estimates, the price to ship dry cargo is going to drop significantly. If you know of a vehicle to short the Baltic Dry Index please let me know. Until mid-2010 I still believe the shipping companies I mentioned last week should provide some long opportunities. Once those new ships begin to appear I would switch to shorting opportunities.

Baltic Dry Index Chart

I know about the ETF SEA, which tracks the Delta Global Shipping Index. That is not the same as the Baltic as you can tell by comparing the two charts. The Baltic reflects shipments in coal, iron ore, grains and feed while SEA also tracks liquid carriers like oil tankers. I am sure one way to short the Baltic would be to short the actual dry bulk carriers like DRYS, DSX and NM to name a few. They are flying high now but their time in the spotlight is going to expire.

ETF SEA Chart

SEA Components

Gold hit a new high this week at $1153 an ounce and it could go higher if the dollar does not rebound soon. Rob Lutts of Cabot Management said central banks are mulling further investment into gold reserves. He quoted Mexico, Russia and the Philippines as having bought gold recently as well as that 200 metric tonnes purchased by India. With currencies devaluing many countries are looking at gold as a reserve instead of the dollar. Lutts is predicting $1350 gold once the IMF announces the sale of the second half of their hoard. They sold half to India and they are taking bids on another 200 tonnes. The IMF said if no country bid for all they would sell it on the open market. That event could definitely depress prices temporarily while a single buyer would send prices soaring. Of course the falling dollar is still the key to keeping prices higher in the short term.

Gold Chart

Volume on Friday was again the worst since Oct-12th and it is probably not going to get any better next week. The week of Thanksgiving is typically one of the lowest volume weeks of the year. That means any market-moving event is likely to be exaggerated in the light volume. Despite the light volume and nearly flat markets on Friday the A/D line was negative with 3741 decliners to 2741 advancers. Friday was the third day of declines and the major indexes slipped back to initial support but that support did not break. Considering it was option expiration I view that as a positive sign.

The Dow was relatively well behaved thanks to gains by MRK, KO, MCD, JNJ, BA and PFE. That those stocks were positive should be a clue. Investors were looking for safe havens with low volatility in case of a future decline. Still, regardless of the reason the Dow managed to cling to initial support at 10300. That was solid resistance just a week ago and it took us four days to break above it. 10400 and the top of the uptrend channel proved to be too hard to crack but closing above 10300 gives us an easy shot at a second attempt at 10400 next week.

Thanksgiving week is normally bullish. Whether it is the onset of holiday cheer or simply investors taking time off from work are spending it in front of a PC shopping for stocks as well as holiday presents. Of course we are not normally resting on the top of a +60% rally from the years lows. How that might play out is unknown. There is also the risk that some positions might be sold to fund the holiday spending since the home equity ATM is out of cash.

If investors did decide to take profits the real support on the Dow would probably be in the Dow 10,000 range after a pause at 10200. I am not predicting a decline but simply pointing out that 10200 and 10000 are likely targets if one occurs. We are still at the mercy of the dollar rather than a liquid market. The three days of declines were mild and they came exactly where you would expect at overhead resistance. No harm, no foul, so far.

Dow Chart

I apologize in advance for the cluttered chart on the S&P. There are so many converging support and resistance points that it looks like a Rorschach inkblot test for chart readers. The S&P has pulled back below 1100 after failing to advance after three days above that level. The breakout essentially failed but without a decline below initial support. This is typical when a critical resistance area is breached the first time. There are always sellers waiting above any critical level. That is what produces the resistance. How the index reacts to that resistance is the key. In this case the spike to 1110 held for three days without failing and without a further advance. That suggests the buyers and sellers were evenly matched. The gap down on Thursday morning was dollar related and helped by the downgrade of the entire chip sector. In other words the stalemate was broken by external events.

The decline stopped abruptly at 1085-1090 and the battle for dominance began anew. Here the outcome was aided by the expiring options and the need for market makers to pin stocks to their max pain levels so the most options would expire worthless. Expiration Fridays are rarely high range days as the market makers defend their positions.

The key for the S&P for next week will be to defend support at 1085. A break of that support will suggest that buyers are tiring and we could see a larger retracement. We don't want this to happen because a decline into month end could be painful. This is normally a bullish period so I do not expect a further decline but that is just my opinion. There is a growing wave of bearish sentiment that could turn ugly if there is the slightest bit of confirmation in the form of a support break. One analyst said late Friday that a rising number of fund managers were parking money in short-term money funds in anticipation of a decline. I don't really have any way to confirm or refute that statement but it suggests some feel the market has run its course.

S&P Chart - 120 min

S&P-500 Chart - 30 min

The Nasdaq composite did not fail at any specific resistance level. It was bushwhacked by the chip downgrade and the Dell earnings disaster. Nasdaq 2200 is relative to the Mar, July and Sept 2008 levels but the real number for those resistance points was 2150. It kind of depends on how you split the hairs on the chart. I personally believe the failure on Thursday was the chip downgrade not some year old resistance.

The most crucial number on the chart today is 2140. If that support level breaks we could easily see the Nasdaq trade down sharply to possibly 2050. This is one of those times where earnings are over, economics are negative and the only thing really powering stocks higher is hope for the next six months. In times like that it is easy to lose sight of the future goal when the alligators are snapping at your heels. I am sure there are some fund managers out there whose bonuses are still at risk. They are probably getting pretty nervous. Hopefully Hewlett Packard's earnings and guidance on Monday will re-inflate the tech bubble.

Nasdaq Chart - 120 Min

Nasdaq Chart - Daily

As usual there is a fly in our soup. The fly in this case is still the Russell small cap index. This is the fourth quarter and small caps are supposed to be out performing. Instead they are under performing. I have written this a dozen times in the last several weeks but it is still true. This under performance is suggesting that fund managers are still afraid of the market. This is the canary in the coalmine and it is bearish.

However, all is not lost. The major indexes are not led by the Russell. The big cap generals are currently leading and the Russell troops are following. Unfortunately they are following so far back that the generals will not have any firepower if a battle develops. The troops are lagging because investors in small caps are scared to add to positions.

Russell 2000 Chart

I am cautiously bullish as long as the Russell remains above 580. If that level breaks I would head to the sidelines and wait. Further support exists at 560 and again at 550 but once the tide turns I would lean bearish under 580.

It is that time of year again and we are readying the End of Year Renewal Special. We have been through some tough times over the last year and not all of them were the market. The management company of the last three years folded and I regained total control of the Option Investor publications. We are still picking up the pieces but the worst is behind us.

Instead of producing the same old promotion for the year-end renewal I am reviewing reader interest in all the newsletter products plus the addition of some new publications. I am going to be sending out an individual survey for each of the newsletters we currently publish. I would appreciate your frank and honest responses on each survey. They are each specific to the individual newsletter so you may get several different ones. Each survey only has about 10 questions and should not take more than a couple minutes to complete. I will take your responses into account when I build the renewal package.

I also have a survey on Option Investor that I would like everyone to complete this weekend. It is very important that you answer honestly and promptly so we can make decisions about Option Investor and some new publications. The link is below. Please complete it over the next 48 hours. Thanks in advance for your cooperation.

Click Here to Take Survey

Jim Brown


Index Wrap

Hitting resistance

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

My chart of the week (one that I don't normally feature every week), that of the Dow 30 (INDU), suggests that the most recent INDU high forms the third point in a major weekly down trendline dating from INDU's late-2007 top. The fact that the Dow also has now retraced 50% of its Oct '07 to March '09 decline (from the 14000 area to around 6400) lends some further technical weight to why INDU might struggle around recent highs. The chart suggests that the last run up into mid-Sept also produced an overbought weekly RSI extreme, with subsequent highs not 'confirmed' by concomitant higher highs in the RSI indicator.

The sum of the foregoing chart considerations relating to INDU suggests technical 'reasons' why the market may struggle to make further advances from highs already reached. The Dow 30 big cap stocks have been leading the market higher recently (actually playing catch up to SPX and COMP leadership earlier) and when the current leader stumbles the other leading indexes will struggle. This is evidenced by the recent double top seen in the Nasdaq Composite (COMP).

Sure, the late-October COMP intraday peak was 2190 and this past Monday's high was 2205, but two tops within 15 points of each other in COMP is a potential double top. Apparent double tops are often overcome but they show at least areas of significant, even if temporary, resistance/selling pressure. Prior highs in the major indexes will likely be overcome at some point but further upside looks limited for awhile.

The S&P 500 (SPX) pierced ITS major down trendline some weeks back, but also is facing potential near resistance at its 50% retracement level around 1120; SPX's recent rally peak was in the 1114 area. The Nasdaq has now gone well above a 50% retracement of the '07-'09 bear market decline and could be headed next to test of implied fibonacci resistance in the 2250-2325 area; this from recent highs around 2200.

The long-term bull trend is intact from my perspective. However, corrective pullbacks along the way have also been part of the process and I'm assuming some further downside action lies ahead, or at least a choppy sideways trend over the coming 3-4 weeks. Currently I'm keying somewhat off the Dow for clues to market direction. Key INDU weekly trendline resistance comes in at the 10400 area in the coming holiday-shortened week. Pivotal near-term Dow support is 10200, the area of its prior (up) swing high, with next support suggested around 9920 as the current level of the 50-day moving average.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

There was a further run up in the S&P 500 (SPX) this past week consistent with the prior week's minor bull flag consolidation although the index follow through to the upside. No seen on the daily chart, resistance on the weekly chart implied by a major 50% retracement objective is at 1120 and SPX got close to that target before dipping back below 1100 support.

If a pullback here is like past corrective patterns, look for further downside. Near support is implied by the 50-day moving average, currently intersecting at 1070. Next support begins in the 1045 area, extending to the prior lows around 1030 which is also support at the low end of SPX's uptrend channel as highlighted on the chart.

A move above 1105-1110 is needed to suggest that the index could not only manage a Close above the 1113 prior intraday high, but could then push on higher, such as to the 1150 area.

A recent closing high (11/17, at 1110) took the SPX 13-day RSI to my suggested overbought zone; this area (of the RSI) has been a fairly reliable indicator reading that has preceded pullbacks such as for 60-70 points on the last two occasions. Since the July low, SPX has not been into oversold RSI territory.

SENTIMENT

Bullish sentiment has been declining on balance in the last 7 trading days as can be seen on my CPRATIO indicator above. This is a healthy trend for the bulls. Another price decline accompanied by a further drop in bullish sentiment or a buildup in bearishness, should bode well for another rally to come.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index after a recent rally petered out going into expiration has dropped back to support in the 509-510 area. My assessment is that there's a better chance of a further 15-20 point drop then there is for that much on the upside relative to Friday's 509 close.

Near resistance is assumed at the 517 recent high, with further resistance projected at 525-530.

Support is anticipated in the 595-596 area, which is both where an upside chart gap is 'filled in' but also the area of the 50-day moving average. Next lower support is likely at the prior low in the 480 area, extending to 475 at the low end of OEX's uptrend channel.

The OEX has had a consistent tendency in recent months for sell offs after reaching the highlighted 'overbought' zone, but for rallies to develop not on pulling back to an oversold RSI reading but from its suggested 'neutral' zone as seen below. It's common in strong uptrends for limited occasions of oversold extremes, similar to dominant downtrends only rarely having overbought readings.

DOW 30 (INDU) AVERAGE; DAILY CHART:

As anticipated the Dow 30 (INDU) Average got close to resistance implied by the top end of the highlighted uptrend channel followed by a pullback. As I wrote last week: "After any further surge higher I'd be looking to take profits in Dow Index (DJX) calls." Monday's strong rally qualified and the following day saw the Dow close a bit higher even.

INDU resistance is suggested at the prior recent intraday high at 10438. An interesting aspect of the way the Average is kept is that its intraday high doesn't always reflect an actual 'print' at that level but the level that the Dow would have reached given the highest highs reached by the 30 stocks comprising the Average at any given point in the day's trade or by day's end. Next higher resistance is suggested at the top end of INDU's uptrend channel, intersecting at the beginning of the coming week at 10535.

Initial near support lies in the 10200 area, or at what was prior 'resistance' at the cluster of prior INDU highs from 10/21-10/23. Next support is at 10100-10120, then in the 9922 area suggested by the level of the current 50-day moving average.

The Dow hit an overbought extreme according to the (13-day) Relative Strength Index or RSI on the highest daily close seen this past week; Tuesday, at 10437. You can easily see on the RSI indicator line the past overbought extremes leading to a subsequent correction. Sometimes the 'lag' time before that happens is a few days, but you can generally assume that a correction is coming, even if that 'correction' is more of a sideways to slightly lower trend rather than a sharp sell off.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP), as mentioned in my initial 'bottom line' comments above, has a bearish looking chart given the current formation of a double top. If resistance at 2200-2205 is pierced then the chart accordingly turns bullish again and a next upside objective could be to the 2250 area, even 2300-2325. Any recent bearish pattern still is seen in the context of COMP's uptrend price channel.

Support is suggested in the 2127 area, at the 50-day average, then down at the low end of the aforementioned channel that currently intersects at 2081 as noted on the chart. If COMP closed below the prior 2024 low for a couple of days running, a reversal of the intermediate up trend would be suggested.

As noted with the S&P, bullish trader sentiment has been falling recently and this bodes well for a next rally, especially on or after any drop in my CPRATIO bullish/bearish model to its 'oversold' (extreme bearishness) zone.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) index showed a bullish pattern when it achieved a decisive upside penetration of its prior high in the 1780 area. Subsequently, last week, it was not so bullish to see NDX drop back under its prior 1781 peak in that this action suggests a possible at least interim top.

Any recent near-term bearish price action has to be viewed in the context of the continued Nas 100 trade within a broad uptrend channel. Absent a fall below pivotal technical support at the NDX up trendline at 1700, maintaining a trend within the uptrend channel suggests potential to go higher still. Near support is noted at 1731 on the chart (at the 50-day average) and this also falls near important support at 1733, at the low end of the upside price gap that occurred in early November.

Key near resistance is at this past week's 1814 high, with a pivotal longer range resistance at the top end of NDX's broad uptrend channel (seen at the red down arrow) around 1900. Assuming resistance at this past week's 1814 high is overcome, an initial move could take NDX to the 1850 area.

I noted last week that: "Faltering upside momentum seen recently suggests that another pullback is underway, consistent with NDX price swings of recent months. This has been especially true after the index has hit overbought RSI extremes." Well, there was ONE more minor rally on Mon-Tues, followed by a correction. Some further downside is suggested although nothing major.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Always it seems we see QQQQ surges in daily trading volume on declines, especially ones that break some perceived technical support; e.g., a pullback below a prior top after it was substantially exceeded. This is consistent with the way that stocks trade, as buying often is piecemeal on the way up, but selling often tends to be a one-time dumping of most or all of what was previously accumulated over time.

The On Balance Volume (OBV) indicator has been sloping lower along with the recent decline so no bullish divergence is suggested. QQQQ looks headed lower from here, but I don't see huge downside: maybe to support around 42.6 or perhaps to 41.8.

Near resistance comes in at 43.8-44.0, then has to be assumed at the prior 44.6 high, but is then hard to measure technically until or unless there was an advance to the 46.17 area at the top of its trend channel. I get one projection of interim resistance (above 44.6 and below 46) that comes in around 45.3 currently.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has been the weakest of the major indexes which somewhat reflects its tendency to track the Nasdaq, but there seems to be more than this at work. The small to mid-cap stocks do best when there's a strong economy or the prospects of one. Lately, discouragement about how long a full-blown recovery may take to develop has set up.

A 625 double top looks cemented in place so to speak if the prior low at 553 is pierced. Absent that, 620-625 may simply be the top end of a trading range going forward, perhaps for some weeks. Pivotal near resistance comes in around 600 currently, with a next key resistance at 616-618.

Immediate near-term support is noted at 577, at the lower channel trendline, with the most pivotal support at the prior 553 low. Below 553 I'd estimate a next downside objective to maybe 536.

GOOD TRADING SUCCESS & A HAPPY THANKSGIVING!



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

Something For Everyone

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Norfolk Southern - NSC - close: 51.40 change: +0.48 stop: 49.75

Why We Like It:
Railroads got a lot of attention in early November thanks to Warren Buffett's bid to buy BNI. The rally has run out of steam for a lot of the railroad stocks but NSC is probably the most bullish of the bunch. Bears could argue that the stock produced a bearish reversal on November 12th but I would argue there hasn't been any follow through on that reversal lower. Shares should have support near $50.00.

I'm suggesting small bullish positions right here. I feel this is somewhat aggressive given the market's recent weakness. More conservative traders could wait for a little more upward momentum and look for a rise over $52.00 or even $53.00 before initiating positions. We'll use a relatively tight stop at $49.75.

Our first target to take profits is at $54.90. Our second target is $58.50. Our time frame is several weeks. FYI: The Point & Figure chart is bullish with a $65 target.

Suggested Options:
I'm suggesting the 2010 January call. My preference is the $55 strike.

BUY CALL JAN 55.00 JBC-AK open interest=6032 current ask $1.20

Annotated Chart:

Picked on  November 21 at $ 51.40 (small positions)
Change since picked:       + 0.00
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         


NEW DIRECTIONAL PUT PLAYS

Goldman Sachs - GS - close: 170.01 change: -2.82 stop: 176.05

Why We Like It:
Shares of GS have been under performing the market. The oversold bounce from its 100-dma back in early November has failed near $180. Now shares are back to testing support at the 100-dma. Bulls could make a case for buying the dip at support but I'd only do so with a very tight stop loss. I strongly suspect that GS will breakdown from here but shares can be volatile so I'm labeling this an aggressive, high-risk trade.

We'll use a trigger to buy puts at $168.75. If triggered first target is $155.50. More aggressive traders could aim for the $150 area or the 200-dma.

I want to remind readers that the big brokerage stocks used to rally sharply ahead of their earnings reports and then sell-off on the announcement. GS' earnings report is about three weeks away.

If you don't want to make a directional bet on GS then check out the strangle play I'm listing in tonight's newsletter.

Suggested Options:
I'm suggesting the December puts. My preference is the $165s.

BUY PUT DEC 165 GPY-XM open interest=5330 current ask $3.95

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 168.75
Change since picked:       + 0.00
Earnings Date            12/15/09 (unconfirmed)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


NEW MARKET NEUTRAL STRANGLE PLAYS

(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.)

Goldman Sachs - GS - close: 170.01 change: -2.82 stop: n/a

Why We Like It:
GS has pulled back toward significant support near $170.00 and its rising 100-dma. It's also an old trendline dating back to late 2008. This is a pivotal turning point for GS and the stock was nice enough to close near a strike price like $170.00.

Personally I suspect GS will breakdown (see tonight's new put play) but shares could move either direction and when they do move I'm expecting a pretty good surge. That's why I'm suggesting GS as a strangle candidate. We don't care what direction the stock goes as long as it moves big. Now it is worth noting that GS is due to report earnings in about three weeks. Traditionally the big brokerage stocks used to rally hard into their earnings report and then sell-off on the news.

Suggested Options:
I'm suggesting the December options. I would use the December $180 calls (GPY-LP) and the December $160 puts (GPY-XL). Our estimated cost is about $4.61. We want to sell if either option hits $9.00 or higher.

BUY CALL DEC 180 GPY-LP open interest=6786 current ask $2.19
-and-
BUY PUT DEC 160 GPY-XL open interest=5428 current ask $2.42

Annotated Chart:

Picked on  November 21 at $170.01
Change since picked:       + 0.00
Earnings Date            12/15/09 (unconfirmed)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


United Parcel Service - UPS - close: 57.51 change: +0.35 stop: n/a

Why We Like It:
UPS has been churning sideways for a week. Looking at a bigger picture the stock's consolidation has been narrowing. A breakout one direction or the other should be imminent. There is short-term support at $55.00 and short-term resistance at $60.00. The stock was kind enough to close right in the middle allowing for a great strangle set up. We don't care what direction UPS moves as long as it sees a decent run one way or the other.

Suggested Options:
I am suggesting the December options. I would use the December $60 calls (UPS-LL) and the December $55 puts (UPS-XK). Our estimated cost is $1.05. We want to sell if either option hits $3.00 or more.

BUY CALL DEC 60.00 UPS-LL open interest=14728 current ask $0.46
-and-
BUY PUT DEC 55.00 UPS-XK open interest=3330 current ask $0.59

Annotated Chart:

Picked on  November 21 at $ 57.51
Change since picked:       + 0.00
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009         



In Play Updates and Reviews

Updated Stops

by James Brown

Click here to email James Brown

We're updating our stops on three candidates and closing a couple of plays due to expiration.


CALL Play Updates

Arch Cap Group - ACGL - close: 69.31 change: -1.37 stop: 67.95

Traders were locking in profits ahead of the weekend and ACGL gave up 1.9%. The stock paused near its 30 and 40-dma around the $69 level. Volume was above average on the decline, which is worrisome. Given the S&P 500's recent weakness we could be seeing a potential bearish double top here in ACGL. Short-term I think the key is the rising 50-dma near $68.50. If ACGL breaks down under the 50-dma then momentum will have turned in favor of the bears. I'm not suggesting new bullish positions at this time. Our target is the $74.00 level.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on  November 07 at $ 68.81
Change since picked:       + 0.50
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         


Deere & Co - DE - close: 50.83 change: -0.06 stop: 47.40 *new*

DE is still showing some relative strength. The stock resisted any serious profit taking and traders bought the dip near $49.80 this morning. Holding the $50.00 level on a closing basis is bullish. While DE still looks strong here I would be cautious about opening new positions given the weakness in the broader market. We're going to inch up our stop loss to $47.40.

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:
I was suggesting the December calls but I would hesitate to launch new positions given the market's recent weakness.

Annotated Chart:

Picked on  November 18 at $ 50.52 *gap open higher   
Change since picked:       + 0.31
Earnings Date            11/25/09 (unconfirmed)
Average Daily Volume =        6.2 million  
Listed on  November 09, 2009         


Deckers Outdoor - DECK - close: 95.72 change: +0.23 stop: 96.95

Thursday's decline definitely did some damage to the current up trend but I'm not willing to give up on DECK just yet. We're still sitting on the sidelines so it doesn't hurt us to wait. The plan is to use a trigger at $100.75 to buy calls. If triggered our first target is $107.50.

Suggested Options:
If DECK hits our trigger we want to use the December calls. I'm suggesting the Dec. $105 strike.

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 100.75
Change since picked:       + 0.00
Earnings Date            02/25/10 (unconfirmed)
Average Daily Volume =        659 thousand
Listed on  November 16, 2009         


Gold ETF - GLD - close: 112.94 change: +0.64 stop: 106.75 *new*

Gold delivered a strong week in spite of a bounce in the U.S. dollar. The GLD hit new all-time highs and gained about 3% for the entire week. Gold futures actually hit new all-time highs near $1,150 an ounce. The commodity and this ETF are definitely short-term overbought and due for a correction but they can always get more overbought. I'm not suggesting new positions at this time. Please note our new stop loss at $106.75.

If you exited your November calls today you should have done well. The November $105 calls closed near $7.80. 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:       +10.66
                               /1st target hit @ 109.50 (+7.0%)
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


MSC Industrial Direct - MSM - close: 45.90 change: +0.10 stop: 44.49

Traders are buying the dip near $45.25. They did it on Thursday and Friday. The larger trend is up but I hesitate to launch new positions given the weakness in the S&P 500 index. Our first target is $49.75. Our second target is $52.50.

Suggested Options:
I was suggesting the December calls but I hesitate to launch new positions here.

Annotated Chart:

Picked on  November 17 at $ 46.62
Change since picked:       - 0.72
Earnings Date            01/07/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on  November 17, 2009         


Waters Corp - WAT - close: 59.04 change: -0.33 stop: 58.75

Shares of WAT, like most of the market, are now down four days in a row. The stock is nearing some short-term support but I'd focus on the 50-dma near $57.50 instead. I might consider buying calls on a bounce from the 50-dma but for now our only entry point is a trigger at $61.50 (a new high). If triggered our first target is $64.90. We'll cautiously set a secondary target at $67.45.

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

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         


PUT Play Updates

Green Mountain Coffee Roasters - GMCR - cls: 65.01 chg: -0.12 stop: 71.05

Friday delivered a very quiet session for a normally volatile GMCR. The stock was pinned to the $65.00 strike price for November expiration. Given last week's bearish breakdown I'm suggesting put options but readers may want to see a little more confirmation first. A new low under $63.30 could be used as a new entry point if you prefer to see more momentum. If options weren't so expensive you could try a strangle or a straddle since GMCR is sitting on the $65.00 level - this way you don't care what direction the stock goes.

Most of the clues are suggesting the next real move will be lower but this remains an aggressive, higher-risk trade. GMCR still has extremely high short interest. Our first target is $60.25. Our second target is $55.50.

Suggested Options:
I was suggesting the December puts. My preference was the Dec. $60s.

Annotated Chart:

Picked on  November 19 at $ 64.75
Change since picked:       + 0.26
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on  November 18, 2009         


iShares Biotech - IBB - close: 77.61 change: -0.25 stop: 80.05

The IBB turned in a volatile Friday morning. Shares gapped open lower at $77.18 and quickly rallied only to fail at the $78.00 level. I'm still bearish and would still open put positions right here. The biotech stocks can be a volatile group so I'm suggesting small positions. Our target is near the November lows at $73.50.

Suggested Options:
I'm suggesting the December puts. My preference is for the $75 strike.

Annotated Chart:

Picked on  November 19 at $ 77.18 /gap down entry point
                             /originally listed at $77.86
Change since picked:       + 0.43
Earnings Date            --/--/--
Average Daily Volume =        4.9 million  
Listed on  November 19, 2009         


Northern Trust - NTRS - close: 47.24 change: -0.43 stop: 50.26 *new*

NTRS set new eight-month lows on Friday. The next level of support looks like it could be the March lows around $45.80. I am adjusting our first target to take profits to $45.85. I'm also adjusting our stop loss down to $50.26. I'm not suggesting new positions at this time. Our second target is $41.00. The Point & Figure chart is bearish and its target has fallen from $39 down to $35 in just the last few days.

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

Annotated Chart:

Picked on  November 12 at $ 49.18
Change since picked:       - 1.94 
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on  November 12, 2009         


Research In Motion - RIMM - close: 59.72 change: +0.88 stop: 65.26

RIMM received another downgrade this week and yet shares managed to bounce on Friday. The stock rallied from the $58.00 level but struggled with round-number resistance at $60.00. This could just be an oversold bounce that happened to pin the stock near the $60.00 strike price for expiration. I'm still bearish on RIMM but if you're launching new positions now I'd tighten your stop loss.

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:
Previously I suggested the December puts with a preference for the $60 strike.

Annotated Chart:

Picked on  November 16 at $ 61.80
Change since picked:       - 2.08
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: 36.62 change: -0.23 stop: n/a

Stocks are still retreating from last Monday's highs and investors sentiment seems to be cracking. Traders are turning more cautious as they look toward year-end. This coming week could be volatile as volume will probably be light thanks to the Thanksgiving holiday. I'm not suggesting new positions.

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.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on  November 11 at $ 37.08
Change since picked:       - 0.46
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         


CLOSED BULLISH PLAYS

Canadian Nat. Res. - CNQ - close: 66.09 change: -0.93 stop: $64.95 *new*

Our original trade listed November calls so we had to close this play on Friday. The stock has pulled back toward short-term support near $65.00 but I'm not sure it will hold. CNQ should have stronger support near its rising 100-dma around $62.75.

Chart:

Picked on  November 09 at $ 67.74 *gap open higher entry
                          /original trigger was $66.05
Change since picked:       - 1.65 <-- exit early @ 66.09 (-2.4%)
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  November 07, 2009         


Chevron Corp. - CVX - close: 76.77 change: -0.57 stop: 76.75

Another day of strength for the dollar pushed oil lower and that prompted shares of CVX to gap down on Friday morning. Shares quickly hit our stop loss at $76.75 closing the play.

Chart:

Picked on  November 11 at $ 78.87 /gap higher entry point
Change since picked:       - 2.12 <-- stopped out @ 76.75 (-2.6%)
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =       10.6 million  
Listed on  November 10, 2009         


Parker Hannifin - PH - close: 53.98 change: -0.33 stop: 53.40

PH almost hit our stop loss on Friday morning. The stock gapped open lower at $53.41. That proved to be the low of the day. Our stop was $53.40. Our plan was to exit on Friday at the closing bell since our original trade suggested November calls. Even if we didn't have plans to exit I'd probably suggest an early exit now since PH has now closed under technical support at its 50-dma with Friday's decline.

Annotated Chart:

Picked on  November 03 at $ 55.25 (small positions)
Change since picked:       - 1.27 <-- exit @ 53.98 (-2.2%)
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009