Option Investor
Newsletter

Daily Newsletter, Saturday, 11/28/2009

Table of Contents

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

Market Wrap

Black Friday Market

by Jim Brown

Click here to email Jim Brown

The potential for a Dubai debt default roiled the global markets with fears there may be more financial monsters left under the bed.

Market Statistics

There were no economic reports on Friday but had there been you can bet they would have been ignored. The storm cloud spreading outward from Dubai was not a hurricane but it was definitely rocking the global boat. Basically the government of Dubai has an investment vehicle called Dubai World. Dubai World is run by Dubai's ruler, Sheikh Mohammed Bin Rashid Al-Maktoum. Dubai World had borrowed billions from more than 70 lenders around the world. Dubai World develops projects all over the world and recently the scope of their projects has moved from the ridiculously extravagant to obscenely extreme. Dubai World has $3.52 billion in bonds due on Dec-14th from it's Nakheel unit. Dubai World has more than $60 billion in debt and now it can't pay its bills. Since it is a quasi-governmental entity run by the country's ruler this reflects badly on the ability of the country of Dubai to pay its own bills. That $60 billion number is based on a filing in late 2008. Analysts said it could be as much as $90 billion today.

Dubai World is not bankrupt but they are asking for a six-month moratorium on paying their debts so they can restructure their finances. This is a totally reasonable step for almost any company but being owned by an oil rich nation causes enquiring minds to wonder how deep the distress goes in Dubai and whether this same virus has infected nearby oil producers in the middle east. Actually Dubai does not have any oil of its own but is surrounded by oil rich giants. Dubai tried to use this geographic opportunity to create a booming business and resort community as a hub for that oil rich region. Dubai is now the most populous city in the United Arab Emirates.

Some people believe this financial problem is specific to the Dubai World entity. Over the last decade the people running Dubai World have gone off the deep end in over spending on projects that are beyond belief. One reporter called Dubai, Vegas on steroids. For instance Nakheel Properties, a subsidiary of Dubai World, developed the man made islands Palm Jumeriah, Palm Deira and Palm Jebel Ali with plans to construct other island complexes called The World and The Universe. Construction on the 300-island World complex was halted in early 2009 and the developer committed suicide. The Palm Deira was planned to be eight times larger than the Palm Jumeriah but due financial problems the construction was reduced in size then halted. Rumors have been spreading for months that the Palm Jumeriah island is sinking back into the Persian Gulf.

Palm Jumeriah

Palm_Deira

Currently under construction and scheduled for completion in January is the 2,684 foot tall Burj Dubai skyscraper in Dubai. This is almost twice the height of the World Trade Center towers at 1365 feet. It has 160 floors compared to the prior 110-floor record for the WTC towers. Office space rents for $3,500-$4,000 per square foot. Maybe I should say "was" renting with the Dubai economy in a shambles they may not be renting any today. The budget for the project was $4.1 billion. As if this was not big enough there were plans to build the Nakheel Tower to be the world's next tallest building with a target height of 3,500 feet. Plans for the tower were suspended several months ago due to financing problems.

Burj Dubai

Another Dubai World (DW) project is the Las Vegas City Center currently under construction. DW is doing this in conjunction with MGM Mirage (MGM) to develop an 18 million sq ft project costing approximately $11 billion. DW provided joint venture funding for the project. The original estimate was $4 billion but design changes and cost overruns common to DW projects has pushed it higher. The center is expected to open for business in December and both DW and MGM have issued statements saying the current DW problem will have no impact on City Center because the project is already fully funded. The $11 billion project is just another example of how DW spending was out of control.

Las Vegas City Center

In 2007 90% of the population of Dubai was made up of foreign workers. However, with the Dubai economy in free fall due to the global recession and the 50% drop in oil prices the worker population is either fleeing or being fired. Over 1500 work visas are being canceled every day. When your visa is cancelled you must leave the country within 30 days. Many of these workers were promised years of work with a decade of development ahead. Most bought homes in hope of profiting from the economic boom.

With the boom now busted and 50,000 workers a month being kicked out of the country the economy is in ruins. 50,000 workers consume a lot stuff and generate a lot of economic activity. Remove that many per month over the last two years and there is not a lot of activity left. Real estate prices have crashed up to 50%. Luxury vehicles are being sold for half of their value 12 months ago. The workers leaving the country can't sell their property because they owe more than it is worth so it becomes abandoned.

Dubai still has a debtor's prison. If you can't pay your debts you go to prison until your relatives pay them for you. Earlier this year newspapers reported there were more than 3,000 cars abandoned at the Dubai Airport, left by debt ridden foreigners who were fleeing the country to avoid going to prison. Many cars had notes of apology along with maxed out credit cards left inside.

The Abu Dhabi Central Bank floated a $10 billion bond offering back in February to help the government of Dubai pay its debts. Abu Dhabi bought another $5 billion in Dubai debt this week. The Royal Bank of Scotland (RBS) was the biggest underwriter of loans to Dubai World with HSBC Holdings also having a large exposure. RBS arranged $2.3 billion in DW loans since 2007. HSBC has $17 billion in loans in the UAE that could be impacted by a default in the region. British banks in total have more than $49.5 billion in loans to the UAE.

Deutsche Bank said Dubai borrowed more than $80 billion in a four-year construction boom and that boom has gone bust. Commercial property values are down -50% from their 2008 peak. Over 1,000 projects have been halted and construction terminated. Anyone holding a loan on one of these projects is in serious trouble. Arnab Das, head of market research and strategy for Roubini Global Economics said, "Central banks around the world may have stabilized the financial system but you can't make all the excesses disappear and Dubai had a lot of excesses." Abu Dhabi Commercial Bank has a large exposure to Dubai World and that is not the first problem they have had in the region. Two Saudi Arabian families defaulted on loans earlier this year totaling more than $610 million. This DW problem is further confirmation that being in the middle of an oil empire does not guarantee financial success.

After laying out all the problems and players in this scenario I am going to tell you I don't think this is a real problem. The Arab Monetary Fund (AMF) based in Abu Dhabi, will meet over the weekend and I suspect they will work something out. Even if Dubai World imploded completely the total risk is more like $20 billion than $60-$90 billion. That is a lot of money but it is manageable. Dubai World is likely to get a serious tongue lashing from the AMF and have to agree to some serious restrictions but the AMF and Abu Dhabi will bail them out in some form. It is one big distantly related family of sorts and a problem with DW hurts everyone else in the region get development loans. I suspect we will have some news by Monday that puts the market at ease.

You may not realize that the news on Dubai World broke on Wednesday but nobody in the U.S. reacted to the news. It was only after Europe and Asia crashed on Thursday that U.S. investors started paying attention. Europe crashed because the majority of loans to Dubai World and the UAE in general came from European banks. Some of those banks were down more than 10% on Thursday. This rippled out to other overseas markets on Friday and the U.S. played catch up on Friday. I believe the U.S. decline on Friday was just a knee jerk reaction to the two days of European/Asian declines.

Next week is a big week for economics. There are four ISM reports with the national manufacturing index on Tuesday. The Fed Beige Book is on Wednesday with another economic view of the various Fed regions.

Friday is the big event with the Non-Farm Payroll report for November. The official consensus estimate is for an improvement to a loss of -145,000 jobs from -190,000 jobs in October. However, the whisper numbers are improving. Morgan Stanley is expecting an improvement to a loss of only -90,000 jobs and a +100,000 revision to October. That is extremely optimistic compared to the majority of analysts. However, we saw new Jobless Claims fall to only 466,000 last week. That is the lowest level since 2008. Unfortunately that headline number is after the seasonal adjustments. The actual behind the scenes number was 543,926 but who is counting. This chart shows that claims have been declining since March but appear to have accelerates lower over the last month.

Weekly Jobless Claims chart

Weekly Economic Calendar

Friday was not only Black Friday for retailers but Black Friday in the markets. The market was only open for half a day but it was ugly. The Dow dipped to -230 at the open but quickly rebounded into the -80 range before sinking again at the close. The opening was a knee jerk reaction to declines in Europe/Asia but the closing dip to -154 was a dose of caution settling in before the weekend.

Investors were seeing the dollar spike higher, gold and crude implode and equity markets extremely erratic. Cautious traders moved to cash to wait for the smoke to clear. I wish the markets had closed lower because I believe this is a buying opportunity.

Gold prices fell from $1195 on Wednesday night to $1130 on Friday morning. This was due to a monster short squeeze in the dollar after a flight to quality started it moving higher. You would have thought gold would be a hedge against negative news but the dollar rebound was too strong.

The Dollar index dipped to a 15-month low at 74.17 and a 14-year low against the Euro. This is when gold hit $1195. When the dollar began to rebound almost vertically to almost 75.60 the gold/dollar hedges evaporated. Most equity traders don't realize that a full 1.50-point move in the Dollar Index is almost unheard of for one day.

If you are shorting dollars you are dealing in pips not points. In the EURUSD currency pair a pip is .0001 and it is worth $1 to the trader. A move in the dollar index is not exactly correlated to the EURUSD because it is a basket of currencies but works in this illustration. The dollar index moved from 74.170 to 75.575. In a currency trade that would be roughly the equivalent of $10 for every .001 point move. That move was 1,405 x $10 or $14,050 per contract. (I am just using the dollar index as an illustration because everyone can get this chart on their home PC without a currency futures subscription.) If you were long/short 5-10 contracts you made a lot of money or lost a lot of money if you did not stop out.

If you were a money manager in some sort of hedge trade where you were short the dollar and long gold you would probably not be playing with just 5-10 contracts but 500-1000 or even a much bigger number. This was a monumental move and when paired with gold futures the contraction in position value was huge. You had a $65 drop in gold prices equal to a $6,500 move per full size gold futures contract. If you were short the dollar and long gold it was a rough 24 hours. I really suspect the monster moves were more short covering than anything else.

Dollar Index Chart

Gold Chart

Crude oil was almost an identical chart to gold with a huge drop from $79.92 on the 23rd to $72.39 on Friday. The Friday intraday spike was almost entirely from the dollar rebound. Those playing the oil hedge rather than the gold hedges were equally surprised. Obviously there was no change in the fundamentals of oil overnight. It was purely a currency related move. That drop to $72.39 would have been a great dip to buy. I have been worried over putting on any long trades on oil stocks over the last few weeks because of the repeated tests of support at $76. The speed with which crude recovered from the dip has put me at ease. This would have been the prime opportunity to settle at a lower level but buyers rushed into to dip.

Crude Oil Chart

Other than the Dubai news and the moves on currencies and commodities there was very little news in Friday's shortened market session. Reports from the retail sector claim there were bigger crowds swarming stores on Black Friday than in 2008. In our local Toys-R-Us the checkout line was three-hours long. In the local Super Wal-Mart customers had been sitting on the floor next to the roped off sections for most of Thursday to be there when the specials started on Friday.

Interviews with Best Buy managers around the country said crowds were larger than last year because products were priced cheaper. Managers said they hoped sales held for the next three weeks so they could go into the holidays with empty shelves rather than lots of excess inventory. Hewlett Packard netbook computers for $199 appeared to be the hottest sellers along with big screen TVs.

All the online retailers are gearing up for cyber Monday. That is where all the shoppers this weekend made note of items they wanted to buy and will go shop online from work on Monday. I cruised some websites Friday and several were barely limping along. It took 30-45 seconds for some Micro-Center pages to load with the current bargain specials. NewEgg.com, my favorite electronics seller, actually had some pages fail to load due to "server too busy" and others were very slow. Amazon pages loaded quickly in 5-10 seconds but Ebay pages became increasingly slow as Friday night arrived. All those service delays tell me that business is going to be much better than most analysts had expected. That assumes of course that it wasn't just people looking for Black Friday specials online.

I am actually cautiously bullish for Monday but we do need to realize that the Dubai event is not over. Dubai reminds us that there are still problems in the world and that could prompt money managers to take profits. The markets were making new highs last week and Dubai was a spot on a map. By next Friday it could be just a spot on the map again but there is always the possibility of a domino effect. The beginning of the subprime crisis started small. Finance companies that most people had never heard of began to experience higher loan losses. Small flags were raised but nobody expected the eventual crisis as the falling dominoes got progressively bigger.

Do you remember the Thai Baht crisis in 1997 that led to the Asian Contagion and came close to a global financial meltdown? Who knew the Thai Baht currency could cause a global meltdown? Thailand decided to float the baht and cut its peg to the dollar. Ho-hum you say? The currency imploded and Thailand exhausted its reserves trying to support it. When they finally ran out of reserves they devalued the currency and the impact cratered economies all over Asia. People forget that Thailand was already deep in debt because of real estate problems before they devalued the baht. The real estate domino was the first to fall and nobody outside Thailand heard it. Asian markets crumbled, Asian currencies plummeted in value and it took years for the problems to go away. The IMF had to bailout Thailand with a $20 billion program, part of $40 billion in total, in an effort to stave off a global meltdown. It was not until 1999 that Asian economies began to recover.

Just like the Thai Baht was the first domino to fall in the forest there is always the possibility that some event will appear suddenly today that exposes another new wave of problems that threatens to tank the financial system. Is it the Dubai default? I doubt it but I would have said the same thing back in 1997 about the Baht. My initial comment would have been "What is a Baht and why do I care?"

I think the wiser brother, Abu Dhabi, will bail out the wayward sibling just like they have many times in the past despite some comments to the contrary on Friday. Dubai has actually been an embarrassment to the rest of the UAE community with its obscene excesses. Dubai captured the world's attention as the wild child. Now they are back to the family begging for another bailout. I think it will happen but I expect some strong words and restrictions. However it happens it should put the markets to rest. Unfortunately it may take a few days for the fear to go away.

As for the major indexes the Dow came to rest right on decent support at 10,300. The news reports of crowded stores and better than expected sales should help smooth tensions. I would love to see the Dow begin to move higher from the 10,300 level but I would not be unhappy to see a further decline to 10,200 and a rebound from there. That would allow some further clearing of positions and give new buyers a better confidence to enter the market. Dow 10,200 is also stronger support.

Dow Chart

However, the S&P is giving me some cause for concern. The S&P declined to support at 1085 and then rebounded very slightly to close at 1091. The S&P has been struggling to move over 1100-1110 and hold the gains. 1110 has been rock solid resistance and I was hoping the historically bullish Black Friday session would make that low volume break over 1110 and give us a head start for month end next week.

S&P 1085 is going to be a critical level. Any further weakness next week has got to hold that 1085 level or we could be in for some falling dominoes of our own. There is still a lot of profit at risk from the March rebound and money managers on a calendar year end may decide that taking profits now in the face of global uncertainty is a wise, bonus saving, move. Let's hope that does not happen.

S&P-500 Chart

The Nasdaq is also giving me a cause for concern. The velocity of the 2009 rebound has slowed and resistance at 2200 was rock solid and prevented a return to even the midline of the uptrend channel. The Nasdaq has been trending down for the last seven days and although it closed back in the channel and slightly above the 50-day average it still appears in danger. The dip to 2113 and a three-week low was scary. A further weakening would target a return to support at 2035. Unfortunately I believe a decline to that level would not stop there.

I want to believe in the Nasdaq and on the strength of the big cap techs to power higher but I am not feeling the love here. When coupled with the weakness in the Russell it makes me question whether there is an upside possibility. Let's hope this overall weakness is temporary and news of holiday buying revives the chipmakers and stocks like MSFT, APPL, AMZN, EBAY and RIMM. A strong report about Hewlett Packard computer sales would not hurt either.

Nasdaq Chart

The Russell 2000 chart is ugly. The Russell closed on exactly the low of the day and exactly on support. The Russell lost the most of any major index at -2.52% and closed on the lowest tick of the day. This is not a bullish event. I would love to see a miracle on Monday and something pull the markets higher but the Russell is telling us there may be further weakness ahead. It may not be next week but baring a miraculous recovery in the markets I think the Russell is the leading edge of the next decline. There are of course 1001 things that could reverse it and I would be thrilled. I think we should watch the Russell next week as our coalmine canary and a signal to exit quickly if the canary drops dead.

Russell 2000 Chart

Despite the big moves in the markets the volume on Friday was only 4.5 billon shares across all exchanges. This was the LOWEST daily volume in over a year. It does not invalidate the big losses but it does make you wonder if we will see a big move on Monday as traders come back to work.

Monday is month end and typically the last day and the first two days of a month are slightly bullish. Hopefully there will be some good news out of Dubai and that weight will be off our shoulders. I told you earlier that I was cautiously bullish about Monday given the knee jerk action in low volume on Friday and higher expected month end volume next week. The Nasdaq and Russell will have to hold their ground for any positive sentiment to be effective.

I feel like the market is that repeat delinquent and the principal has given him one more chance to improve his grades or be kicked out of school. Next week will be that one more chance for the markets. If the market can escape the week without flunking the Nasdaq and Russell classes then maybe there is hope. A break under 575 on the Russell would be a failing grade. The Nasdaq has a little more room with a break under 2100 a serious infraction. I want to be cautiously bullish but only above those levels.


Option Investor is twelve years old this weekend. It is also the tenth anniversary of our Year End Renewal Special. We launched the first newsletter on the Sunday after Thanksgiving 1997 and the first EOY special on the Sunday after Thanksgiving in 1999. That calls for a double celebration this Sunday! Are we going to break out the party hats and crack open the champagne? Nope! Not at Option Investor. Feel free to do it on our behalf but our idea of a celebration is closing a winning position.

We are going to celebrate by announcing the Tenth End of Year Renewal special but you saw that coming. So I don't bore you with repetition you need to go here to see the details. I don't know about you but 2009 was so much fun I know you can't wait to see what the markets bring in 2010.
Click here for the 2009 Renewal Special Details

Happy Birthday!

Jim Brown


Index Wrap

Backing Off From Resistance

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

As I discussed last week, once the S&P and Dow hit some key technical resistance areas, it was highly likely that the market would at least begin a correction. It (a correction) was 'due' to speak and I thought a pullback was likely once the Dow 30 (INDU) got to the upper end of its well-defined uptrend channel. Judging by INDU, the prior four pullbacks since August have had pullbacks of 321, 368, 487 and 441 Dow points as measured from peak to trough. The average correction has been 404 Dow points.

Does the same pattern hold here, as measured from the recent intraday high in the 10500 area? Nothing says the same pattern will repeat but patterns do tend to repeat. Otherwise, technical analysis wouldn't 'work' and I'd be a lot poorer too!

As I pointed out in my Wednesday (11/25) Trader's Corner article titled Probabilities, there were some other long-term weekly chart considerations that suggested at least a pause here if not the start of a pullback. Namely that INDU and the S&P 500 (SPX) were at resistance trendlines that they hadn't yet overcome. Moreover, both these indexes, which have been leading the market lately, playing 'catch up' to the Nasdaq, were in an area of resistance implied by a 50% retracement of the 2007-2009 bear market decline.

CHART OF THE WEEK:

I've kept the same explanations as in the aforementioned 'Trader's Corner' piece as to which variety or type of trendline I'm considering with the Dow weekly chart here. The breakout above the internal 'best-fit' trendline that occurred 3 weeks back showed strong upward momentum. However, the longer the market stayed quite overbought and had retraced 50% of the prior big decline and a 'natural resistance', then hit its 'conventional' (external) down trendline, a sell off simply had a high probability of occurring.

I know it always seems that corrections are 'caused' by some bearish news, but I see it as more that bearish news hits at the 'right' time; i.e., when the market is vulnerable to its influence. This seems to be part of the cyclical nature of market trends. My take on this all changed when the legendary institutional technical analyst George Lindsay appeared on Wall Street Week in early-1982 and predicted the start of a monster bull market beginning in August of that year. His work with market cycles predicted it would happen and the 'reasons' fell into line for WHY it happened.

An interesting story it was, among many re George Lindsey and I relate it in my (Essential Technical Analysis) book. By the way, since I'll never get a further future royalty on my book (since my advance to write it was so substantial), I can say without financial interest that you can get my book now for the Amazon Kindle reader.

But I digress via my story telling and summing up I'd say that the market will correct some more to the downside in the next week or two, although I'd look for an immediate bounce back from the Dubai news early in the week. By the way, I was once offered a job to manage some of the Abu Dhabi investment money but that is a different Emirate and another story. Time to move on!

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

After forming a line of resistance in the 1113 area and quite near the 1120 upside objective I've had for a while, the S&P 500 (SPX) 'gapped' lower on the opening after the Dubai story broke overnight. This action suggests a possible at least interim top. A correction here would relieve or throw off the overbought condition seen with SPX as measured by the RSI indicator on a 13-day basis. The weekly RSI had also gotten to an overbought extreme as can be seen with the INDU weekly chart above.

I anticipate some lower lows than seen already with Friday's sharp one-day sell off, which of course occurred with many market participants away from the market. Even thought participants will conclude that the Dubai news won't affect the U.S. financial sector all that much, it still points out the fragility of the global economy as real estate troubles are still out there in a major way.

Near support, as suggested by the 50-day moving average, is at 1073 currently, with a lower pivotal support down in the 1045-1050 area. Its possible that the Index might retest its prior recent low in the 1029-1034 area again, which is also support implied by the low end of SPX's uptrend channel currently but I tend to think that a next downswing low wouldn't get that far.

Nearby overhead resistance begins at 1105 and extends to 1113. Major resistance should begin in the 1150-1160 area.

SENTIMENT

Bullish sentiment, as measured by my equities call to put daily volume ratio seen above, is still quite pronounced, especially given how the major market indexes were struggling to overcome recent highs, not that these kind of 'technical' factors much influence options traders. Traders and investors are more known for their herd mentality than anything else and which is why the CPRATIO 'works' as a reliable contrary indicator.

I anticipate some lowered bullish expectations or a drop in at least one of my daily indicator readings before this market is ready to rip again. This is not to say that I expect my sentiment indicator to dip as low as where I define a fully 'oversold' condition in terms of bearishness.

S&P 100 (OEX) INDEX; DAILY CHART

As I noted last week: "My assessment (of the S&P 100 OEX Index) 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." Friday's drop took the OEX down to the 505 area, before a minor bounce occurred, so there was a bit more upside than downside last week relative to the prior week's close (at 509). Where to now? I think we'll see lower levels before corrective action runs its course. I'd also look for a rebound on Monday-Tuesday, but doubt that OEX swings into a new up leg and takes out the recent high.

Near resistance is at 514 to 518, then up around 530, resistance implied by the top end of the index's uptrend channel.

Support is anticipated in the area of the 50-day moving average, currently intersecting around 498; call support more precisely as 496-498. Next lower support begins around 485, extending to the 480 area.

Again, I'd note the tendency for rallies to begin after the S&P indexes get to a 'neutral' mid-range reading, rather than to an oversold extreme. This 'neutral zone' is highlighted on the OEX daily chart.

DOW 30 (INDU) AVERAGE; DAILY CHART:

As I'd been thinking would happen, the Dow 30 (INDU) Average finally got TO, not just near, resistance implied by the top end of its uptrend channel before Friday's sell off hit. I'd been writing previously that at or near this upper channel would be a place to take profits in Dow Index (DJX) calls. If it pertains to you, I hope that was on your Thanksgiving list to do BEFORE the holiday!

INDU of course recovered from its intraday lows at the end of light trade on Friday and is likely to rally further from this recent low coming up early in the week ahead. However, I also doubt that the Average will be able to rebound back above resistance at 10375 to 10450, at least not yet on a closing basis. Next resistance has to be assumed to lie in the 10495-10500 area, then up around 10600 next.

Initial near support I've again pegged on my Dow daily chart below as 10200, with a next pivotal support coming in around 10000-9975. Major support should be found beginning at the prior 9679 downswing low.

The last closing high in the Dow was not 'confirmed' by a similar new high in the RSI indicator. These price/RSI divergences are often telling relative to an upcoming correction. This kind of bearish divergence doesn't help pin down exactly WHEN a downturn will or could hit but does alert traders to a time frame where banking on still more upside is iffy. As most traders can attest, it's a more profitable outcome when exiting bullish options positions before a correction gets underway. That said, it's easy to say not always so easy to do!

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has had a bearish-looking chart since forming an approximate double top in the 2190-2205 area. When Nasdaq is lagging, the S&P is not going to just keep chugging higher and vice versa. I noted last week that only if resistance at 2200-2205 was pierced, especially on a Closing basis, would I have gauged the chart as turning near-term bullish again which never happened of course.

COMP did have a good recovery move on Friday off its 2114 low and managed to close back above its 50-day moving average at 2131. Of course the Composite is not 'burdened' with all the financial stocks of the S&P. COMP could yet dip to support in the 2100 area, but probably not before the index rebounds further early in the coming week. I see some potential for the Index to 'fill in' the Wed-Thurs downside price gap by trading to at least 2170.

I also see a fairly significant resistance overhang beginning at 2180-2190. A close above 2200 that was maintained the next day would put COMP back on a bullish track in terms of the chart. Absent that, there's potential for further downside. Support levels are anticipated around 2100 as already noted, then in the area of the prior 2024 low. I doubt that COMP would re-test this low but it is the key level in terms of maintaining an UP trend.

In terms of my bullish/bearish sentiment indicator, as noted with the S&P I'd tend toward a more bullish outlook if traders had 1-2 days ahead of a sizable pick up in put volume.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) index chart indicates an ongoing short term correction, same as the Composite, but also still within a longer term up trend. On a near-term basis, once NDX dropped back under its prior top at 1781, the chart pattern suggested further downside potential. Not being able to maintain prices above a prior top once it was exceeded, suggests a possible interim top.

Absent a fall below technical support at the NDX lower up trendline, now intersecting around 1722, the index still maintains an overall bullish trend. A downside penetration of the prior 1652 (down) swing low would turn the intermediate trend DOWN however. Not what I expect but that's what the chart would suggest if this was an outcome.

What happens if there's a drop to the 50-day moving average is noteworthy, with just slightly lower technical support at the lower up trendline as noted. Pivotal resistance is in the 1814 area, at its prior intraday high. A move above or below these key levels would suggest potential follow through in the same direction. Most important in maintaining a bullish technical pattern is that the prior 1652 low is not pierced, especially on a closing basis.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

A very low volume sell off in the Nas 100 QQQQ tracking stock, followed by an intraday recovery off the low makes Friday's break less dire for the bulls. The On Balance Volume (OBV) indicator also hasn't headed down in a decisive way. The chart is bullish still although the best outcome for that picture is that the Q's stay within its uptrend channel.

Near resistance begins at 44-44.1, with even more pivotal resistance apparent at the prior recent high at 44.6.

Near support is at 42.9-43.0, with lower support suggested by the low end of the QQQQ uptrend channel, currently intersecting around 42.2. Major support begins at the prior 40.6 low.

It's possible that the lows for this recent sideways to lower correction have been seen. Even if true, prices may chop around in a mostly sideways direction for the next few trading days.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) for some weeks now has shown the more bearish technical action of the major indexes. I'd note again that small to mid-cap stocks seem to do best when there's a strong economy or the prospects of one. Discouragement about how long a full-blown recovery may take to develop is a drag on RUT.

A close at its Friday 577 low maintained a bearish chart pattern. If there was a recovery move early in the week ahead, RUT's recent low would establish 3 points in a still bullish long-term up trendline. A maybe big IF, but stay tuned!

Below 577, potential support next lies at the prior 553 low. Key resistance is at the prior recent high at 605. RUT has an exact double top in place at 625 which would tend to be 'confirmed' as a key top (and reversal of the dominant trend to down) if the 553 low was pierced on a closing basis.

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

Metal Fabrication & Business Services

by James Brown

Click here to email James Brown

Editor's Note:

Traders shouldn't make any big bets based on Friday's market movement. Let's wait and see how stocks react on Monday when fund managers get back from their Thanksgiving holiday.

A few stocks that could be bullish candidates: AZO, DE, GR.

A few stocks that could be bearish candidates: JPM, RYAAY, CMG



NEW DIRECTIONAL CALL PLAYS

Precision Castparts - PCP - close: 105.27 change: -1.93 stop: 103.49

Why We Like It:
PCP was hitting new 2009 highs a few days ago. The profit taking on Friday wasn't that bad with shares bouncing near prior resistance. If this market can rebound from current levels I suspect PCP will quickly return to making new highs again. The Point & Figure chart is bullish with a $131 target.

I am suggesting a trigger to buy calls at $107.35. If triggered our first target to take profits is at $112.45. Our second target is $118.75.

Suggested Options:
I'm suggesting the 2010 January calls. My preference is the $110 strike. The new symbology for the 2010 January $110 call is: PCP1016A110

BUY CALL JAN 110 PCP-AB open interest=513  current ask $2.75

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 107.35
Change since picked:       + 0.00
Earnings Date            01/20/10 (unconfirmed)
Average Daily Volume =        817 thousand 
Listed on  November 28, 2009         


NEW DIRECTIONAL PUT PLAYS

FISERV Inc. - FISV - close: 46.29 change: -1.01 stop: 48.55

Why We Like It:
Shares of FISV spent more than three months failing to breakout over resistance at the $50.00 level. Now the stock is making lower highs and lower lows. There is potential support near $45.00 but I don't think it will hold. I'm suggesting bearish positions now. More patient traders could wait for a failed rally in the $47.50-48.00 zone. I would expect a bounce on the first touch at the $45 level. The P&F chart is bearish with a $41 target. I'm listing our exit target at $42.25. More aggressive traders could aim for the $40 level.

Suggested Options:
I'm suggesting the January puts. My preference is the $45 strike. The new symbology for the January $45 put is: FQV1016M45

BUY PUT JAN 45.00 FQV-MI open interest=983  current ask $1.20

Annotated Chart:

Picked on  November 28 at $ 46.29
Change since picked:       + 0.00
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        1.4 million  
Listed on  November 28, 2009         



In Play Updates and Reviews

Not That Bad

by James Brown

Click here to email James Brown

Editor's Note:

Friday's market turned out to be a volatile one as investors reacted to the Dubai World default news. Foreign markets took the brunt of the selling but the intraday bounce in the S&P 500 rolled over in the last few minutes of Friday's holiday-shortened session. It's hard to draw any firm conclusions with so many investors, big and small, at home for the Thanksgiving holiday. The real impact won't be seen until Monday and analysts will have had the weekend to consider the impact the Dubai news will really have on the market.

I suggest traders stay cautious and reserve some capital. It could take a few days before we really see which direction the market wants to go. Although at the moment I would focus on support near 1080 and resistance near 1110 on the S&P 500. A breakout either way will probably set the new direction for stocks.


CALL Play Updates

Capella Education - CPLA - close: 71.05 change: -0.98 stop: 69.49

CPLA held up reasonably well on Friday. The stock gapped open lower at $70.57. The intraday bounce had trouble with the $72.00 level so I hesitate to open new positions at this time. Nimble traders could try buying calls on another bounce near the $70.00 level, which should be bolstered by the rising 50-dma. More conservative traders may want to wait for more signs of strength first (like a move over $73.50 or even the $75.00 level, which is overhead resistance.

We suggested small positions. If CPLA does breakout over $75.00 we can choose to add to our positions. I do consider this an aggressive, higher-risk trade. Currently the Point & Figure chart is bullish with an $85 target. I'm setting our first target at $79.50.

Suggested Options:
I'm not suggesting new positions at this time. If CPLA does offer a new entry point I'd use the December or January calls.

Annotated Chart:

Picked on  November 24 at $ 72.55
Change since picked:       - 1.50
Earnings Date            02/11/10 (unconfirmed)
Average Daily Volume =        126 thousand 
Listed on  November 24, 2009         


Gold ETF - GLD - close: 115.06 change: -1.56 stop: 109.49

Friday's session could have been a lot worse for gold investors. When the Dubai news hit the wires investors were in a "sell first, ask questions later" kind of mood. Gold futures plunged $50 overnight but by the end of trading on Friday gold had trimmed its losses to less than $10. Shares of the GLD gold ETF gapped open lower but traders bought the dip at its rising 10-dma. This looks like a sign of strength but the GLD remains very overbought and due for a correction. I am repeating my comments from earlier that more conservative traders will want to seriously consider an early exit right now to lock in a gain.

Last week I lowered our final exit target to $118.50. I am not suggesting new positions at this time.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on   October 06 at $102.28
Change since picked:       +12.78
                               /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: 46.21 change: -1.01 stop: 44.49

MSM is another stock that held up reasonably well. Shares gapped open lower but found some short-term support near $45.75-46.00. If the market continues to slip look for MSM to dip toward $45.00 and its 50-dma. We can use a bounce near $45.00 as a new bullish entry point but I would hesitate to open positions if the S&P 500 breaks down under 1080. Our first target is $49.75. Our second target is $52.50.

Suggested Options:
If MSM provides a new entry point I'd use the December calls ($45 or $50 strikes).

Annotated Chart:

Picked on  November 17 at $ 46.62
Change since picked:       - 0.41
Earnings Date            01/07/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on  November 17, 2009         


Norfolk Southern - NSC - close: 51.19 change: -0.65 stop: 49.75

Profit taking in NSC was pretty mild on Friday. Traders bought the dip near round-number, psychological support at the $50.00 level. More aggressive traders could buy calls on this intraday bounce but I'd prefer to see a new relative high considering the market's weakness.

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:
Wait for a new entry point. I'm suggesting the January calls.

Annotated Chart:

Picked on  November 21 at $ 51.84 (small positions)/gap higher entry
Change since picked:       - 0.65
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         


Vertex Pharma - VRTX - close: 39.00 change: -0.38 stop: 38.49

Traders bought the dip in VRTX near recent support. Selling pressure was kind of mild but I'm sticking to the plan. We want to see a move over resistance near $40.00. I'm suggesting a trigger to buy calls at $40.25. We'll use a stop under last week's low. Our target to exit is at $44.25. My time frame is several weeks.

Suggested Options:
If VRTX hits our entry point I'm suggesting the January calls. My preference is the $40 strike.

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 40.25
Change since picked:       + 0.00
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on  November 23, 2009         


PUT Play Updates

Green Mountain Coffee Roasters - GMCR - cls: 62.95 chg: -0.41 stop: 71.05

We should remain very cautious on GMCR. Friday was an opportunity to really sell GMCR and shares didn't move that much. The stock slipped to $61.85 on Friday morning but trimmed its losses by the closing bell. I'd feel more confident with bearish positions if the S&P 500 broke down under the 1080 level.

GMCR is a dangerous stock to be bearish on. GMCR has extremely high short interest. Our first target is $60.25. Our second target is $55.50.

Suggested Options:
I hesitate to launch new positions at this time.

Annotated Chart:

Picked on  November 19 at $ 64.75
Change since picked:       - 1.80
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on  November 18, 2009         


Goldman Sachs - GS - close: 164.16 change: -4.76 stop: 176.05

Financial stocks were some of the worst performers on Friday as investors worried about who had exposure to Dubai World's debt. Shares of GS gapped open lower at $164.27 and eventually closed with a 2.8% decline. There are a few things I would expect from shares of GS. The stock will probably try and fill the gap with a bounce toward $169-170. The $160 level could be round-number support. Plus the exponential 200-dma near $155 could be technical support. Look for that bounce near $170 to roll over and use it as a new entry point to buy puts. Our first target is $155.50. More aggressive traders could aim for the $150 area or the simple 200-dma.

Suggested Options:
If GS provides a new entry point I'd use the December puts.

Annotated Chart:

Picked on  November 25 at $168.75
Change since picked:       - 4.59
Earnings Date            12/15/09 (unconfirmed, could be in January)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


iShares Biotech - IBB - close: 78.35 change: -0.76 stop: 80.05

I am still very tempted to exit early from our IBB play but so far the stock is honoring the trendline of lower highs. The intraday bounce on Friday was pretty sharp and the ETF performed better than the major averages. I am not suggesting new bearish positions at this time. We may want to consider switching directions and buying calls if the IBB can close over resistance at $80.00.

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:
No new positions at this time.

Annotated Chart:

Picked on  November 19 at $ 77.18 /gap down entry point
                             /originally listed at $77.86
Change since picked:       + 1.17
Earnings Date            --/--/--
Average Daily Volume =        4.9 million  
Listed on  November 19, 2009         


Northern Trust - NTRS - close: 47.69 change: -0.52 stop: 50.26

NTRS hit new multi-month lows on the gap down this morning but like everything else shares bounced intraday. I'm not suggesting new positions at this time. Our first target is $45.85. 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:
No new positions at this time.

Annotated Chart:

Picked on  November 12 at $ 49.18
Change since picked:       - 1.49 
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on  November 12, 2009         


Research In Motion - RIMM - close: 58.14 change: -1.62 stop: 62.75 *new*

RIMM sank to new three-week lows on Friday. The path of least resistance appears to be down but shares are nearing possible support (see chart). I remain cautious on RIMM. I'm not suggesting new positions at this time. Please note our new stop loss at $62.75. 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:
No new positions at this time.

Annotated Chart:

Picked on  November 16 at $ 61.80
Change since picked:       - 3.66
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.)

Goldman Sachs - GS - close: 164.16 change: -4.76 stop: n/a

It looks like the new direction for GS has been decided and it's down. I am no longer suggesting new strangle positions on the stock.

The options suggested were 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.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on  November 21 at $171.67 /gap open entry
Change since picked:       - 7.51
Earnings Date            12/15/09 (unconfirmed, could be January)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


Ultra(Long)-S&P500 - SSO - close: 36.66 change: -1.21 stop: n/a

The S&P 500 and the SSO hit short-term support Friday morning and bounced. The real test will be Monday when fund managers come back to work. Do they buy the dip or sell it? I'm not suggesting new strangle positions at this time.

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:       - 0.42
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         


United Parcel Service - UPS - close: 57.43 change: -0.77 stop: n/a

UPS is still stuck in its trading range. I see the close near $57.50 as an entry point to open new strangle positions. Shares are bound to breakout sooner rather than later. I'd limit new positions to the $58.00-56.00 zone.

The options suggested for this trade were 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.

Suggested Options:
See above.

Annotated Chart:

Picked on  November 21 at $ 57.99 /gap open entry
Change since picked:       - 0.56
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009         


CLOSED BULLISH PLAYS

Arch Cap Group - ACGL - close: 68.81 change: -1.14 stop: 67.95

Our call play on ACGL went from being profitable to a loser overnight with shares of ACGL gapping open lower at $67.06. This was under technical support at its 50-dma and under our stop loss at $67.95 so our play was closed immediately on the gap down. If shares of ACGL close under $67.00 it's going to make the peaks in October and November really look like a bearish double top.

Chart:

Picked on  November 07 at $ 68.81
Change since picked:       - 1.75 <-- stopped out/gap down $ 67.06 (-2.5%)
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         


Waters Corp - WAT - close: 59.02 change: -0.76 stop: 58.75

Selling pressure in WAT wasn't that bad on Friday but I'm tired of waiting for shares to breakout. Readers may want to keep WAT on their watch list for a move over $60.00 or better yet a move over $61.50 as a bullish entry point. If shares close under the 50-dma it might be time to consider bearish trades. Our trigger at $61.50 was never hit.

chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 61.50
Change since picked:       + 0.00                 *never opened*
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        1.2 million  
Listed on  November 12, 2009