Option Investor
Newsletter

Daily Newsletter, Saturday, 6/26/2010

Table of Contents

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

Market Wrap

Time to Fish or Play Golf

by Jim Brown

Click here to email Jim Brown

Monday's open was the high of the week and it was all down hill from there. Economic uncertainty was the motivating factor.

Market Statistics

The market dodged a bullet at the open with the Q1 GDP revision coming in at +2.7%. The consensus estimate was for a +3.0% gain. There were many who feared it could have fallen as low as +1.5%. The last revision was +3.0% and the first revision was +3.2%. This was the final revision to the Q1 numbers and analysts will now begin focusing on the Q2 numbers due out July 30th.

Expectations for Q2 and Q3 are slipping daily with Q2 estimates averaging +2% and Q3 possibly under 2%. This rate of growth is not sufficient to maintain employment gains. There is also the worry over the inflation rate. The CORE PCE inflation component in the Q1 GDP ended at +0.7% on an annualized basis and it is expected to fall again in Q2. The Fed would like to see it in the 2% range. There is a growing fear over a deflationary environment ahead.

GDP Chart

One problem heading in our direction is the end of federal stimulus. By January the $787 billion from stimulus bill will have been spent. State and local governments have run out of money to deficit spend. In the U.S. 46 states are facing a Greek style deficit problem. Money from Washington is drying up by year-end and those states will be facing a combined $125 billion budget shortfall despite already painful budget cuts. Those states will be forced to enact further budget cuts and raise taxes on citizens to fund the existing shortfalls. This is not conducive to economic growth. Employment is still weak and consumers are running on empty. Sales and income tax revenue has fallen for five consecutive quarters. That is the first time since 1962 that has happened. This will require major budget cutting by the states and more economic pain for consumers.

The federal government can't help because they have their own problems. U.S. debt will top $13.6 trillion in 2010 and rise to 102% of GDP by 2015. Publicly traded debt will rise to $14 trillion by 2015, up from $7.5 trillion in 2009. By 2015 the interest payments alone will be more than $1 trillion a year and 30% of U.S. government revenue. The government can't afford to renew the tax cuts at year-end and will be forced to let them expire. Putting those taxes back on consumers will only make matters worse for economic growth because it takes needed funds out of consumer's pockets.

This is a real problem for the economy and the markets. The nation is headed into a forced austerity program regardless of whether the government would like to spend more money. The markets are going to suffer as the year progresses because of the coming tax problem. Investors are going to take profits before year-end to avoid the increased taxes. That money will then go into bonds to wait out the economic stress. There are some tough economic times ahead.

Despite the coming economic stress consumer sentiment improved slightly in June. The headline number improved to 76.0 from the first June reading of 75.5. Obviously it was only a minor gain but it pushed the index to a two year high. The gains came in the current conditions index, which was probably influenced by the normal summer holiday euphoria. People normally feel better during the summer with vacations underway and the lack of daily school scheduling duties.

The next reading on sentiment for July will likely decline due to the massive press coverage of the drop in home sales. New home sales fell to a 40-year low after the tax credit expired. Up to 35% of those currently contracted to buy a home under the tax credit plan will be unable to close by the June 30th deadline according to the National Association of Realtors. To make matters worse the bill currently in progress that is trying to extend that deadline until September 30th failed again on Friday. If the non-farm payroll report next Friday comes in as negative as expected that will further depress sentiment.

Consumer Sentiment Chart

The Weekly Leading Index rose for the first time in seven weeks but only by a half a point to 122.9. However, the annualized growth rate declined even further to -6.9% from -5.8% the week before. The growth rate has declined 11 of the last 12 weeks. The minimal gain in the headline number is a statistical anomaly and will probably head lower again next week. The WLI is predicting serious problems in the economy in 2011. This is a forward-looking indicator for the period six months ahead. It is currently at the lowest level since July 2009.

WLI Growth Rate Chart

The American Trucking Associations' Truck Tonnage Index fell -2.8% in May on an unadjusted basis. Compared to May 2009 the index is still up +7.2% but the gains have been slowing over the last several months. Trucking volumes appear to have plateaued and could be starting to weaken. Trucks carry 68% of all goods in the U.S. economy.

ATA Truck Tonnage Chart

Globally the transportation picture is also slowing. The Baltic Dry Index, an index that tracks shipping costs of various dry cargoes all over the world has declined for the last four weeks and is in danger of a serious breakdown. The index hit a high of 4200 the week of May 24th and has declined to close at 2501 on Friday. That is a 1700-point drop or -40% in only four weeks. That is a serious indication that ship traffic is falling sharply. This is a major warning especially because the drop came in only four weeks. The only qualification would be this is a dollar denominated index and the dollar has fallen -4% over this same period. I am sure there is some impact from the dollar but not -40%.

BDI Chart

There is a definite smell of recession in the air or maybe it is deflation instead. It appears that on June 1st an email went out saying "recovery is over, prepare for the second dip." The bounce on the China export and Brazil GDP news was the sucker's rally and now everyone is bearish again. I want to know how to get on that email list because I did not get the email. Somewhere a straw fell and broke the back of the recovery. Obviously there were a lot of straws falling in May but the proverbial last straw must have finally fallen.

The financial regulation reform bill reached critical mass on Friday and is expected to pass next week. Bank stocks rallied late Friday in relief that the changes were over. Unfortunately many of the changes won't actually take form until the new regulatory body actually takes the document and turns it into rules.

The Volcker rule is in the bill but it was watered down slightly to allow banks some leeway in trading for their own benefit. They can speculate with up to 3% of their capital in private equity and hedge funds. Banks are also allowed to deal in derivatives in order to hedge their own risk but not to speculate on risk as a trade. This will keep companies like AIG from writing credit default swaps on anything without any capital reserve to back them up. The bill calls for derivatives to be traded on public exchanges like the CME.

Small banks are expected to see a profit hit of between 2-4% while larger banks could see a hit up to 10%. One of the biggest problems is the additional capital requirements. Some analysts believe capital requirements could rise to as much as $5 trillion. Any additional capital requirements would come out of available funds for lending. This means there will be less credit available to customers. Banks have been hoarding cash for the last year in expectations of both a second dip and the increased capital requirements. How it will actually impact their requirements won't be known for months. Smaller banks have five years to raise their capital to meet the new rules.

Banks will lose billions from restrictions on things like overdraft fees and service charges, which will be either eliminated or significantly reduced. Chase is reportedly going to lose $350 million a year in fees. You can bet they will show up in some other form. Customers will always end up paying any fees caused by regulatory changes. They will just be called something else.

Banks rallied because the process was over. There were fears the rules could have been a lot worse and many rumors were already priced in. This was a relief bounce but we still don't know how this will translate to actual rules.

Wal-Mart (WMT) is heading south at a high rate of speed. With the democrat's successful cram down of the bank reform and the negative results in the primaries, analysts believe Wal-Mart will be next on the target list. The democrats are going to be hell bent to pass everything they can before the November elections because the odds are very good they will lose their majority and new social reform programs will be DOA. Card-check is expected to be next in the hopper along with immigration reform and cap and tax.

The card-check program was introduced in Congress in 2005, 2007 and again in 2009. Basically if more than 50% of workers for a given store or enterprise fill out an authorization card requesting a union then the union becomes the official representative for the workers. It is basically a forced union on the employer. President Obama supports the Employee Free Choice Act and is reportedly talking it up again behind closed doors in an effort to boost the voting base for the democrats. Union members typically vote democratic. Wal-Mart is not a union store and being forced into a union business would raise prices for everyone and raise costs for Wal-Mart. Wal-Mart closed at a new 10-month low on Friday. I also heard the financial reform bill had a clause in it that would make it harder for Wal-Mart to start a bank. Unfortunately I could not find anything online about that clause. The final documents have not yet been released.

Wal-Mart Chart

BP fell to another new low today at $27 after the weather service said there was an 80% chance the storm south of Cuba would turn into a cyclone. The storm reached that level Friday night and is now named Alex. It is headed for the Yucatan peninsula this weekend and will enter the gulf early next week. As of late Saturday the storm is expected to move west of the well and hug the Texas coast.

BP is praying it falls apart over the Yucatan and dissipates into an unorganized disturbance that will not force them to leave the well site. There are roughly 60 ships clustered around the leaking well and should the storm develop into a hurricane it would be very bad for the recovery effort. The ships would have to pull up the pipe and hoses and run for cover. They need four days to break camp and six days to rebuild it once the storm passes. That means the well could be running full blast dumping up to 50,000 bpd of oil into the gulf for 14 days due to storm disruption. This would increase the environmental damage in the gulf by a factor of 2-3 times.

Secondly if the storm turns into a hurricane it would increase the pollution significantly on the shores of the gulf. The storm surge would push oil much further inland as well as up marshes, streams and rivers. It would be an even bigger disaster than it already is.

British Prime Minister David Cameron met with President Obama on Saturday at the G20 and BP was on the list of topics to be discussed. Cameron is catching a lot of heat at home over President Obama's constant persecution of the company. Cameron said he wants some finality to the damages and the cost to BP. He does not want BP to be destroyed since 40% of the shareholders are British. I doubt he will get a cap on costs since the well is still leaking. I doubt he will get a commitment from Obama to quit slamming BP in speeches since Obama believes that is a way to regain credibility. News out late Saturday claims the pair both agreed that further harassment of BP or putting them out of business would not benefit anyone. It will be interesting to see how long that commitment lasts.

NOAA Weather Chart

Storm Track

Chart of BP

The risk of a storm was credited with pushing crude oil prices +3% higher to close just under $79. I believe that reason was bogus. This rebound off support at $75 was to be expected as the quarter comes to a close. In fact commodities in general saw strong gains as funds tried to find something to park money in for the end of the quarter. Commodities are always favorite places to hide until the quarter end passes.

There was no fundamental reason for oil prices to move higher. There is plenty of oil in inventory and about six million barrels per day in excess production capacity. The declining economics in Europe and the U.S. are depressing demand. The IEA said last week that demand factors would continue to slow through 2015 although there would still be overall demand growth. In other words demand growth would decline to only 1% per year instead of averaging 1.5% as previously expected.

Crude Oil Chart

Apple claimed it sold over one million iPhone 4 phones on the first day of sales. This came despite the claims the new antenna positioning is causing a reception problem. The solution to the problem according to Apple is to hold the phone differently or get a case for it. Seems the human body and moisture in your palms tends to degrade the antenna reception on the new phone. Steve Jobs made a big deal out of the new design during the presentation calling it "really cool engineering" to put the antenna in the outside metal band on the phone. I guess it is really cool if you like losing two bars of power when talking.

While there are numerous videos on the web showing the problem there are also many claims by users that they cannot recreate the reception drop on their phone. AllThingsD.com ran a comparison and pointed out that nearly all cell phones including the various Android versions and even the BlackBerry suffer reception signal strength depending on how you hold the phone. I doubt Apple will issue a recall since the answer is simply to put a case around it and 90% of users do that anyway. Apple stock has been losing ground since the problem was first announced but so has the market so it is tough to say which is the cause.

Apple Chart

The economic calendar for next week is full of potential problem reports. There are three ISM reports and a double dose of news from Chicago. The ISM report on Thursday will be the key one that shows manufacturing trends nationwide.

The big report is of course the non-farm payrolls on Friday. The Moody's estimate is for a loss of -155,000 jobs. The various jobs estimates are going to be quoted all over the place next week with ranges from -100K to -500K. The big drop everyone is expecting is the decline in census workers. The real key will be the core rate after subtracting the census workers. Morgan Stanley is looking for a gain of +150,000 jobs. That is astounding after a net gain of only 41,000 in May.

They are basing this on the CEO hiring survey. CEO's reportedly have the strongest hiring confidence in the last three years. Whether that is translating into new jobs remains to be seen. Weekly jobless claims remain stubbornly over 450,000 with a four-week high at 472,000 in the prior week. This is not evidence of CEO hiring.

There is also the problem of the oil spill. The governor of Louisiana claims 150,000 people are out of work because of the spill and the moratorium. Those job losses could have been reported in the May payrolls because the spill has just crossed into its third month.

I believe the payroll report plus the national ISM will be a weight on the market all week.

Economic Calendar

Friday was the annual rebalancing of the Russell indexes and that always creates unusual volume. The rebalance removes stocks that have fallen in market value and replaces them with stocks that have risen in value. The Russell 3000 is the top 3000 stocks in the U.S. with the Russell 1,000 the top 1,000 of those stocks and the Russell 2,000 the bottom 2,000 of those stocks. There is $3.9 trillion in investments benchmarked to the Russell indexes.

The value of the shares being added is greater than the shares being removed so the rebalance requires fund managers to sell some of the 2,700 stocks not being removed in order to buy the appropriate amounts of the new stocks being added. According to fund analysts, fund managers needed to raise $14 billion from the sale of other stocks in order to make the switch. Volume on Friday was 11.6 billion shares compared to an average of only 8 billion shares the rest of the week. O Friday there were roughly $10 billion in market on close orders for Russell 1,000 stocks.

Berkshire became eligible to join the Russell 1000 after a 50:1 stock split on the class B shares. It joined the S&P-500 on Feb 12th and is the 13th largest weighted stock on the S&P. Needless to say it will be very highly weighted on the Russell 1000 and there were 109 million shares traded late Friday. BRK.B averages less than 5 million shares per day.

I don't know what to attribute to the intraday rebound on the indexes other than we have had an intraday rebound for the last three days. The bulls are trying to produce a rally but the selling at the close is killing them. As long as the close is sold the downtrend is going to continue.

The S&P collapsed this week with a 3.6% loss to 1078 after trading as high as 1131 on Monday. The S&P is right in the middle of the range where it spent most of May and early June. Despite the loss this week the trend for the last six weeks is still range bound. A continued drop below 1070 next week will be the signal for the next leg down. Baring unforeseen events I would expect to see 1050 again. However, next week is a holiday week. Volume will be very light and it is typically bullish. Countering that historically bullish sentiment is a raft of economic reports punctuated with the nonfarm payrolls on Friday. That should keep a lid on any rally and possibly keep the pressure on the current range. Support is 1050, resistance 1110.

S&P-500 Chart

The Dow chart is a carbon copy of the S&P with the close at 10143 right in the middle of the recent range. Psychological support should be 10,000 but 9800 is the real target on a continued slide. If it were not for the rallies in JPM and AXP the Dow could have been much more negative. Many of the Dow big caps were down a buck or more. That included KO, WMT, PG, IBM, XOM and JNJ.

Dow Chart

The Nasdaq overcame a monster decline in RIMM and a $2.30 decline in Apple to remain in positive territory. Research in Motion was crushed for an 11% drop after reporting earnings that were less than exciting. With Apple's iPhone 4 and multiple versions of phones with the Android operating system taking market share from the longtime favorite the future looks bleak. Credit Suisse said volume on the other smart phones was going to quickly erode prices and competition for the BlackBerry was going to increase. The BlackBerry remains the phone of choice for the business community but the iPhone and the Android are catching up. RIMM fell to a level not seen since March 2009 at $52 and took a sizeable chunk out of the Nasdaq.

Winners on the Nasdaq included the CME on financial reform along with PCLN and ISRG. The winners outpaced the losers and the Nasdaq managed to rebound off support near 2200 and close slightly positive. Support remains the 200-week average at 2220 and the June lows at 2140. Resistance is well above at 2320.

Nasdaq Chart

The Russell found support at 635 for the last three days but we really can't use the Russell as an indicator this week because of the rebalance. The 620 level is still the critical support point.

Russell Chart

The Dow transports appear to have found support at 4200 and that could be an early indicator of some returning market sentiment. If investors are anticipating an economic rebound this sentiment should be seen in the transports first. Personally I believe this is just a pause point ahead of another decline because the economic factors are weakening. A break under 4200 targets a retest of 4000.

Dow Transports Chart

I remain bearish until proven wrong. The S&P failed at 1100 and is in correction territory again. The 1050 level is beckoning and there are numerous economic reports this week that could contain bad news. Even if we did get a couple days of gains heading into quarter end I would be skeptical until we see what happens as Q3 starts. There are normally gains around quarter changes but the key here is whether or not they stick.

Earnings will start after the July 4th holiday and guidance is not expected to be strong. There are many reasons to be bearish over the next three months and very few to be bullish. The next couple months would probably be put to better use on the golf course or the lake than in the markets.

Jim Brown


Index Wrap

Off Track

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

I wrote last week that the indexes were 'on track' to move higher but it was a 'big question' as to whether they could exceed a half to 2/3rd's retracements of the last downswing. As if on cue, key major indexes stopped dead in their tracks, and then reversed sharply, at the 50% mark. The Dow ran up a bit beyond the 50% benchmark, ending half between the 50 and 62% levels. Only the strong Nasdaq 100 (NDX) ran well beyond a fibonacci retracement, but then didn't quite make it to the next fib line at 61.8% (62), before also tanking after the big Monday run up. There were also reversals in other key indexes at pivotal moving averages.

Important technical aspects/clues to resistance points for the arrested rally and turn around included:

Exact 50% retracements, followed by downside reversals, in the S&P 500 (SPX) and the Nasdaq Composite (COMP), as well as the Russell 2000 (RUT); the Nas 100 (NDX) reversed a hair's breath shy of a 62% retracement of its late-March to late-May decline.

The S&P 100 (OEX) reversed exactly at its 200-day moving average and the Dow 30 (INDU) at its 50-day average.

I maintain that all the aforementioned reversal points were not random, but reflect the tendency for rebounds to go so far and no further technically when the market turns out to still be in a bearish grip.

Monday's key downside reversal was pivotal in knowing that the recovery rally was OVER. So much so that I wrote a late (Wednesday) night Trader's Corner to that effect; this went out in the wee hours of Thursday morning. In addition, the hourly index charts had traced out bearish flags on Wednesday and I wanted to alert as to the further downside potential implied by those formations. I'll update those hourly charts next but also suggest checking out my mid-week piece online by clicking THIS LINK. If you didn't see it already, this column gives a little more background on some important reversal patterns that I saw as 'teachable moments'. When you study reversal patterns, you are forewarned when they come up again; they always do!

Someone just wrote me asking about the world class private option trader Mark Weinstein with a desire to know more about his method of trading. A major thing I learned from professional traders (I was not strictly on my own in the markets; while I managed trading accounts, I was also a full-time analyst at a major Wall Street firm) was that you had to work hard at understanding EVERY market cycle, every trading 'set up', so that you would recognize key (reversal and continuation) patterns NEXT time, if you didn't 'see' it THIS time. Great traders weren't just born: they developed trading expertise and profitability over years of trading.

The hourly charts I spoke about and the patterns are suggesting to me still more downside to come. Not a freefall/waterfall type decline but probably back down to the low end of a broad trading range. A near-term rally shouldn't be surprising, as the short-term 21-hour RSI got down to oversold areas recently as can be seen on the hourly SPX and NDX charts seen below.

I'm not a long-term bear. I'm not a long-term bull either. I look for trading opportunities with favorable risk to reward potential. That's what I do and pretty much all that the aforementioned Market Wizard Mark Weinstein does. I am primarily non-'political' as to a years out, or even months out, forecast.

The hourly charts I mentioned and that continue through the rest of this past week. Prices broke out to the downside (of the bear 'flag') on Thursday and while the market now is oversold on a short-term basis, the pattern suggests still more downside. I'd like to see the 13-day Relative Strength Index (RSI) get fully oversold before betting much on the upside. Sentiment readings are getting more bearish, but I'd like to see them get to a more bearish extreme also before betting much on the upside.

The updated (through Friday) HOURLY charts of SPX and NDX seen next are the hourly index charts I used in my mid-week update. NOTE: the breakdown to the BELOW the low end of the up-sloping 'flag' pattern had not occurred (yet) when I made my chart notes.



My second HOURLY chart, that of NDX:

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

Prior to this past week's bearish price action, there were some bullish developments seen in the S&P 500 (SPX); e.g., the move above resistance in the 1105-1108 area. However, the failed rally at the beginning of this past week created a key downside reversal (this after SPX hit resistance implied by a 50% retracement of the prior major downswing) and resumes the bearish pattern for the index. A key downside reversal is a decisive new high in a rally phase that's followed by a sharp collapse in prices, with a Close below the prior 1-2 day's LOW.

It's of course possible that the S&P is establishing a longer-term support base in the 1040 area per the potential double bottom that has formed to date. The 1041-1042 'double' bottom may end up not just being twin lows around 1040 as added lows might occur in the same area. Or, we could see lower lows (for the current move) in the 1010-1000 area, where some longer-term technical support is seen, but not shown on my daily chart.

I've noted resistance at 1105, then in the 1130 area.

Near support is back in the 1050-1055 area, then at 1040-1042. Fairly major support is anticipated at 1010-1000.

MARKET SENTIMENT:

Bullish sentiment or the bullish outlook of traders dipped significantly on Thursday, according to my equities call to put ratio, but then bounced back on Friday. I anticipate a further dip or two in bullishness that creates another bearish extreme or two, before this market is ready to rally in a substantial and prolonged way.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart has resumed its bearish pattern as the prior rally only made a limited recovery before the index got taken down by renewed selling pressures. While the 473 double bottom low was suggesting a bottom could be in place, 'confirmation' of such a bottom comes only when the prior upswing high (before the twin lows) is exceeded; i.e., meaning OEX would have to climb back above 532. Instead, OEX's rally failed at resistance implied by its 200-day average, the best known and important of any moving average in stocks and stock indexes.

Resistance last week was noted at 510 and this is an even more pivotal resistance going forward given the sharp reversal after this high was hit. Near resistance is at 500, extending to 492.

Key support is seen at 477, extending to 473. A close below 473 would suggest further downside potential to the 450 area. Major support is in the low-400 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Coming into this past week, we had half of the 30 Dow stocks trading above their 200-day averages. No longer, as 5 of the 'weaker' INDU stocks that had been pulled up by the strong, settled back below this key average; i.e., CHV, which really got whacked (not surprisingly for a big oil company), INTC, MMM, PG and UTX. WMT (Wal-Mart) also got pummeled after failing for 2+ weeks to get back above its prior long-term up trendline.

As to the Dow 30 Average (INDU) chart itself, its pattern is bearish; we could also say 'mixed', in that the Dow may be trying to establish a bottom over the sometimes punishing summer doldrums. INDU has made lows in the same approximate area (at least within 65 points) now on three occasions since February. By the way, 'triple bottoms' are not all that common or 'solid' as having bullish potential. Too often lows that are seen more than twice are a way station to a yet a lower low.

I've noted near resistance at 10200, then at 10330. Fairly major resistance remains for the 10600 area

Last week I noted "Key INDU retracement level tests exist at 10504 (50%) and then at 10681, representing a Fibonacci 62% (61.8) retracement." You saw what happened when the Dow got into that zone and slammed into its 50-day moving average; it wasn't 'in the zone' as in having winning potential!

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I wrote last week that the chart was 'mixed'. This week I'd have to say the chart remains bearish on a short to intermediate-term basis. The Nasdaq Composite (COMP) Index's "W" bottom notwithstanding, COMP couldn't gain traction beyond retracing half of its prior decline; late-March to the late-May to early-June lows.

I thought that COMP was going to perhaps challenge its 62% retracement level, but only the big-cap Nas 100 managed to nearly do that. I'm not anticipating a new down leg but can't rule it out either, since triple bottoms give way often enough to give pause to the idea of tech leading the way to a continued long-term bull market. As to a 'triple' bottom, it's more or less what we have to date, counting lows made mostly in the 2123 area back in February.

Key near support begins around 2200, extending to 2186. I've noted next support at 2156 and that extends to the 2140-2139 twin lows of the past few weeks.

Near resistance is at 2250, the area of the current 200-day moving average, with next resistance noted at 2315.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX), while having the greatest relative strength of all the major indexes as suggested by it having regained the most of its prior downswing (as measured by its intraday high), got whacked with the rest of the market. Charles Dow always made the point that when the tide goes out it takes all boats to lower levels.

I'm anticipating that NDX will work still lower, such as back to the 1800-1793 area; the index could also retest prior support around 1770. Fairly major support/buying interest should still be found in the 1756-1752 area.

A more bullish scenario is that the Nas 100 holds in the area of its 200-day moving average (currently: 1837) as it did on Friday, alone among the major indexes, which could then set up another rally attempt. Maybe strength in Apple alone can spearhead that; this seems a bit doubtful but we'll see.

Anticipated near resistance comes in at 1870, extending to 1890-1900. A close above 1900 that was maintained should help NDX regain some bullish footing.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I noted key resistance last week at 47.7 for the Nasdaq Tracking Stock (QQQQ) and somehow came up with the exact high for Monday's rally. I say 'somehow', as I can't remember exactly how I came up that number but think it was the level that 'closed' an earlier chart gap, which often marks important resistance.

QQQQ looks headed lower still as no clear cut signs of support have appeared yet although stopping at the moving average may have brought in some buying. When the stock finds support and rallies there should be at least a small uptick in daily volume.

As mentioned, the Nas 100 has held its 200-day average so I would keep this on your charts; on Friday the average stood at 45.19. I've highlighted near chart support back at the previously broken down trendline, currently intersecting around 44.3. 44.0 may offer bring in some support/buying interest also. The prior lows at 43.6, then 43.2, are potential support levels below 44.

Near resistance is at 46.0, then at 43.5.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) of course couldn't resist the market decline but it does seem to be finding scale down support at the previously broken down trendline. RUT may yet bounce from this line as it did in a minor way on Friday. There's a reasonably good chance that RUT will rebound further, along with the Nasdaq 100. It's retraced now about half of its recent rally.

Near resistance is seen at 660, extending to 670. Fairly major resistance begins around 685, at the prior long-term up trendline.

I've noted support at 623, then at the prior 607 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

One Long, Two Short Candidates

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Bank of America - BAC - close 15.42 change +0.40 stop 14.65

Company Description:
Bank of America Corporation is a bank holding company, and a financial holding company. The Company is a financial institution, serving individual consumers, small and middle market businesses, large corporations and governments with a range of banking, investing, asset management and other financial and risk management products and services. Through its banking subsidiaries (the Banks) and various nonbanking subsidiaries throughout the United States and in selected international markets, it provides a range of banking and nonbanking financial services and products through six business segments: Deposits, Global Card Services, Home Loans & Insurance, Global Banking, Global Markets, Global Wealth & Investment Management (GWIM), with the remaining operations recorded in All Other. On January 1, 2009, the Company completed the acquisition of Merrill Lynch.

Target(s): 16.05, 16.35, 16.50
Key Support/Resistance Areas: 16.45, 16.10, 15.00
Time Frame: 1 to 2 weeks

Why We Like It:
Details of the FinReg reform bill have been agreed upon in principle by both aisles in Washington so the banks have more certainty. BAC has held a critical support level near $14.75 dating back 12/08 and 1/09. $14.75 is the dashed red line on the weekly chart below and it has been on this chart for quite some time. I believe the bank stocks are going to catch a bid, even if its short lived, so I suggest we take advantage and initiate long positions in BAC. Every time BAC dips down to this level buyers have stepped in creating bottom tails 4 of the past 5 weeks. The stock has also broken through a steep downtrend line and looks like it is forming a rounded bottom on the weekly chart. Our initial stop is $14.65 which is below the most recent lows from early June.

Suggested Position: Buy August $15.00 CALLS, current ask $1.21

Annotated Chart:

Entry on June xx
Earnings Date 7/16/10 (unconfirmed)
Average Daily Volume: 163 million
Listed on 6/26/10


NEW DIRECTIONAL PUT PLAYS

Avon Products - AVP - close 27.49 change +0.04 stop 29.65

Company Description:
Avon Products, Inc. (Avon) is a global manufacturer and marketer of beauty and related products. Its products fall into three product categories: Beauty, Fashion and Home. Beauty consists of color cosmetics, fragrances, skin care and personal care. Fashion consists of fashion jewelry, watches, apparel, footwear and accessories. Home consists of gift and decorative products, house wares, entertainment and leisure products, and children’s and nutritional products. Sales from Health and Wellness products and mark., a global cosmetics brand that focuses on the market for young women, are included among these three categories based on product type. Avon primarily sells its products to the consumers through the direct-selling channel. It has operations in six regions: Latin America; North America; Central & Eastern Europe; Western Europe, Middle East & Africa; Asia Pacific, and China. In March 2010, the Company acquired Liz Earle Beauty Co. Limited.

Target(s): 25.80, 25.25, 24.25
Key Support/Resistance Areas: 29.50, 29.00, 27.50, 25.75, 25.00
Time Frame: Several weeks

Why We Like It:
AVP ran into prior support and its 50-day SMA this past week and is now turning lower. The stock made a lower high and I believe it is due to make a lower low, or at least retest its recent lows near $25.00. If we simply catch a portion of this move we will have a nice profitable trade. Our primary target is $25.25 but I have also listed $25.80 as a target which is an area to consider tightening stops or taking profits. If the selling picks up AVP could go all the way down to the $24.00 area which was a prior support/resistance level from 10/08 and 5/09. Our stop is $29.65 and our time frame is several weeks.

Suggested Position: August $27.00 PUTS, current ask $1.45

Annotated chart:

Entry on June xx
Earnings 7/29/2010 (unconfirmed)
Average Daily Volume: 4.2 million
Listed on June 26, 2010


Penn National Gaming, Inc. - IGT - close 18.35 change -0.11 stop 19.26

Company Description:
Penn National Gaming, Inc. (Penn National) is a diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. The Company owns or manages 19 facilities in 15 jurisdictions, including Colorado, Florida, Illinois, Indiana, Iowa, Louisiana, Maine, Mississippi, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania, West Virginia, and Ontario. The Company's properties include Charles Town Entertainment Complex, Hollywood Casino Lawrenceburg, Hollywood Casino at Penn National Race Course, Hollywood Casino Aurora, Empress Casino Hotel, Argosy Casino Riverside, Hollywood Casino Baton Rouge, Argosy Casino Al, Hollywood Casino Tunica, Hollywood Casino Bay St. Louis, Argosy Casino Sioux City, Boomtown Biloxi, Hollywood Slots Hotel and Raceway, Bullwhackers, Black Gold Casino at Zia Park, Raceway Park, Freehold Raceway, Sanford-Orlando Kennel Club, Off-track Wagering Facilities, Account Wagering/Internet Wagering and Casino Rama.

Target(s): 24.05, 23.60, 23.05
Key Support/Resistance Areas: 27.00, 26.45, 26.00, 24.60, 24.00, 23.50, 22.50
Time Frame: 1 to 2 weeks

Why We Like It:
PENN has a primary and secondary downtrend line as overhead resistance along with all of its SMA's which are declining. It is also below a key support resistance area at $26.45 dating back to late 2009. I believe the stock will bounce a tad higher from here before it makes new lows in the coming days/weeks. Let's use a trigger to enter short positions at $25.75. My primary target is $23.60 but I have also listed $24.05 as a target where the stock may find some support. If the selling intensifies PENN will probably trade down to the $22.50 area which is below our most aggressive target. I'm going to place a wide initial stop at $27.60 to account for volatility and will adjust it once we are in the position.

Suggested Position: August $25.00 PUTS, current ask $1.70, estimated ask at entry $1.55

Annotated chart:

Entry on June xx
Earnings 7/26/2010 (unconfirmed)
Average Daily Volume: 738,000
Listed on June 26, 2010


In Play Updates and Reviews

We Are Positioned on Both Sides of the Market

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good Evening. CSCO stopped us out right at the end of the day Friday for a small loss. We've still got HANS long and our new long play on BAC to take advantage of any bounces. I've also released two additional short plays which are weak stocks from weak sectors. I expect trading to be choppy as we head into Friday's employment report and as earnings season gets underway in the coming weeks. I suggest traders remain nimble and protect profits as positions move in the right direction. Please email me with any questions.

Current Portfolio:


CALL Play Updates

Hanson Natural Corp - HANS - close 39.73 change +0.08 stop 38.25

Target(s): 40.50, 41.25, 42.40, 43.25
Key Support/Resistance Areas: 42.50, 41.00, 40.25, 39.30, 38.50
Current Gain/Loss: +0.79% Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
6/26: HANS continues to make higher lows and if there is strength in the broader market early this week I believe our targets will be hit. On Friday the stock was increasing in the morning as the market was making now lows. The volume patterns are also bullish as the pullback tend to come on lighter volume. This shows me there may institutions buying this stock which bodes well for a bullish thesis. I've made some minor adjustments to the targets.

6/24: HANS printed a bullish engulfing candlestick today and closed +1.15% higher, despite the significant weakness in the broader market. The market should bounce soon, if not tomorrow, and this should bode well for HANS. The stock was turned back from its 50-day SMA today for the second time in the last 4 trading sessions. If it keeps knocking it should break through, and with the broader market in oversold conditions itching for a bounce, I expect this to happen and our targets to be hit. The 20-day and 200-day SMA are also providing support for the stock.

Current Position: August $40.00 CALLS, entry was at $2.20

Annotated Chart:

Entry on June 23, 2010
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on 6/22/10


PUT Play Updates

Whirlpool Corp - WHR - close 96.65 change +2.36 stop 105.50

Target(s): 94.10, 91.50, 86.05
Key Support/Resistance Areas: 101.70, 99.00, 97.50, 94.00, 85.25
Time Frame: 1 to 2 weeks

Comments:
We are waiting to be triggered at $97.50 to enter short positions. My comments remain the same from Thursday. I still believe WHR has a good chance to trade down to $91.50 and eventually $86.05 but I do not suggest chasing it at these levels. The broader market should bounce from here and I suspect WHR will as well. But these bounces should be short lived and I suggest we take advantage them. I have lowered our entry to short positions to $97.50. My comments from the play release remain the same. WHR has been making lower highs and has broken many trend lines. The stock has one more trend line providing support from the July lows to the February lows. However, I think it only a matter of time before this is broken and the stock retests or breaks its recent lows near $91.50. WHR is also below its 20-day and 50-day SMA's and I think there is enough overhead resistance to enter short positions at $97.50, which is below Thursday's highs and the 20-day SMA. I am going to place a wide initial stop at $105.50 to account for volatility and will adjust it once we are in the position.

Suggested Position: Buy August $95.00 PUTS current ask $6.80, estimated ask at entry $6.40

Annotated chart:

Entry on June xx
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 2 million
Listed on June 23, 2010


CLOSED BULLISH PLAYS

Cisco Systems - CSCO - close 22.18 change -0.29 stop 22.20

Target(s): 23.35, 23.65, 23.85, 24.20
Key Support/Resistance Areas: 23.65, 22.55, 22.35
Current Gain/Loss: -21.21%
Time Frame: 1 to 2 weeks
New Positions: Stopped Out

Comments:
We were stopped out of CSCO right at the end of the day for -2.84% loss. The stock broke down out the base it has built over the past month and the reasons for initiating the trade failed. I have to say I was surprised the stock broke down, especially below $22.35 and especially as the broader market was gaining. CSCO lost -7% from its intraday high on Monday. If readers still have positions I would place a stop below today's low and play for a bounce from here.

Closed Position: August $22.00 CALL at $1.30, entry was at $1.65

Annotated Chart:

Entry on June 23, 2010
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 69 million
Listed on 6/16/10


CLOSED BEARISH PLAYS

Dollar Thrifty Auto Group - DTG - close 43.76 change +0.05 stop 45.90 *NEW*

Target(s): 43.15 (hit), 42.70, 41.65, 40.05, 39.35
Key Support/Resistance Areas: 45.50, 44.15, 43.50, 41.50, 39.00,
Current Gain/Loss: +6.06%
Time Frame: 1 week
New Positions: Closed

Comments:
DTG was closed at the open on Friday per Thursday's updates. My comments from Thursday explain why we chose this route. DTG hung in very well on Thursday and we did not experience the selling pressure I was looking for to reach our lower targets. There was selling in many consumer oriented stocks but not DTG. I am concerned of a broader market bounce higher at these levels and DTG will most likely be a beneficiary. I do think the bounce will be short lived but DTG may bounce another $1 or more higher up to its 20-day and 50-day SMA's, which is where I think the stock will most likely turn back lower. But I don't want to sit through a bounce and see the position deteriorate. Time decay will also start to affect our option premium so in lieu of today's relative strength in the stock I am suggesting we sell positions at the open tomorrow to limit risk and preserve capital. We can always re-enter a short position and maybe even do so at a higher price. Our first target of $43.15 was hit on Wednesday.

Current Position: July $45.00 PUTS at $1.75, entry was at $1.65

Annotated Chart:

Entry on June 22, 2010
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 9.1 million
Listed on June 19, 2010