Option Investor
Newsletter

Daily Newsletter, Thursday, 6/17/2010

Table of Contents

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

Market Wrap

Preparing for the Backside of the Hurricane

by Keene Little

Click here to email Keene Little
Market Stats

Thanks to a last half hour buy program the market was pushed back into the green after spending most of the day in the red (similar to Wednesday's last half hour push). Someone has been working very hard to keep the market propped up this week, which was very obvious in the overnight futures. SPX, RUT and other European-settled options stopped trading at today's close and now all they need is a settlement price Friday morning and most of the big money will probably be finished with the market this week. In other words it might lose its prop. But, as always, we'll let price dictate which way the market is headed from here.

I want to discuss a couple of issues this evening that relate to some concerns that I have about inaccurate analysis which could leave investors with the wrong impression about our economy and therefore the stock market. We all want to think positive and if you ask anyone to describe a bear the first thing out of their mouth is "pessimist". I'm a bear and readily admit it. When this bear market cycle runs its course I'll probably be an early bull. I'm one of the most optimistic people you'll ever meet. When I talk bearishly about a market and I'm called a pessimist, my usual retort is "I prefer to call myself a realist". Hope is a wonderful thing--just not in the stock market (where it's a 4-letter word).

So I want to discuss a couple of false pieces of information that I know you and your family and friends are receiving, and how to answer questions from them. I'll then get into a little bit about portfolio insurance in the hopes that it might help you with conversations with friends and family who don't believe it's necessary to protect their accounts. It's one thing not to believe the market is going to decline sharply but it's another thing not to protect against the possibility.

I receive a lot of questions from friends and family that challenge my bearish opinion, which by the way, I love to get. We all need to be constantly challenged in our thinking otherwise we get set in an opinion that could lead us down the wrong road. One problem with the world today is we're too polarized and unwilling to listen, really listen, to another person's opinion. We read only web sites we agree with and discard those who disagree with us. But I digress.

I recently received an analytical piece from an investment advisory (the name of which I will not divulge because I do not want to publicly disparage one while so many share the blame). In the latest newsletter they talk about how the market is wrongly hung up on the European problems and that little countries like Greece don't mean a thing to us. In a strictly monetary sense this person speaks the truth. But in a socioeconomic sense this person wouldn't recognize a bear market if it bit him on his keister. He believes today's situation is like the Asian contagion and that we'll recover just like we did after the 1998 dip.

The letter makes reference to the widening spread between corporate bonds and Treasuries as just the normal occurrence when there's too much worry about the "spread" of European woes. There were a lot of people who recognized, in hindsight, that the widening spreads heading into the fall of 2007, as a result of the housing crisis (which would be "contained"), actually was a bearish omen. Well guess what--it's baaack.

Corporate Bond vs. 30-year Treasury Spread, chart courtesy elliottwave.com

The widening spread is plotted inversely so that the wider the spread the lower the line. This is to show the correlation between the bond spread and the stock market. Remember, the spread is a measure of willingness to take on risk. The more risk averse investors become the higher the yield they demand. That risk averseness translates to less willingness to own stocks.

You can see how the spread has widened beyond where it was in February when the stock market made its low, which it's now testing. The bond spread is beckoning the stock market and it will follow it (bonds lead the stock market, not the other way around). So the "spread" of the European financial crisis is virtually guaranteed to affect us. It's that social mood thing. A widening of credit spreads points to a contraction in available credit, which is the life blood of our global economy. It was the credit market locking up that helped create the panic selloff in 2008. It's deja vu all over again.

Next the letter talked about why the stock market will continue on its bull run from March 2009. I quote, "In 2010, for example, we believe the growth in the U.S. economy is heavily due to the huge growth in the money supply in late 2008 and 2009. In our view, that powerful stimulus gives the U.S. some immunity from the influences from tiny (economic) countries on other continents. In other words, our economy is being driven by something that Greece does not influence."

After I picked myself up off the floor and sat back down, I dashed off an email with the following chart, with the question "what monetary growth?"

M3 + Credit Growth, chart courtesy nowandthefuture.com

Since late 2008 we've experienced a historically fast year-over-year decline in the money supply, never seen before. So I ask again, what growth? This is deflation, pure and simple, and stock markets do terrible in deflationary times. A credit bubble like we experienced, and the consequent credit destruction that we must get through, has set us up for one hell of a correction. Yes, the government is doing its best to flood the market with money and stimulus spending but as I've said before, the analogy that comes to mind is that they're merely shoveling flood waters.

But you can see from just this one small example how much false information comes to you from supposedly legitimate investment advisors, especially the buy-and-hold types, which this one is as they made a strong recommendation to continue to hold through any rough patches ahead, and even congratulated those who held on through the March 2009 low).

Another statement I hear a lot is how much cash is on the sidelines, just waiting for the green light to come roaring into the market. What cash? Cash as a percentage of total assets in mutual funds is back down to record lows of 3.5% (they always need some in order to handle redemption requests). The percentage of cash, at the bottom of the chart, is again drawn inversely to show correlation with stock market peaks and valleys.

Mutual Funds Cash to Asset Ratio, 1960-2010, chart courtesy elliottwave.com

The all-time low percentage of cash is right where it was at the top in 2007. So convinced of a continuing bull market are fund managers that they've put all their working capital to work in the market. If and when the stock market starts down in earnest, sparking liquidation requests from fund holders, the managers will be forced to liquidate holdings in order to handle the cash requests. As happened in 2008, this will only exacerbate the selling.

Speaking of cash, how many are aware that you could be prevented from withdrawing cash from your money market accounts? I was just recently made aware of an SEC ruling, passed on January 27, 2010 by a 4-1 vote, as reported by Zero Hedge, that allows Money Market Funds to suspend redemptions as they deem necessary (in the name of preventing a run on money market accounts). Do you think those in the know know something?

And this brings me to portfolio insurance (for those who refuse to go to cash). But before getting into that, let me show the longer term SPX charts that I've shown before, updating them for any new subscribers (to help you get a sense of why I'm so adamant about protecting investors). With the market looking like it's getting ready to tip over (at least that's the setup), the weekly chart (with a wider view than my normal weekly chart) shows a typical 5-wave move down from the April high into a low in 2011 that would complete a larger degree 3rd wave in the decline from October 2007.

S&P 500, SPX, Weekly chart, 2007-2012

A drop down to the 870 area by August would only be the 1st wave of the larger degree 3rd wave. So you can see it could be a painful two years for anyone who believes buy-and-hold is the way to go (to the poor house). Now we step out further and look at how that larger degree 3rd wave fits into the wave count from the 2000 high. It's a big A-B-C pullback correction to the bull-market run up during the previous century.

S&P 500, SPX, Monthly chart, 1997-2018

The monthly chart shows a typical 5-wave move down from October 2007, which would finish the c-wave and end the bear market. The 1st wave of the 5-wave move down was the 2007-2009 decline and the rally back up from March 2009 was the 2nd wave correction (2nd waves are known to get investors very bullish and this one did that in spades). The strongest move of the 5 waves is the 3rd wave and that's the one that's due next, which will take us into next year. That's the 5-wave move down I showed on the weekly chart.

Once the 3rd wave down is complete in 2011 (speculating on that since it could go faster or slower) we'll get about two years of a consolidating market (a trader's market) and then the final 5th wave down into the low in 2016. The projected low will be around SPX 310 (below DOW 3000). Many scoff at the idea the market could get that low (which would be an 80% decline from the October 2007 high) but if we follow historical patterns it could actually drop a lot lower than that.

This is not presented just to scare you. Well, if you're complacently sitting in long positions and not worried about the next "little" pullback then yes, I am trying to scare you. This may not pan out but what if it does? Is there a way to protect yourself, or offer advice to friends and family who do not want to sell their positions? As readers of this newsletter you are more educated than most traders out there, by far. You know the methods available to take advantage of a declining market or how to at least offset the risk of a declining market. One method of course is to purchase puts.

When any of us buys a house or a car, or a big diamond ring for our fiancée/wife (with the profits made in a bear market), it's very common for us to immediately think of insurance. But when it comes to a stock portfolio worth hundreds of thousands, if not millions, of dollars, especially in retirement accounts, insurance is the last thing we think of. So here are some numbers to share with your family and friends. Friends don't let friends drink and drive. We should start a campaign with "Friends don't let friends invest without insurance." Not as catchy, I know.

If you buy a $40,000 car you'll probably pay about $1200/year for insurance. If you have no accident your insurance goes unused and up in smoke (and you hope it does since it means you didn't have an accident) and your car will probably depreciate about $8,000 the first year (just guessing here). But not even accounting for the depreciation, the insurance will cost roughly 3% of the value of the car (and a higher percentage the following year on a depreciated car). Now take a $1M investment account. The same cost for insurance (3%) will be $30,000. Ask an investor if they'd be willing to spend that much for insurance on their account and I can almost guarantee what their answer will be.

So let's say we're worried about a strong market decline by August and if it doesn't decline by then we'll cancel the insurance, with the insurance being September put options.

We're going to buy September SPX 1100 puts which today I could have paid about $50. Playing with ThinkorSwim's options Risk Analysis tool (thanks to our resident options guru, Linda Piazza for her help on this) I can get an idea how much the puts will be worth if the market drops, stays the same or rallies and how much premium will bleed away over time. I did not play with a lot of different choices (month, strike, SPX values, etc.) but instead just wanted to give you some rough numbers to consider.

Scenario 1:
-- SPX drops to 870 (the July 2009 low) by August opex (August 20th), which would be a 21% decline (a loss of 245 SPX points)
-- A 22% decline in a $1M portfolio would mean a loss of $220K that needs to be protected against
-- By playing with the risk analysis tool I see that I need 17 puts to cover my loss and the initial expense of the puts
-- 17 puts times $50 = $85K cost
-- 17 puts at SPX 870 = $307K
-- $307 - $85 = $222K, which offsets the $220 loss on the portfolio's value (the total portfolio is up +$2K).

Scenario 2:
-- SPX goes flat and is still at 1100 by August opex, at which time you sell the puts back to the market
-- The value of the puts drops by half so the $85K value suffers a $42.5K loss. This equates to an insurance cost of 4.2%.

Scenario 3:
SPX rallies 10% (111 points) by August opex
-- The value of the puts drops to $2.25 from the original $50 price, for a loss of $81K on the put position
-- The 10% increase in the portfolio value is +$100K, which offsets the loss on the puts (the total portfolio is up +$19K).

So we're risking 4.2% in insurance cost to protect the portfolio into August, and that's only if the market stagnates and goes nowhere. The other two possibilities, with a strong market decline or a moderate rally, has the total portfolio increase in value. Tell me where else insurance has the potential to make you money (not by devious methods such as torching your own worthless property, smile).

If someone has played with more numbers, such as longer-dated put options and OTM or ITM strike prices, and found a better choice for insurance, I'd love to hear from you so that I can pass along the information.

Hopefully this little exercise will get some of you thinking about how to help others weather a rough storm that's coming. We've been in the eye of a Category 5 hurricane since March 2009 and the back side of the hurricane is typically worse than the front side and is the time when the real damage typically occurs). I have little doubt we'll see the same effects in the stock market on the back side of this hurricane.

So where to park all your money? Robert Prechter has some recommendations that can be found in his book, "Conquer the Crash":

Investment Recommendations through 2016, courtesy Robert Prechter in "Conquer the Crash"

Sorry if that was a long-winded approach to account protection but I think it is important, especially considering where I think we are in the price pattern. It's one thing to make money in this business but it's more important to keep it. If the A-B-C bounce pattern off the May 25th low is the correct interpretation, it should be very close to completion, if it hasn't already been completed. And that sets us up for some very hard selling over the next month or more.

The closer view of the weekly chart above shows a 5-wave move down into July that could see 870 relatively quickly and then a small consolidation and another drop to the 750 area by August. This would be a typical move but it could be a lot worse or instead find support at higher levels.

S&P 500, SPX, Weekly chart

The daily chart shows the a-b-c bounce off the May 25th low as a correction to the decline. The count for the 1st wave down (wave (i) on May 25th) is quite frankly ugly (doesn't pass the smell test) but considering the deep drop for the flash crash and then high bounce, perhaps that's what's screwing up the looks of the pattern. I'm going with this until something better looking comes along. But even an alternate wave count that I'm considering calls for a sharp decline from here, one that at least equals the decline to the May 25th low (180 points which would give us a downside target near 935 and near the January and June 2009 highs).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1116
- bearish below 1088

One other alternate pattern that I'm considering, shown with the dashed line in the above chart, is for a larger A-B-C bounce off the June 8th low, to play out into July. I won't have a better feel for that possibility until we get a pullback/decline and if it becomes a higher probability I'll be sure to alert you to it so that you can plan your option trades accordingly.

Looking a little more closely at the a-b-c bounce pattern off the May 25th low, the 120-min chart below shows the 5-wave move up from June 8th, which should mean the move up is now complete. If it does push higher on Friday and into next week, the upside target would be 1130 and then possibly as high as 1150. As noted on the daily chart above, the 1115 area has been important support/resistance and that's where price has been having trouble at the moment. It's either bullishly consolidating or getting ready to let go to the downside. We should know Friday and so far we've got a hint from the daily candle--a hanging man at resistance. A red candle on Friday would create a sell signal.

S&P 500, SPX, 120-min chart

The DOW, and SPX, bounced off the 200-dma, which is bullish. The daily candle is a hanging man and actually a potentially more bearish dragonfly doji. A down day on Friday, especially if the DOW closes back below its 200-dma near 10330, would give us an important sell signal considering it should be the completion of the correction of the decline.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10550
- bearish below 10186

On the daily chart of NDX below I'm showing the price projection at 1912.76 (seen a little more clearly on the 120-min chart below the daily chart) where the a-b-c bounce off the May 25th low achieved two equal legs up. It's also very close to the 50% retracement of the decline so it's a potentially important Fib level, which is where it has stalled the past two days. Whether it's being held up for opex (overnight futures activity would suggest that's what's happening) or if it is instead bullishly consolidating, we'll know very soon, possibly Friday. A push above 1945 would be potentially bullish and I'd back away from the short side if that happens.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1945
- bearish below 1844

The a-b-c bounce is shown more clearly in the 120-min chart below and shows the 5-wave count for wave-c. Today it broke its uptrend line from June 9th (the bottom of its rising wedge pattern) and at the end of the day it jumped back up for what could be a retest of the broken trend line. A drop down on Friday would leave a bearish kiss goodbye. The rising wedge pattern says we'll see a fast retracement of the rally off the June 9th low (NDX 1774, which is SPX 1052).

Nasdaq-100, NDX, 120-min chart

The RUT has been banging its head on its broken uptrend line from March 2009 as it finishes its c-wave of its a-b-c bounce off the May 25th low. That trend line is currently near 675 if it's able to push a little higher on Friday otherwise it looks ready to start down.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 675
- bearish below 651

The banks have been looking relatively weak and even the 2nd leg up for its a-b-c bounce off the May 25th low has not been able to achieve the height of the May 27th high as the other indexes have done. BKX has stalled at 50, which has been a support/resistance level in the past. It should be one of the ones leading the southbound parade once everyone is lined up and ready to go.

KBW Banking index, BKX, Daily chart
%IMG15%

The Transports on the other hand have been stronger relative to the other indexes. The TRAN has retraced almost 62% of its decline and I'm using a little different wave count on it because it's something I'm still considering for the other indexes. It calls the June 8th low the bottom of the 1st wave (instead of May 25th) and the bounce up as the 2nd wave correction. It could also be wave-a of a larger a-b-c bounce (dashed line) but as mentioned earlier, I won't have a better feel for the chances of that happening until we get a pullback started (a choppy decline that looks more like a b-wave than a 3rd wave would suggest the alternate wave count). If the TRAN drops back below 4100 I think we can rule out any of the alternatives and look for a steep decline.

Transportation Index, TRAN, Daily chart

The U.S. dollar is doing what I had expected--it has started a correction of its rally from November and will likely be in a multi-month correction (therefore potentially choppy). The euro should also see some relief from all the selling it experienced and get a bounce to relieve some of the oversold indicators.

The decline in the dollar has helped commodities this week, including gold and silver, but I don't think it will last long. In fact I'm seeing remarkable confluence of patterns calling for a synchronized selloff in the stock market and commodities. Gold is wedging up to what could be a triple top with waning momentum. The gold bulls are a determined bunch but I think the next big move is going to disappoint them.

Gold continuous contract, GC, Daily chart

As gold wedges up, so too is oil getting a wedgie. The pattern of oil's bounce off the May 20th low now looks complete as of yesterday's high at 78.13, which was just shy of a 62% retracement of its decline in May. As with the stock market, it looks ready for a 3rd wave down which will take it well below $60.

Oil continuous contract, CL, Daily chart

Today's economic reports were initially met with selling in the futures at 8:30 AM and then the cash market at 10:00 AM. But after "someone" worked so hard to lift the futures from their overnight lows into positive territory before the open they weren't about to let a little selling take over and they worked all day again to get them back up into positive territory. Clearly opex manipulations behind last night's and today's price action.

Unemployment is getting worse, not better (no real surprise there) and CPI is showing not disinflation but deflation. Both reports demonstrate that all the wishful thinking, called hope, for improving employment numbers and a growing economy (to support increases in prices) is turning to dust. All the Fed's money and all that the government spends can't seem to put Humpty Dumpty together again.

The Leading Indicators came in only slightly lower than expected but the Philly Fed number missed by a mile. Expectations were for a slight decline to 20 from 21.4 but instead it came in at 8.0. Anything above zero means growth but clearly this report was "less good". That report made the "lifter's" job that much more difficult in getting the market back up from this morning's low. If not for the usual final 30-minute spurt into the close the indexes would have closed in the red.

Economic reports, summary and Key Trading Levels

There are no significant economic reports on Friday.

In summary, I think the market is set up for a hard decline and once opex week is out of the way it's looking like big money is going to step out of the way and not fight a market decline, which could happen as early as Friday. Once they've unloaded much of their inventory, which I think they've been doing, it's in their best interest to let the market drop and then swoop back in and pick up the pieces at bargain prices. Drive it back up, rinse and repeat.

Jeff Cooper, who writes a subscription service under Minyanville, reported on Wednesday the following: "As offered in recent columns, the end of June this year ties into the beginning of some powerfully explosive negative cycles. Maybe it's nothing. But I hear reports that Iran is sending two war ships to confront the Israeli blockade while at the same time Saudi Arabia has given Israel permission to use its air space." The Saudi permission has been confirmed.

I keep saying this market is a tinder box waiting for a match. We don't know who will provide the match or who will light it but until we get through August, which is the vulnerable period from a cycle perspective and some potentially significant astrological events (Arch Crawford is predicting a market crash worse than anything anyone has seen before), I think it's very dangerous to be long the stock market.

I've been crying wolf so long I've developed a howl in my voice (old timers will remember the song "Little Red Riding Hood" by Sam the Sham and the Pharaohs--Li'l Red Riding Hood). Instead of using the words "I don't think little big girls should go walkin' in these spooky old woods alone", I'd use "I don't think little big traders should go tradin' in these spooky old markets alone." Bring along some protection (puts) to beat back the bad wolves out there. I've been warning about the next leg down for what seems forever and it may not come for another month or two, or it could start tomorrow. Play it safe and keep your risk under control at all times, both sides.

Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1116
- bearish below 1088

Key Levels for DOW:
- cautiously bullish above 10550
- bearish below 10186

Key Levels for NDX:
- cautiously bullish above 1945
- bearish below 1844

Key Levels for RUT:
- cautiously bullish above 675
- bearish below 651

Keene H. Little, CMT


New Option Plays

Long Candidate Breaking Out to New Highs

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Express Scripts, Inc - ESRX - close 52.74 change -0.41 stop 49.80

Company Description:
Express Scripts, Inc. is a pharmacy benefit management (PBM) operating in North America. It offers a range of services, which include health maintenance organizations (HMOs), health insurers, third-party administrators, employers, union-sponsored benefit plans, workers' compensation plans and government health programs. The Company operates in two business segments: PBM and Emerging Markets (EM). The PBM segment consists of retail network pharmacy management and retail drug card programs, home delivery services, specialty pharmacy services, benefit plan design and consultation, medication therapy and safety through pharmacogenomics, and assistance programs for low-income patients. The EM segment consists of distribution of pharmaceuticals and medical supplies to providers and clinics, distribution of fertility pharmaceuticals requiring special handling or packaging, and healthcare account administration and implementation of consumer-directed healthcare solutions.

Target(s): 53.70, 54.75
Key Support/Resistance Areas: 54.00, 51.25, 50.00
Time Frame: Several weeks

Why We Like It:
ESRX has been a strong performer despite the market weakness over the past six weeks. The stock has built quite an impressive congestion area between $50.00 and $51.50 since late March and recently broke out printing a new high. The stock is now turning back to retest the key pivot area and I suggest we take advantage of any weakness the stock gives us. In addition, the stock's 20-day and 50-day SMA's are near $51.25 which should provide solid support if the ESRX trades down there. I would like to use $51.90 as an area to initiate long positions. I believe the market will give us this level and allow ESRX to break out to new highs. Our targets are $53.70 and $54.75 (which would be a new all time high for the stock). We'll use a stop at $49.50 which is at the bottom of the congestion area and below the aforementioned SMA's, but I will be surprised if ESRX trades down there unless the overall market is under severe pressure. Aggressive traders may consider entering now but I think if we are patient we will get filled in the coming days on market weakness, which is bound to happen.

Suggested Position: Buy August $52.50 CALL if ESRX trades down near $51.90, current ask $3.10, estimated ask at entry $2.60

Annotated Chart:

Entry on June xx
Earnings Date 7/29/10 (unconfirmed)
Average Daily Volume: 5.5 million
Listed on 6/17/10


In Play Updates and Reviews

Short Position Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Cisco Systems - CSCO - close 23.16 change -0.12 stop 22.20

Target(s): 23.55, 24.20
Key Support/Resistance Areas: 23.65, 22.55
Time Frame: 1 to 2 weeks

Comments:
I am hoping to get filled on CSCO in the coming days at $22.85. Monday would actually be best but let's wait for the set-up and see what the market gives us. The stock hit a low of $23.05 today which I mentioned as a good entry for more aggressive traders yesterday. My comments remain the same from the play release. CSCO has been building a nice base for the past 3 to 4 weeks and is trading in a $1 range (4.5%) between $22.55 and $23.55. $22.50 is key pivot level for the stock dating back to 2006. It appears the stock may want to break higher out of this base, but we don't necessarily need that to happen for a profitable trade. CSCO looks stable here with a lot of support and I suggest we take advantage of the reliable price pattern that is being built. I would like to use $22.85 as a trigger to enter long positions. If triggered readers should be able to purchase July $22.00 calls for about $1.30 (current ask is $1.49). If CSCO then proceeds to rally to the top of its base at $23.55 we should make about 55 cents on the position for a +40% gain. If CSCO breaks out it could rally to fill a gap which is up near our more aggressive 2nd target of $24.40 and below the stock's 200-day SMA. Another entry could be considered at $23.05. Our stop will be $22.20. NOTE: I view this trade as potentially being quick.

Suggested Position: Buy July $22.00 CALL if CSCO trades down near $22.85, current ask $1.49, estimated ask at entry $1.30

Entry on June xx
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 69 million
Listed on 6/16/10


Ormat Technologies - ORA - close 29.61 change -0.18 stop 27.25

Target(s): 30.45, 31.80
Key Support/Resistance Areas: 32.00, 30.60, 29.00, 27.50
Current Gain/Loss: +5%
Time Frame: Several weeks
New Positions: Yes

Comments:
ORA closed above its 50-day SMA and made a new daily high again, however, the stock sold off during the morning weakness and closed down 18 cents. For options traders, if we get a move up to $30.45 (which is our first target) next week our options should be worth about $1.45. This will represent a nice profit and is a good place to take profits or tighten stops. If you are only trading the stock I think ORA can make it up to the $31.80 area but it may take some time depending on the overall market direction. The fact that ORA is making daily highs is good and as the sellers wane I am confident we will hit our targets.

Current Position: July $30.00 CALL, entry was at $1.00

Entry on June 16, 2010
Earnings Date 8/4/10 (unconfirmed)
Average Daily Volume: 345,000
Listed on 6/15/10


CLOSED BULLISH PLAYS

Direct TV - DTV - close 37.79 change -1.54 stop 35.70

Target(s): 38.20, 38.50, 39.50, 41.50
Key Support/Resistance Areas: 38.60, 37.00, 36.30
Current Gain/Loss: N/A
Time Frame: Several weeks
New Positions: Dropped

Comments:
Wells Fargo downgraded DTV to Market Perform from Outperform with a price target of $38-40. This sent DTV down -4% today. This is enough for me to drop the play as there could be latecomers to the selling party that may have missed it today. And if the market reverses lower DTV could get hit as well so its simply not worth the risk. I'll keep an eye on the stock and may consider re-listing it at some point in the future. For now, we have dropped the play.

Suggested Position: Buy July $37.00 CALL if DTV trades down near $37.20 which is just above its 50-day SMA, current ask $2.78, estimated ask at entry $1.40

Annotated chart:

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


CLOSED BEARISH PLAYS

Freeport McMoRan Copper & Gold - FCX - close 65.81 change -1.22 stop 68.80

Target(s): 65.15, 64.50, 63.10, 61.50, 58.30
Key Support/Resistance Areas: 66.00, 65.00, 64.00, 58.00, 55.00, 52.00
Current Gain/Loss: -24.37%
Time Frame: 1 week
New Positions: Closed

Comments:
FCX broke the 50-period SMA on its 30 minute chart this morning and sold off hard. We got the big move lower I was looking for to exit the position at our adjusted target of $65.15. So we are flat the PUTS at $1.80. With the weekend coming up and OPEX tomorrow I believe it was best to exit the position, preserve capital, and look for better opportunities. For readers who have positions I urge you to protect capital. I do not suggest holding positions hoping the stock will decline from here. FCX just isn't giving it up like I expected and if the market moves higher from here time decay will eat away further at the option premium. The stock may be also be forming a bull flag so the longer it stays at these levels the greater the chance for a move higher. If FCX declines from here I would be looking for strategic exit points and trail stops down if possible. I'll leave some of my comments from last night. On the intraday charts FCX has been in an uptrend the past 5 days and on the 30 minute chart FCX has bounced off of the 50-period SMA (currently $66.66) as support on the way up. This level needs to break convincingly to get the stock moving lower, and if it does I think we could see $65.00 relatively quick. Fundamentally, demand for copper should be weakening as evidenced by housing starts in the US and other countries like Australia, which came in overnight at 4.3% Q/Q compared to estimates of 7.0%. This has been a frustrating trade and I think it is prudent to consider exiting positions to preserve capital. As such, I have added $65.15 and $64.50 as additional targets. The estimated price of our options at these targets is about $1.75 and $1.90, respectively. These are good levels to either take profits or tighten stops to see if we can get more out of the trade. When FCX gets moving the moves tend to be big. On the daily charts, the stock remains in a downtrend and has made a series of lower highs and lower lows, but it has also stubbornly refused to give up any of the recent gains. Readers may want to consider placing a sell limit order based on the option (as opposed to the stock price) to simply exit positions. I view this trade as aggressive and quick so proper position size should be used to limit risk. I am also choosing an out of the money option to limit capital at risk.

Closed Position: July $60.00 PUT at $1.80, entry was at $2.38

Annotated chart:

Entry on June 11, 2010
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 19 million
Listed on June 10, 2010