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Newsletter

Daily Newsletter, Saturday, 6/5/2010

Table of Contents

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

Market Wrap

Estimates Busted!

by Jim Brown

Click here to email Jim Brown

Friday was a day for surprises with job growth in May coming in much lower than expected and Hungary became the new Greece.

Market Statistics

The estimates for the Friday payroll report were being revised higher right up until the numbers were released. Goldman Sachs revised their estimates to 600,000 late in the week. President Obama was bragging in a televised speech about the strong jobs growth expected in May. Obviously they were all drinking the same Kool-Aid.

The May jobs report showed a gain of 431,000 new jobs. If you have been reading these pages over the last couple weeks you know that the Census Bureau was expecting to hire 400,000 temporary workers in May. They did not quite get all 400,000 hired but came close at 390,000. That means actual hiring across the U.S. amounted to ONLY 41,000 real jobs. All the rest was temporary census.

The actual estimates for hiring in the private sector ran from 50,000 to 200,000 jobs. Nobody expected less than 50K and almost everyone expected more than 100K. To say the private jobs number was disappointing would be an understatement after adding 231,000 private jobs in April and 208,000 in March. March was revised lower from 230,000.

The unemployment rate fell to 9.7% from 9.9% but it was a technical drop not an actual drop. After the March payrolls surged so sharply quite a few people who were considered discouraged workers and not looking for a job suddenly thought maybe they could actually be hired and rushed into the job market in April. This increase in job seekers boosted the available workforce and pushed the unemployment rate to 9.9%. In May those same workers became discouraged again and the labor force contracted by 322,000 as they quit looking for work. This pushed the labor force participation rate back down to 65% and technical unemployment back to 9.7%. Unemployed workers fell to 14.97 million after removing those discouraged workers.

The average duration of unemployment increased to 34.4 weeks and a new record. A record 46% of unemployed workers have been out of work for more than six months. The number of newly unemployed workers (less than five weeks) increased by 2.75 million to 18.7% of all unemployed workers. The U6 unemployment rate, which includes those working part time for financial reasons while looking for a new full time job is now 16.6%. That is the real unemployment number not the often quoted official rate of 9.7%.

I never cease to be amazed that so much attention is given to precisely measure the monthly change in a 143 million worker labor force. Since the monthly numbers are just estimates to be corrected much later this is a monthly exercise in futility.

In a couple months when the census workers are terminated we could see jobs decline rather than advance for several months. The state of the economy is not strong and anyone paying attention to the weekly new jobless claims around 450,000 per week should realize that fact. Moody's does not expect the U.S. to return to full employment until 2013.

In the chart below the blue represents private hiring in May with the red census hiring.

Remember, when listening to a politician claiming strong jobs growth if they do NOT mention the census hiring they are trying to deceive you.

May Payroll Chart

If the jobs numbers were not enough to shake up investors we also found out that Hungary may be the new Greece. The new Hungarian government, which was sworn in less than a week ago, said it was going to announce a new austerity plan to tackle the countries current economic problems. The new administration said it was also going to publish the figures about the "true" state of the 2010 budget. The new administration said it inherited a much weaker nation than their predecessors had revealed and had found that the economic numbers had been falsified. I guess the "blame it on the prior administration" excuse must be developing into a global trend since others have had so much success with the excuse recently.

The new prime minister's spokesman said, "Hungary had only a slim chance of avoiding a Greek-style debt crisis although the administration would act quickly to avoid the Greek path." The Hungarian currency plunged over 2% against the euro and hit a new one-year low. The stock of the largest bank fell 11.1%.

The new center-right government won the April elections by a landslide and capturing a two-thirds majority and ousted the incumbent socialists. The campaign platform was to boost growth via tax cuts and various economic stimulus measures. This was contrary to the new socialist programs and tax hikes proposed by the incumbents.

Hungary borrowed money from the IMF and EU in 2008 to avoid a default. As a condition of the loan Hungary was supposed to freeze its deficit at 3.8% of GDP. The new administration claims the corrected numbers show the 2010 deficit to be 4.5% to 4.8% but some analysts are expecting it to be more than 5%.

The sudden arrival of Hungary as a potential debt crisis equal to Greece is not such a big deal other than it again is a warning that European countries are not stable. Greece in April, Spain in May and Hungary in June. Who will pop up to attract headlines in July?

It is not that European countries are spending themselves into a crisis but they are deflating themselves into a crisis. Most of Europe is still in a recession and the more austerity measures are implemented the closer they will get to a deflationary environment. You can't cut spending drastically and raise taxes even more drastically and expect growth. With the EU forcing a new round of austerity measures on the weaker countries the more the Eurozone will decline. The common currency countries don't have the option of inflation to bail themselves out. They are stuck using the common currency so recession and deflation are the only answer.

I have written before about EU banks not wanting to lend to each other because of the potential balance sheet problems of owning too much country debt. On Friday the European Central Bank or ECB reported overnight deposits from member banks reached a record 320.4 billion euros. This is by far the most since the euro was created in 1999 and has exceeded 300 billion on four of the last five days. Those deposits earn 0.25%. Member banks are parking cash at the ECB on worries that the 750 billion euro rescue package may not be enough. The ECB said member banks will have to write off more loans this year than in 2009. Clearly the banking crisis is back in the EU.

I don't want to apply too much weight to the jobs report or the Hungarian problem. After all Hungary is number 50 on the country GDP ranking list. They are not significant in terms of global risk. I believe they were just convenient excuses. Remember my mantra of late, "when the market wants to go down it will always find an excuse." The market is in a bearish trend. It has not been able to post two consecutive daily gains of any substance since late April. Every little news headline is turning into the excuse of the day. We are in a bear market until really bad news is ignored.

That bad news is likely to get worse before it gets better. We have evidence from multiple economic reports that the U.S. is weakening. As that evidence grows the market will continue to weaken. The economic weakness may not be material and we may not actually dip back into a recession but that is what investors fear. If the June jobs report shows a loss of non-census jobs we could accelerate to the downside. Once the economics begin to improve the market will improve also, even if Europe is still in the tank.

One report I never focus on in my writing is the Economic Cycle Research Institute (ECRI) Weekly Leading Index every Friday. The index is supposed to predict future economic growth by factoring in the weekly changes in other economic reports. The index is a leading indicator of things to come by accumulating changes in dozens of other reports. The weekly index normally moves at a snails pace and saying the ECRI WLI gained 0.3 from 124.5 to 124.8 is not worth a weekly mention. That is the equivalent of reporting weekly on the six inches of continental drift every year. However, the change in the WLI over the last six weeks has been dramatic. The index has fallen from a cycle high of 134.7 on April 30th to 124.1 on Friday and the lowest level since July 2009. This is an earthquake in the index and in the forecast prediction of economic growth. This shows how the economy has suddenly changed direction. There is a rising number of analysts who think our GDP for Q3 will be negative. Some as much as -2% negative.

Weekly Leading Index Chart

When you really look at all the events of the past week it is a wonder that we did not close a lot lower. We had the Gaza peace armada and the blow up over IDF soldiers killing nine people. North Korea warned that war could erupt soon. "The present situation of the Korean peninsula is so grave that a war may break out at any moment" according to Ri Jang Gon, deputy ambassador.

There was a strong rumor that Societe Generale (SocGen) was facing a huge derivatives loss. The euro plunged -1.6% on the news although the rumor was denied by "unofficial" people at SocGen. The company's stock fell -7.6% despite a statement by the company. When asked by CNBC about the rumor a SocGen spokesman said, "If we had something to say, would have already communicated."

Euro Chart

The economic calendar for next week is very light with the only material event the Fed Beige Book on Wednesday. There was a call by Kansas City Fed President Thomas Hoenig to raise the interest rate to 1% by the end of the summer so the Beige Book will be key input for the June 22nd FOMC meeting. Dallas Fed President Richard Fisher, St Louis Fed James Bullard and Philly Fed's Charles Plosser have also expressed reservations about the extended period language. Jeffrey Lacker said he was "marginally comfortable" with the phrase and Atlanta Fed President Dennis Lockhart said he backed language promising rates near zero. "Waiting too long is probably less risky than moving too soon." We will hear a lot more of this talk before the June FOMC.

Economic Calendar

The president caught more flack over the oil spill as he cancelled his trip to Australia and Indonesia for the second time in order to make a third visit to the gulf. The president has gone from a "good working relationship with BP" to outright hostility. He is becoming increasingly hostile as the oil spreads as it did to the Florida shores on Friday. His disapproval rating on the spill has risen to 44% but BP's rating is much higher at 68%.

The president struck out at BP and blasted them over possibly paying their normal annual dividend. Analysts have been theorizing that BP might cancel the dividend this year in order to save cash for the cleanup effort. BP pays out an annual dividend of $10.5 billion. BP said it did not need to cancel the dividend but that was a board decision. They have more than $5 billion in cash and extensive credit lines.

Obama criticized BP for spending "lavishly" on TV ads to burnish their corporate image and considering paying the dividend. "What I don't want to hear when they are spending lavishly on advertising and shareholders is that they are nickel and diming fisherman and small businesses here in the gulf." I would agree with the sentiment but it is amazing how fast the president distanced himself from BP when his poll numbers started dropping. By attacking BP in his daily comments he is hoping to rise again in the opinion polls. It is amazing how attacking large corporations in banking, medical and energy can boost poll numbers.

BP is getting its fair share of negative press and deservedly so. All the methods attempted up to this point have failed. They have been less than truthful in their commentary and hired temporary workers for the last beach Obama visited to give the impression they were working hard on the cleanup.

Last week they successfully cut off the pipe at the top of the well and set another pipe and containment unit right on top of it in what should have captured 90% of the flows. Instead the gas and oil is simply blowing out under the seal and they are capturing only 6,000 bpd of a much-increased flow from the well. The well is now open directly to the sea and flowing at 100% of capacity. Scientists believe the well is gushing between 12,000 and 19,000 bpd into the gulf. Evidently the LMRP unit was not engineered correctly to capture all that capacity or the seal was damaged in the process. BP continues to claim that it will take a couple days to know if the device is going to work but a quick look at the real time video clearly shows a stronger leak in process.

The efforts by BP have been such big failures that there is a contest in progress to design a new logo for the company. This is not a BP sanctioned event. See Logos Here

Sample Logo Submission

The press keeps claiming the spill is the largest environmental disaster in history. DrRoySpencer.com put together this graphic showing that much more oil is spilled every year by tankers and rig accidents than the current BP spill.

Historical Oil Spill Events

Crude prices fell -$3.10 or -4.1% to $71.51 and wiped out the gains made since last Friday. Pushing crude down was the rekindled fear about an economic decline in Europe and a sharp rise in the dollar to a new 52-week high. Worries over the lack of jobs also took the speculation out of the crude market. Oil had rallied on hopes BP was finally going to fix the leak with the LMRP effort. Those hopes were dashed.

Crude Oil Chart

Dollar Index Chart

Natural gas stocks bucked the down market after gas prices rallied +2.3% to a new three month high at $4.97. President Obama was praising the benefits of nat gas earlier in the week and new EPA rules made it apparent many coal-fired plants would have to be closed or converted to nat gas.

EOG Resources was the exception to the rule with a decline of nearly $7 after a gas well blew out in Clearfield County Pennsylvania. The well spewed gas and gas liquids for several hours but it was finally capped at noon on Friday. There were no injuries. The well was being drilled in the Marcellus Shale. The blowout came during the fracturing process and 1.5 million gallons of fracture fluid was ejected from the well. EOG Resources was formerly known as Enron Oil and Gas. EOG operates 117 wells in the Marcellus Shale.

Natural Gas Futures Chart

Friday was also afflicted with a major downgrade of the financial sector. Richard Bove cut the price target and earnings estimates for Goldman Sachs and Morgan Stanley. He cut Goldman's target to $182 from $200 and earnings per share to $17.17 from $18.72. Bove said the quarter had been very bad for trading in both equities and bonds in the investment banking arena. He said it was going to be a bad quarter for Goldman.

He followed the Goldman downgrade with lowered earnings targets for Morgan Stanley (MS) and said this environment will ultimately impact JP Morgan (JPM), Citigroup (C) and Bank of America (BAC). He said the Goldman downgrade was unrelated to the SEC charges and everything to do with the fears in Europe, the fears in the financial market and the widening of the spreads. Bove had previously warned the new financial reforms would knock 10-12% off bank stocks but it would only be temporary once the industry adjusts. Despite the downgrade and the -3.2% decline in the Dow, Goldman only lost -1.2% to $142.

The biggest Dow losers were CAT, BA and AXP with -5% declines but the rest of the Dow stocks still took a serious hit. Consumer stocks VZ, PG and MCD faired the best with -1.5% declines. Mohamed A El-Erian, CEO of Pimco, said he expects more volatility ahead. "The disappointing jobs report is further evidence that drivers of self-sustaining private consumption growth are facing structural problems that result in slow income growth, reduced credit availability and lower ability to monetize wealth." Eduardo Castro-Wright, vice chairman and U.S. chief at Wal-Mart told shareholders that competition in the industry is "stiffer than ever." WMT shares declined with the market even though the company said it was going to buy back $15 billion of its shares.

Dow Component Chart

iSuppli reported the results of a first quarter survey of PC vendors and they had good news. In the first quarter global PC shipments jumped 22.7% from a year ago to 81.5 million units. This is the highest year over year growth since iSuppli began keeping records in 2003. However, analysts pointed out that Q1-2009 was a very bad quarter for PC sales. The following table is the top seven hardware makers ranked by market share in Q1.

Hewlett Packard - 19.6% share, up +22% year over year
Acer - 13.3% share, units up 47.1%
Dell - 13.1% share, units up 21.8%
Lenovo - 8.6% share, units up 58.5%
Toshiba - 5.6% share, units up 31.2%
Asus - 5.4% share, units up 136.2%
Apple - 3.4% share, units up 32.4%

Apple may be on the bottom of that list but it is far from the bottom in overall sales. Next week is the Apple Developers Conference and Steve Jobs is expected to announce an upgrade for the iPhone. Apple has provided updates or new devices every June since the iPhone was first announced in 2007. We know from the lost prototype saga that there is a new phone in the works with a front facing video camera that would allow for video conferencing assuming there was enough bandwidth. The bandwidth challenge with AT&T is expected to be eventually handled with the addition of Verizon to the iPhone options. Unfortunately that is not expected to be announced next week.

Despite the belief that a new iPhone will be announced this year there has been no slacking of demand. Analysts expect sales of 8 million units when the quarter ends on June 30th. Analysts claim the feature rich iPhone makes the device very "sticky" with users and none want to change to another device as is common with other smart phones other than the Blackberry. Apple shares are stubbornly holding in the $260 range thanks to the lure of a new product announcement and Apple's $42 billion in cash. Price targets range from a median of $320 to as high as $350. The new iAd business where developers can insert ads in their applications will bring another revenue stream into the Apple business.

Apple Chart

The Dow lost 110 points in the last hour to close down -323 points and close under 10,000 at 9928. The last two weeks of volatility gains since the May 25th dip to 9774 were completely erased. The Dow has been alternating between gains and losses with multiple triple digit moves over the last three weeks. The 10K level had formed as decent support but that support collapsed at the close on Friday.

This was the lowest close since February 8th at 9908. It is also a huge warning sign that we are about to test another level, possibly in the 9500 range. The Dow failed multiple times to break back above the 200-day average and four month closing low is a negative indicator.

The Friday decline came on nearly 11 billion shares of volume after the lowest volume week since early April. We averaged right at 9 billion shares all week until Friday's clash. There was lower volume on the advances and higher volume on the declines. This is a textbook market decline with multiple failures at high profile resistance, slowing volume as those resistance levels were tested and higher volume as support failed.

Dow Chart

The S&P ended at a new three month closing low at 1065. That is of course strong support and it was ahead of a weekend with tons of geopolitical risk. The resistance at the 200-day at 1106 was tested multiple times and failed every time. The support at 1065 has also been tested but the outcome looks bleak today. The trend is negative and the 1050-1065 range is the last hope before a dip to a significantly lower level.

Last Sunday I warned that the 200-day average should be our line in the sand for bullish trades on a breakout. That did not occur and today a move below 1065 should be the signal for additional bearish trades. Between those levels is simply high volatility noise.

SPX Chart

The Nasdaq was holding above the 200-day until the -83 point drop on Friday. The Nasdaq is still slightly more bullish than the Dow/SPX but only barely. The key levels to watch are 2200 followed by 2125 and the February support. If the Dow and SPX crater below their Friday closes the Nasdaq will probably try to catch up once Apple makes their announcement. Apple typically spikes on the announcement then rapidly declines. That could be the anchor for the Nasdaq that drags it lower.

Nasdaq Chart

The Russell has been the hero for several weeks with a firm resolve not to trade under the 200-day average. That was the support at the close on Friday. With the Dow and SPX firmly under the 200-day and threatening to go lower the odds of a break under the 200-day on the Russell are good. The next support is 625 from February, Sept and Oct. (black line) If that support breaks I believe we will see a drop under 600 to something in the 585 range. The Russell dropped -5% on Friday and besides banking and oil it was the biggest loser of the week. That suggests fund managers are finally turning some small caps lose in fear of a steeper market decline. A rebound on Monday would be nice but it would take a move over 670 to make me bullish.

Russell 2000 Chart

In summary, I am not positive on the market for next week. There are plenty of excuses left should the market want to go lower and there are new ones appearing every day. There is no overriding reason to be long the market and there are limited events on the calendar that could be strongly positive. There are far more events in the near future that could provide a negative push. Sentiment is increasingly negative and the path of least resistance is still down. I remain cautious until proven wrong.

Last Sunday I experienced a cardiac event that kept me in the hospital all week. I have never had any heart problems in my 62 years of existence so it came as a shock. It appears I will become better acquainted with my new cardiologist over the coming months. Fortunately there is nothing serious and I should have a couple decades of life still ahead. I appreciate the well wishes from everyone and I plan to be writing for years to come. I love the markets and the macro impacts of fundamentals, technicals, earnings and economics but I would like for the geopolitical events to quickly fade away. Unfortunately we don't get to choose what impacts our markets so I will continue to report on them until they do become mute.

Jim Brown


Index Wrap

Friday Wipe Out

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

I continue to anticipate that recent lows may hold but also don't look for a sustained rally for awhile. The market has excesses to 'work off', especially still high bullish sentiment. And, while I've noted an oversold condition on the daily charts, among the major stock indexes only the S&P 100 (OEX) is at or near an oversold reading on a weekly chart basis.

Technically, distinguishing features of this past week's rally (into Thursday) included a reversal at down trendlines dating from the April high in the S&P, Dow, Nasdaq and Russell 2000, as well as failure to either pierce or hold above near resistance implied by the 21-day moving average in the Nasdaq and Russell.

Sentiment readings ran back up to overly bullish extremes ahead of the Friday sell off. Only the Nasdaq 100 (NDX) and the Russell 2000 (RUT) ended the week still above their 200-day moving averages and fund managers tend to take note of this particular bearish technical sign of declining momentum.

A problem for the bulls as I see it is this tendency among traders to see a next rally coming already and to jump back into calls. I'll be more convinced about getting back into Index calls when there is greater bearishness reflected in higher levels of put purchases in equities relative to daily call volume.

My first chart, that of the weekly SPX, reflects the bit further down OR sideways that the major indexes would have to go to reach a 'typical' oversold extreme in terms of the 8-week Relative Strength Index (RSI).

I came back to my home among the Rockies from the Pacific shores to find that my data and charts had big 'holes' in them, so I am the one responsible for the lateness of my Saturday post and your e-mail from OIN. Blame me and I can blame the virus or whatever caused my disappearing data and the time it took to replace that data and rework my charts. Unlike many charting apps I store all my own historical data on a home network. A good idea usually but I see it can have a drawback when my backup hard drive is not up to date.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

I mentioned a key resistance last week as being the 200-day moving average for the S&P 500 (SPX) and that turned out to be a stone wall as you can see by the exact touch made there with Thursday's intraday high.

The chart is bearish still of course, with a down trendline that has been established. We can assess the upside 'breakout' point as being at this trendline, as well as in the area of the 200-day moving average.

On the downside, key support remains in the 1040 area, the prior low from late-May (5/25). I suspect that this low will hold up as future support again although there's a possibility that SPX blows through this, but maybe just once on stop loss selling followed by a rebound. Stay tuned on this!

Near resistance is still 1100-1105, extending to around 1120. Fairly major resistance begins at 1150 and extends to the 1170 area.

Near support remains the 1060 area as I noted last week, with a next key support around 1040 and the prior intraday low. If SPX pierced 1040, next chart support is 1020, extending to 1000 even.

MARKET SENTIMENT:

In terms of market sentiment, as seen above in my CPRATIO model, I think bullishness was overly high last week given the uncertainties the market still perceives; e.g., the state of our economy and the fears about European upheavals. (When I had European responsibilities for Dow Jones in London, it was usually what was happening in the U.S. or otherwise outside Europe that was potentially scary. Pay back time?)

As for the prospects for a bottom and recovery, I believe we need to also witness at least a 1-day drop in my sentiment indicator to or close to an 'oversold/high bearish reading such as occurred at the last bottom. I don't usually trust the herd and I'd like to not join it and own calls when bullish expectations are high.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart remains bearish as the index rebounded to resistance at its down trendline and then got hit with heavy selling on Friday as the employment report came in well under bullish expectations. It shouldn't be a huge surprise to get blindsided by economic forecasts in this current environment.

No possibility for a V shaped bottom any longer and it may end up looking a 'W', assuming a bottom forms this month. I'm not currently looking for a new down leg in an oversold market. In fact, unlike my first chart above that shows the weekly RSI chart for the S&P 500, the OEX weekly 8-week RSI (not shown) is already in oversold territory; the only major index that has gotten to the beginnings of an oversold extreme.

Key near resistance is still around 500, extending to the 21-day moving average at 504. A close above the 21-day average that was maintained would be an initial bullish breakout. Tougher, more major, resistance comes in at 530-532.

Near support is still 480-482, which extends to the prior 473 low. A major next support zone is at 450-440.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I was anticipating last week that the Dow 30 (INDU) would end up making a bottom above 10000 and would therefore keep its long-term uptrend intact. We saw of course a Friday close below 10000, making it the first such WEEKLY close below 10000 since late-October. That prior close was on the way UP as the Dow was marching to above 11000, not down as in the current move. Another weekly close below 10000 turns the long-term INDU trend lower.

I'm not living and dying around INDU maintaining 10000 and think this coming week should see a close still in this area or above, even if only by a bit. It should also be noted that we have 22 Dow stocks trading BELOW their 200-day moving averages and only 8 that are still above this key average; i.e., BA, CAT, DIS, HD, INTC, KFT, MCD and PG.

Pivotal resistance remains the 10250 area. Key chart/technical support still looks like 9800. The next key support below 9800-9775 is at 9700.

I suggested last week that it looked favorable to buy Dow index calls on dips in the Dow to, and under, 10000. If you bought calls accordingly, I suggest exiting at INDU 9800.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I'm still anticipating a low setting up in the Nasdaq Composite (COMP) Index that is at or above 2200-2190 support. I noted last week that ... "I'd like to own the COMP basket at 2200 and under, with expectations for a rally ahead (maybe not just ahead in the holiday shortened week) that carries back into the 2350-2400 price zone." Well, COMP rallied so far just to 2300 and made another high defining a down trendline (and resistance) and then got slammed on Friday.

Where to from here? Chopping around, sideways to lower again as long as COMP can't get back above its 21-day moving average and the aforementioned down trendline highlighted on the chart. I think COMP is in a 'base' building process, not setting up for another sizable downswing, at least not below 2150 or to under the February 2100 low.

Key resistance is 2300 and then comes in at 2350, extending to 2375.

Near support is in the 2200 area, then at 2150, with fairly major support anticipated at the early-February low around 2100.

Bullish sentiment, as I discussed in my SPX commentary, bounced back 'too' fast in my estimation to suggest that bullish traders rushing back into calls were going to be rewarded in this still unsettled market. I'd like to see the call to put ratio (CPRATIO line seen below) come back down before I would start figuring that COMP was ready for any sustained rally.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX), unlike all but the Russell, is still holding above its 200-day moving average, showing how the big cap Nasdaq stock basket hasn't been hit quite as bad as the rest of the market. NDX has given ground but less so than the Composite. The Composite of course has all the dogs (sorry, the more 'challenged' stocks) in it, not just the big glamour companies like Apple and Intel.

I continue to anticipate support coming in on dips back toward 1800, with support/buying interest below that having been shown by lows made at 1752-1757.

Key resistance is at 1885-1900, with next resistance around 1940, extending to the last rally top in the 1980 area.

I wrote last week that ... "A rally to test 1900 may not be far off." How true! I might have forgotten to ALSO mention that 1900 would represent a great short-term NDX put buy for those steely enough to 'fade' (sell against) an expected bullish employment report. Old trader saying: buy the rumor, sell the fact. Assuming it's not a fact established in a pre-opening government report! How valuable to have seen that report before release. You think?

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

As there's been no official correction to the prior reported QQQQ low at 4155, this point now has been used to draw an initial up trendline. Unfortunately for the NDX bulls the down trendline, currently intersecting at 46.5, is the better 'established' line (of resistance). Until or unless the Q's break out above its down trendline, the chart remains bearish. This is not to say that the stock may not be forming a bottom in the 1750 to 1800 area. The longer such a sideways move goes on, the better are the prospects for a more sustained rally later.

I'm assuming next support comes in at 44.5, then at the prior 43.2 intraday low, with major support beginning around 42.6, extending to 42.

Key resistance is at 46, extending to the recent high in the 46.5 area and then coming in again around 47.

I was a bit surprised to not see a big volume spike on the Friday sell off. This may suggest that those holding the stock are not going to be scared out of their positions so easily.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) rallied back to its previously broken major up trendline and then fell like a stone after that, providing another example of support (or a line of support), once pierced, 'becoming' resistance later on.

As I wrote in my last week's commentary, "A move back above the trendline would suggest RUT would continue to be a hot sector or, in this case, an investment 'theme' based on company size; i.e., small to mid-cap companies." RUT probably still represents a key sector to play on a next rally but a tide still going out drops all boats.

The previously broken trendline currently intersects at 670 and is the current pivotal technical resistance. Resistance just below 670 is also noted at Friday's high around 660.

I've noted support at 632, at the 200-day moving average, then in the 620 area, including the prior 618 low.

GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.


New Option Plays

Long and Short Candidates

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Direct TV - DTV - close 37.95 change -1.77 stop 35.70

Company Description:
DIRECTV, incorporated in 2009, is a provider of digital television entertainment in the United States and Latin America. The Company operates two direct-to-home (DTH) operating segments: DIRECTV U.S. and DIRECTV Latin America. DIRECTV Holdings LLC and its subsidiaries (DIRECTV U.S.) is the provider of DTH digital television services and the second largest provider in the multi-channel video programming distribution (MVPD). DIRECTV Latin America (DTVLA) is a provider of DTH digital television services throughout Latin America. DTVLA is comprised of: PanAmericana, which provides services in Venezuela, Argentina, Chile, Colombia, Puerto Rico and certain other countries in the region through the wholly owned subsidiary, DIRECTV Latin America, LLC (DLA LLC); the 74% owned subsidiary, Sky Brasil Servicos Ltda. (Sky Brazil); and the 41% equity method investment in Innova, S. de R.L. de C.V., (Sky Mexico).

Target(s): 39.50, 41.50
Key Support/Resistance Areas: 37.00, 36.30
Time Frame: Several weeks

Why We Like It:
DTV is a relative strength play that recently broke out of a $37.00 resistance area that should now act as support. The stock is holding an upward trend line from February which is right on its rising 50-day moving average, currently at $36.23. This should offer solid support and gives us a good reference point to place a protective stop at $35.70. If DTV trades down to near the broken resistance level near $37.00 I suggest reader initiate long positions.

Suggested Position: Buy July $37.00 CALL, current ask $2.26, estimated ask at entry $1.80

Annotated Chart:

Entry on June xx
Earnings Date 8/10/10 (unconfirmed)
Average Daily Volume: 12.3 million
Listed on 6/5/10


NEW DIRECTIONAL PUT PLAYS

Apple Inc - AAPL - close 255.96 change -7.15 stop 275.00

Company Description:
Apple Inc. (Apple) designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players, and sells a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third-party Macintosh (Mac), iPhone and iPod compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores, and digital content and applications through the iTunes Store.

Target(s): $34.55, 32.15
Key Support/Resistance Areas: 272.00, 265.00, 250.00, 243.00
Time Frame: 1 to 2 weeks
Comments:
AAPL has a developers conference this week. The stock typically spikes on the keynote announcement by Steve Jobs then struggles the next couple of weeks. Apple has stubbornly refused to give up much ground and I believe the stock is due for a correction. The stock made a recent double top on the dailies and also a lower high. I would like to use $262.00 as an ideal entry point to initiate short positions. We'll use a stop of $275.00 which is above the recent highs.

Suggested Position: Buy July $250.00 PUT if AAPL trades up near $262.00, current ask $11.40, estimated ask at entry $9.50.

Annotated chart:

Entry on June xx
Earnings (unconfirmed)
Average Daily Volume: 29 million
Listed on June 5, 2010


In Play Updates and Reviews

Most Long Positions Closed

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening. Wow, virtually all estimates for Friday's employment numbers were far too ambitious and way off the mark. This sent the pre-market futures lower causing a significant gap down on Friday morning. So much for letting the firms and analysts on Wall Street influence my view on economic data. I mentioned in the Intraday Market Update on Thursday that there were mixed signals coming out of the economic reports, citing that no improvement in jobless claims and continuing claims were signaling that firings and lay offs remain elevated. That was obviously the right call. In hind sight we should have been exiting positions on Thursday's strength ahead of these numbers, but hind sight is not a luxury we have in trading so we must be quick to adapt.

However, in Thursday's newsletter I wrote about a possible "sell the news" event and I suggested to readers to be quick to tighten stops on Friday on any strength with "the anticipation that your long positions will be closed or stopped out, regardless of whether listed targets are achieved." What I didn't expect was the large gap down so we were forced to adjust. Nonetheless, in early trading the S&P 500 bounced +8 points from its opening low print and that was all she wrote. Selling into the bounce with either tight stops or simply taking profits was the right course of action considering the extreme bearish tone in the market. As a result, I have outlined in the play updates how our closed positions were executed and the reasoning and strategy behind each move.

This leads me to share with you one of the biggest challenges I have had to overcome as a professional trader, and that is figuring out when to exit positions. I believe too many traders, especially less experienced ones, put too much focus on the entry point as opposed to developing sound rules for exit strategies and being able to adapt to whatever the market gives us. Since April 16th, or the past 8 weeks, volatility has exploded and it appears there is no end in sight. This has made it difficult to manage swing trades and we have had many winning trades turn into losers. Many times it has been a result of targets nearly being missed or stops being taken out by a few cents, only to watch the position reverse creating frustration. The fact of the matter is that traders need to constantly adjust stops and targets and not be afraid to pull the trigger to exit positions. One of my general rules is to "trade to trade well, not to make money." That may sound odd because obviously we trade to make money. A better term to describe it is probably a "state of mind." Having this state of mind takes the emotion out of taking losses or hoping for big gains, rather it allows me book small gains consistently and accept small losses which keeps my account growing. The fact is that nobody can be perfect and coming up with rules and strategies focused on exiting positions, such as using trailing stops if a position is moving in the right direction, will help you become a better trader.

Onward to my view on the near term market direction and my intentions for the model portfolio. I have been writing that we are in no man's land without a convincing close above 1,110 or below 1,070 in the S&P 500. Was Friday a convincing close below 1,070? I would like to think so but I am not convinced just yet. Markets have a knack for faking out traders and many times overshoot a trend line or support/resistance area prior to reversing. With the heavy selling and distribution on Friday it didn't surprise me to see the SPX close below 1,070. The fact is that the index closed right at the flash crash lows of May 6th and there are some support areas just below. For example, the low in the ES futures on May 26th was 1,059. Friday's low in the ES futures was 1,059.25. This could be considered a logical bounce point in the market, or do we go all the way down to test the May 25 lows near 1,040 first?

A test of the May 25 lows would complete an "M" type pattern on the longer term intraday charts (i.e. 1, 2, or 4 hour chart). Opening a short position now thinking we will test lows near 1,040 may not be the best strategy considering the price action on May 25th when we hit those lows. The SPX proceeded to tack on +50 points in a day and a half, then retraced -30 of those points, and finally added on another +40 points. All of this happened in 3 trading days and the SPX ultimately gained +63 points off of those lows.

Add in the geopolitical news driven market and anyone's guess is as valid as the next. Good or bad news may catapult the market in either direction. I believe the best strategy going forward is to sell (or initiate short positions) into strength and buy (or close short positions) into weakness. We will also have a balanced portfolio of long and short positions. For now, we remain in a difficult price range and I expect the volatility and choppy price action to continue, maybe for the remainder of June. I am more bearish than bullish but believe there are opportunities for bounce plays to the long side. However, my longer term view of things isn't so rosy and in the end I believe we will have a double dip recession and may even test March 2009 lows. The overall geopolitical events will most likely determine how severe things ultimately get or whether there will be more stimulus and government support to save the market yet again. Lastly, we need to stay nimble and focus on shorter term bullish and bearish moves that can generate winning trades.

NOTE: I've had some technical difficulties with my charts so I've had to use a back-up charting package on some of the play updates. I have also provided 30 minute intraday charts to explain the exits rather than the normal daily charts. Feel free to email me with any questions.

Current Portfolio:


CALL Play Updates

Qualcomm Inc - QCOM - close 35.30 change -1.16 stop 34.20 *NEW*

Target(s): 20-day SMA, 36.45 (hit), $36.75, 38.00, 38.95
Key Support/Resistance Areas: 37.50, 37.00, 36.25, 35.25, 34.50
Current Gain/Loss: +0.00%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
QCOM is the lone position we kept open on Friday as this stock has long term support near $35.25 dating back to 2007. We are currently breakeven in the trade and are looking for another bounce from here, possibly to new recent highs. QCOM hit our target of $36.45 on Thursday but the move was stopped probably because of its 20-day SMA. This is still a valid target but I suggest readers watch the 20-day SMA and tighten stops if QCOM trades up this level this week. I've also listed $36.75 as a target which is just below Thursday's highs. If the markets bounce QCOM should do well as it is a quality name in a good industry. I'm going to move the stop up to $34.20 which is below the stock's recent lows to protect capital if things proceed lower.

Current Position: July $36.00 CALL, entry at $1.30

Annotated chart:

Entry on 6/1/2010
Earnings Date 7/21/2010 (unconfirmed)
Average Daily Volume: 26 million
Listed on 5/29/10


Quest Software - QSFT - close 19.89 change -0.13 stop 18.10 *NEW*

Target(s): 19.60, 20.50, 21.00
Key Support/Resistance Areas: 18.60, 19.36
Time Frame: Several weeks

Comments:
QSFT remains a relative strength play but I would not be chasing the stock up at these levels unless it is an intraday trade or you are using a tight stop and monitoring the position. I suggest patiently waiting for a throwback to our trigger near $19.00. This level is above the recent breakout of resistance at $18.70 and the highs from 5/20, 5/21, and 5/26. If QSFT trades down near $19.00 I am confident the prior resistance will hold as support. The stock traded up to $18.87 in 12/2007 which adds to the thesis as this level holding. Conservative traders may want to stay away from this position due to the market conditions, or use a lower entry (like $18.80) and a tighter stop. My comments remain valid from the play release last night. QSFT is relative strength play that is involved in virtualization software and cloud computing, among other things. These stocks have done extremely well as the market has been under pressure over the past month. QSFT has recently broken out of a resistance level near $18.60 to $18.70 which has acted as support the last couple of days. The stock made new all time highs on 5/19 and if the market can continue its bounce from today I expect QSFT to make new highs again. I have also noticed unusual option activity picking up in the July strike prices and above average volume, both bullish signals. I would like to see QSFT pullback near the $19.00 level which we will use as a trigger to enter long positions. I'm going to lower the stop to just below the 20-day and 50-day SMA's. I am also choosing a $20.00 out of the money call option to limit capital at risk.

Suggested Position: July $20.00 CALL if QSFT trades down near $19.00

Annotated chart:

Entry on June xx
Earnings Date 8/10/10 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on 6/2/10


CLOSED BULLISH PLAYS

Diana Shipping, Inc - DSX - close 12.75 change -0.69 stop 12.90

Target(s): 14.00, 14.35, 14.75
Key Support/Resistance Areas: 14.40, 14.15, 13.50, 13.25, 13.00, 12.20
Current Gain/Loss: -19.4%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
DSX made a double top near $13.20 in early trading near prior support of the past few days. When this happens it is imperative to think about placing a tight stop to protect gains or limit losses, especially with the bearish tone in the market. Since we were looking to sell into strength and exit long positions the proper stop should have been placed just below the low of the 2nd 30 minute bar. This enabled us to exit at a better price than our original stop loss. For readers who still may have positions I would expect DSX to bounce from here but the overall market direction this week will be the determining factor. The stock looks like it wants to make a higher low on the daily chart and may be starting to form an upward trend. A new stop could be place below Friday's low. The last area of support is $12.20.

Closed Position: July $12.50 CALL @ $1.25, entry was at $1.55

Annotated chart:

Entry on 5/28/10
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 1.4 million
Listed on 5/27/10


Rino International - RINO - close 12.52 change -0.71 stop 12.55

Target(s): 13.25 (hit), 13.65 (hit), 14.00, 14.50, 15.95, 16.90
Key Support/Resistance Areas: 15.00, 14.50, 13.75, 12.75, 11.75
Current Gain/Loss: +3.2%
Time Frame: One week
New Positions: Closed

Comments:
RINO made double a top near $13.12 which was also near an intraday downtrend line and the 20 and 200-period SMA's. Since we were looking to sell into strength and exit long positions the proper stop should have been placed at $13.02 which was just below the prior day's intraday support. This enabled us to protect a small profit on the trade and not let the position turn into a loser. As mentioned in last night's updates the best course of action for this trade was to take profits when RINO hit our 2nd target at $13.65 on Thursday. But we didn't so it forced us to adjust to the weak market on Friday. For readers who may still have positions RINO is holding an upward trend line that started on May 25th. A new stop could be placed below Friday's low.

Closed Position: July $12.50 CALL at $1.55, entry was at $1.50

Annotated chart:

Entry on May 27, 2010
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 926,000
Listed on 5/25/10, 2010


Trina Solar - TSL - close 16.49 change -1.03 stop 16.45

Target(s): 17.45 (hit), 17.95, 18.20, 19.00
Key Support/Resistance Areas: 16.55, 17.25, 18.50, 19.00, 20.00, 21.00
Current Gain/Loss: +0.00%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
TSL gapped lower and then rose sharply up to our target of $17.45 which was hit on Thursday as well. As such the position was closed into the morning strength as indicated in Thursday's updates. For readers who may still have positions TSL really needs to get above $17.80 to have the best shot at bouncing higher. Over the last few trading sessions it appeared the stock was going to make a run at it but after Friday's tape that seems like tall order to ask of the stock. There is some support at current levels so a stop just below here is the prudent action to take.

Closed Position: July $18.00 CALL @ $1.50, entry was at $1.50

Annotated chart:

Entry on 6/1/2010
Earnings Date 7/21/2010 (unconfirmed)
Average Daily Volume: 5.4 million
Listed on 5/29/10