Option Investor
Newsletter

Daily Newsletter, Saturday, 7/17/2010

Table of Contents

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

Market Wrap

Earnings Giveth, Sentiment Taketh Away

by Jim Brown

Click here to email Jim Brown

A bad run of economic numbers punctuated by the eighth largest drop in history in sentiment knocked the Dow for a -260 point loss.

Market Statistics

Remember the phrase, "when the market wants to go down it will find a reason." Friday was a prime example of that axiom. After an 8% rally over the last two weeks the market was looking for a reason to take profits. Add in the volatility from the expiring options and the low volume of a summer Friday and the recipe for a drop was complete. There were no bids because nobody was trading. Declining volume was 13:1 over advancing as unattended sell stops were hit.

The excuse du jour for Friday was the preliminary Consumer Sentiment report for July. The headline number fell -9.5 points to 66.5 for the 8th largest drop in recorded history. The monthly sentiment numbers have been reported for 390 consecutive months. To put this drop in perspective the September 2001 drop was -9.7 points after 9/11 caused consumers to hide in their homes.

Top Sentiment Drops

The 66.5 headline number was the lowest level for sentiment since last August and it is only 10 points above the 28 year low set in November 2008. The present conditions component fell -10.1 points to 75.5 and the expectations component fell -9.1 points to 60.6. With both components taking a major dive this was not related to some short-term news event although there is some correlation of sentiment to the stock market. The market took a major fall in the last two weeks of June but it began to rebound the day after the July 4th holiday. Also, the market suffered a much bigger drop from late April to early June and the sentiment numbers continued to climb. Blaming the ten-point decline on the stock market does not add up this time.

The BP oil spill has been around since April 22nd so that should not have been a factor. What was different in late June was the rapid escalation of headlines and talk about a potential double dip recession. Analysts led by Alan Greenspan were talking about the invisible wall the economy hit in June. Then the jobs numbers went negative again with a loss of -125,000. The vast majority of consumers don't listen beyond the headlines and did not know about the census fluctuation. They saw a gain of 431,000 jobs in May and a headline loss of -125,000 in June. (reported on July 9th) This was headline sticker shock to go along with the double dip recession talk.

You may remember back on June 29th the Consumer Confidence headline number also dropped a whopping -10.4 to 52.9 and the Dow lost -266 points on the news. Friday's sentiment report was a confirmation of the confidence number decline. The reports are entirely different and survey a completely different set of consumers so I would say this was solid confirmation of a change in mindset.

The sentiment numbers will become vastly more important next month. If the trend continues lower the double dip could become a self-fulfilling event as concerned consumers stay away from the mall and skip the back to school specials.

Consumer Sentiment Chart

Also raising red flags on Friday was the negative reading on the Consumer Price Index. The CPI is supposed to measure the amount of inflation in consumer prices. Instead it reported a headline drop of -0.1%. That is not earth shaking except that it was the third consecutive month of negative numbers.

If you take out food and energy prices rose +0.2% but most consumers would find it difficult to live without those components. Even without those components the year over year core CPI number is about to break under 1.0% and its historic low. This has fallen like a rock since the December reading of 1.8%. It has been 1.0% for the last three months and with prices falling it is only a matter of time before we see it in fractional territory.

There is no inflation, period. The term deflation, which was purposefully not used for years and "disinflation" used in its place, is now being heard daily in the news and is being muttered by the Fed heads themselves. The deflation scenario is still far from certain but a collapse of the job market could accelerate that possibility.

The FOMC minutes specifically pointed out that inflation was worryingly slow. They would love to be fighting inflation now because they have run out of recession bullets. Their only option now is to warm up the helicopters and fire up the printing presses. It is time for "helicopter Ben" to live up to his nickname.

Helicopter Ben Bernanke

Deloitte and the Harrison Group just completed a consumer study on buying habits now that the recession is over. The American Pantry Study found an amazing amount of frugality compared to prior habits.

93% expect to continue spending cautiously even when the economy improves.
92% have made changes in their grocery related shopping habits.
89% feel they have become more resourceful because of the economy.
84% have become a lot more precise about what they buy.
81% try to see how much they can save with coupons or loyalty cards.
55% of those cutting back suffered no decline in income but cut back anyway.

The big drop in Consumer Sentiment impacted the market even harder because of the other negative data points earlier in the week. The Philly Fed Survey dropped to 5.0 from 8.0 and analysts were expecting a rise to 10.0. Last month it dropped to 8.0 from 21.4. The Philly Fed Survey is nearly in free fall.

The NY Empire Manufacturing Survey fell from 19.6 to 5.1. That is the lowest reading since December. The backorder component went decidedly negative at -15.9.

The Producer Price Index headline number fell -0.5% and it was the third consecutive decline deeper into negative territory. Retail Sales for June declined -0.5% after a -1.1% decline in May.

These are serious declines in major reports. In addition the FOMC minutes showed the Fed lowered its growth estimates and suggested the recovery could take 5-6 years. That was not well received and set the tone for the rest of the week.

The Weekly Leading Index declined again but the prior week was revised lower so it appears there was no change. However, you can bet that next week is going to show an acceleration of the downward trend. The smoothed annual growth rate declined to -9.8 stretching its decline to 10 straight weeks and 15 of the last 16 weeks. The all time high of 28.5% was set last October and the all time low was -30.2% in December 2008.

Weekly Leading Index Chart

The economic calendar for next week is heavily weighted with real estate reports and they are not expected to be bullish. The selling season is almost over but the demand after the tax credits expired has fallen to almost nothing. Pending home sales fell -30% in the last report.

Economic Calendar

The focus next week will be earnings with the heaviest schedule of blue chips for the Q2 earnings cycle. Twelve Dow stocks report along with 122 S&P companies. There are 73 companies reporting that are seen as key bellwether stocks. Some of those would be IBM, MSFT, MMM, EBAY, AMZN, AAPL, UTX, CAT, etc. The earnings are expected to be good but the guidance and top line revenue numbers from those that reported last week are not exciting. This led to considerable disappointment for traders.

Earnings Calendar

Google was a major disappointment on Thursday night. Google missed estimates of $6.52 per share with earnings of $6.45. It wasn't that the miss was that bad but Google has been having trouble convincing analysts that it can keep up the pace of growth. Google has branched out into dozens of alternate products lines but none are really turning into profit centers. Now they have started a stock trading division. I guess with $29 billion in cash and marketable securities they need to do something besides park it in a brokerage account and money market fund. Unfortunately with stock trading comes risk. Next week they will probably branch out into Nerf ball manufacturing or turtle farming. Google's head count continues to rise with 1,200 employees added in Q2.

Investors are losing interest in Google's different endeavors and moving on to other stocks. Google lost -$34 on Friday after the earnings news.

Google Chart

General Electric (GE) reported earnings of 30-cents that beat the street estimate of 27-cents but revenue fell -4.3% and was below analyst estimates. Cost cutting and not a sharp rise in sales helped push profits up +16%. However, new orders did rise +8%, the first time they have increased since 2008. GE shares lost -4.6% on the revenue decline.

Bank of America shares took a -9% hit wiping out more than $10 billion in market cap after reporting earnings that disappointed the street. Earnings rose +15% to $2.78 billion. Loan loss reserves fell -17% from Q1 levels and credit quality was rapidly improving. However, loan demand was falling and BAC said it could take a $10 billion charge for costs related to the FinReg bill passed this week. Trading revenue fell 42% from year ago levels. They said trading dropped sharply after the flash crash and in response to the European debt crisis. The CEO said the bank's economists do not believe there will be a double dip recession but they were worried about the suddenly slowing momentum in consumer spending. Earnings beat the street but the cloudy future crushed the stock price.

Bank of America Chart

BAC said there was a new wave of foreclosures ahead and a new problem developing was an increased delinquency rate on prime loans. This has been reported by other banks and agencies as well. Realty Trac said on Friday that bank foreclosures were up a record 38% last month and more than one million homes would be foreclosed over the rest of 2010.

Citigroup said it earned $2.7 billion last quarter which works out to 9-cents per share but revenue fell -37%. Investment banking revenue fell -36% from the prior quarter. Wall street was expecting 5-cents per share. Loan loss reserves dropped slightly to $46.2 billion or 6.8% of outstanding loans. Allowance for consumer loan losses was $39.6 billion or 7.87% of consumer loans. The CEO said credit quality was improving but loan demand was light. They credited growth in Latin America and Asia for their profits. Citi shares lost -6% on the earnings news.

Citigroup Chart

Antennagate continued to drag on in the press and stole airtime from the release of the Droid X phone this week. Apple called a hastily scheduled press conference for Friday afternoon and spent 45 minutes bragging about the iPhone 4 before finally announcing the fix for the antenna problem. It was pure Apple led by Steve Jobs and became more of an advertising pitch with free publicity than a press conference. The fix turned out to be a free plastic case with every iPhone. They could have just announced it on the website and an email to the press but why waste a perfectly good opportunity for free advertising.

Jobs said more than three million have been sold in the last three weeks. They are getting ready to open up sales in 18 more countries. Only .055% of users have complained about the antenna problem. Only 1.7% of users have returned the phones compared to a 4.6% return rate of the iPhone 3G. Jobs said the iPhone 4 dropped more calls than the 3G but only 1 more per 100 calls. He did not say how many of the 100 calls were dropped only that the I4 drops one more than the 3G rate.

Jobs came across as hostile that reviewers and customers were making such a big deal of the problem. "Apple is not perfect, phones are not perfect." If you don't like your phone bring it back. Maybe the I4 is not the phone for you. The played a video comparing existing reception problems with a dozen competitor phones as a way of downplaying the problem with the I4. Apple shares rallied into positive territory with the fix announcement but returned to negative territory as Jobs fielded questions with a less than pleasant tone.

Apple Computer Chart

Goldman Sachs settled the SEC charges for chump change and did not admit any wrongdoing. Goldman will pay $550 million to make the problem go away. That is the equivalent of eight days of trading profits for Goldman. Interesting that the Goldman charges came just as the FinReg debates began in Congress and ended the same week that FinReg was finally passed. Surely that is just a coincidence now that the need for a scapegoat has passed. Goldman shares spiked over $150 on the announcement but were dragged lower by the negative market. Several brokers were quick to reiterate their price targets from $185 to $225. Goldman reports earnings on Tuesday.

Goldman Sachs Chart

The S&P dropped to a low of 1065.79 on the May 6th flash crash. That was a -900 Dow points at the lowest point of the day. The world was coming to an end for about 20 minutes that day. The S&P closed at 1064.88 on Friday and back below that flash crash low. Of course we have seen three dips with much lower lows over the last two months but the return to that level at the close is worth watching.

Personally I think the Dow and S&P were simply over extended and returned to levels that could be considered support and did so on an expiration Friday on a strong news event. Remember the Dow dropped -266 points when the consumer confidence report was released with a -10 point drop in late June.

I would like to think that we will see a rebound on Monday. We have a big earnings calendar with some blue chips that should beat on both EPS and revenue. I don't think they can generate a prolonged rally given the recent economics but they should be able to resurrect the markets for trading next week.

Late Friday the IMF upgraded the outlook for Latin America to 4.5% to 5% GDP for 2010 from a prior estimate of 4%. This came after the close and should be bullish. It should offset some of the negative economics from the U.S. last week.

Brazil and Canada are expected to hike rates this week. That is bullish since it means their economies are doing well enough to justify the increases.

There are three European debt sales next week. Spain, Greece and Portugal will attempt to sell debt on the open market. Since the Greece debt sale last week was over subscribed by three times they should have no trouble with the sales. This should be bullish for the European outlook. The European bank stress test results are supposed to be released on Friday and the scuttlebutt from the European press is that the majority of banks will pass with flying colors. The anticipation of a successful stress test should be positive for market sentiment.

On the negative side will be all the real estate reports due out this week. None are expected to be positive but anyone not waking up from a multiyear coma this week should already know that housing will be down. Expectations should already be priced into the market.

The net of all those events should be a more bullish tone to the markets for at least the early part of the week. With IBM reporting on Monday and Microsoft on Thursday we should at least see a little buying ahead of those events.

Remember, we were grossly over extended after an 8% rally off the July 2nd lows. The S&P failed exactly where it should have failed at 1100 and then sold off -3% from the Thursday close at 1096. Friday looked ugly but in reality it was way overdue.

The S&P has support at 1060. I would have preferred to see it stop at the stronger support at 1070 on the way down but the big declines in Google, BAC, MA and others were too much to overcome. SPX 1060 is the last line in the sand before a return to 1020. A break of 1060 would negate any potentially bullish news events and return us to a downward trend. We could see 1050 as a speed bump but I believe a break of 1060 will be the key.

S&P-500 Chart

The Dow had support at 10100 and the close at 10098 is close enough for me. This is a critical level and a break here targets 9900 then 9600. The Dow has 12 components reporting earnings next week. There will be plenty of volatility in the index as each company takes a turn in the spotlight.

We really need to see the Dow bulls rally on Monday morning and pull us back from the brink or it could get ugly very quickly. IBM will be the biggest Dow component to report on Monday and they are expected to beat everything. Hopefully they can drive a stake in the heart of the sellers.

Dow Chart

The Nasdaq broke all near term support and appears to be targeting 2140. With Google losing $34 and a dozen other Nasdaq stocks losing $3 or more it was an ugly day. The Nasdaq lost 3.1% or -70 points. Support at 2220 was not even a speed bump on the opening drop and the Nasdaq only closed a point off its lows.

There are a bunch of tech stocks reporting next week but I don't know if that is a good thing or a bad thing. Almost every stock that reported earnings last week was crushed. If that trend continues then the Nasdaq is in trouble. However, IBM, APPL and MSFT should beat on every metric so hopefully they can offset declines by the chip sector and the dozen or so chip stocks that will report.

Nasdaq Chart

The Russell lost almost 4% on Friday with a -24 point drop to 610. The small caps are being sold because they are illiquid. In times of market stress the small caps are sacrificed first in favor of holding the large caps where funds can enter and exit without making waves.

This was an option expiration Friday and that causes additional volatility in small caps. Plus it was a summer Friday and traders were at the beach or on the golf course and not monitoring their stops. The sharp downdraft accelerated because of the thin volume and that is why there was a 4% decline. With support at 610 the Russell could be poised for a rebound but the index will likely under perform for the next two months if the economics remain weak.

If the Russell continues lower the next target would be a third test of 590 as support. However, a third test of support normally fails.

Russell Chart

The flaw in the bullish argument is that markets don't rally when financials are weak. The Bank Index fell -5.71% on Friday because of the earnings disappointments from Citi and BAC. Even the blowout earnings from JPM on Thursday failed to save it from a 4% loss on Friday. The banks are all warning that life under the new FinReg rules could be costly and unpredictable. JPM warned of "unintended consequences" from the 262 new rules that have yet to be turned into laws. Banks will see fees cut, trading restricted and opportunities narrowed. Worst of all they have no real clue when and how this will be enacted. The new regulators need to be found, vetted, confirmed and then go to work turning the FinReg reform bill into actual rules and policies so that they can be disseminated to banks. It could take a year or more for the process to progress to the point where they can actually start regulating. Indecision produces volatility.

In summary I expect a choppy to slightly bullish market next week. After the week is over I expect the market to weaken as we head into the summer doldrums. The earnings from the largest of the big caps will be over and we will know how the rest of the reports will likely play out. No potential surprises means no incentive to trade.

Jim Brown


Index Wrap

Talk of major Head & Shoulder's Top Re-surfaces

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

I wasn't surprised to see a correction set in given the short-term overbought condition we were approaching last week. Given Friday's sharp sell off it also wasn't especially surprising to also see talk re-surface of a major Head & Shoulder's Top (H&S) being in place, with a downside target in the S&P 500 to 900 or lower. I calculated 863 as a possible target IF the index had continued falling below the 'neckline' of the H&S pattern and falling substantially further, which it didn't. I'll go through the H&S chart interpretation further on.

Looking first at the odds of a correction setting in when it did this past week. It's fairly common for a downside correction when the major indexes get to an overbought extreme in terms of the 21-hour Relative Strength Index (RSI) as seen below on the hourly chart. This is especially true given increased volatility that's been with us since the current correction began in early-May. The price swings have been more extreme as uncertainties about the recovery have generated a lot of movement. 1100 appears again as a key resistance area in SPX.

I'll look next at the potential Head and Shoulder's top pattern that is being talked about among technical circles, as seen on the long-term weekly chart of the Dow Jones Industrial Average (INDU). The so-called 'neckline' has yet to be decisively penetrated, as can be seen below.

There are a couple of points to be made on whether a major top pattern like the H&S has been traced out. Usually when the trendline defining the neckline is pierced, prices keep going. The other point is that the H&S pattern is one that most of the time forms over a shorter period of time and is more seen on a daily chart basis. If INDU had kept falling and if we apply the rule of thumb target (the same as we would on a daily chart), it comes out to an 8250 downside objective.

Common thinking here is that a break of 9693, at the 'neckline' would forecast a further waterfall type decline; e.g., a 1500+ point fall. Technical analysis isn't just about applying 'mechanical' rules to a chart. If some technical considerations suggest that the market could fall 1800 points, I then also look at the current environment and see if there's a scenario that would suggest stocks dropping so much.

Earnings forecasts in general aren't falling, just some shortfalls versus expectations. Sure, if earnings are under consensus like seen Friday (7/16) with BOC and C those stocks are going to adjust, but the market in such a period as we're in overreacts. Fear has gained temporary dominance over greed; these two usually play leap-frog with each other. However, if the Dow should fall to the 8300 area, market prospects would have to be perceived radically differently than now; e.g., something unanticipated comes like a terrorist event or other big unknowns that sock us. Based on present realities though, it's a major speculation to project such lowball targets.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) rally stopped in a key area of technical resistance this past week at the upper down trendline. Technically, the rally from the lower downtrend line had better than average potential to keep going higher. However it's also true that typically there are further (and smaller) price swings that 'complete' a wedge pattern. Once the wedge pattern completes itself, 'confirmation' of a bullish breakout move comes in the form of rallies beyond prior rally highs. That can occur with velocity after the spring gets wound tight so to speak.

The rally dating from the previous week faltered over a 3-day period. Three trading periods, whether hourly, daily or weekly, churning at the same approximate highs is a clear and present danger to a trend reversal and that's what happened on earnings disappointment Friday. It's been thought that the financial sector is well positioned to recover and lead the overall market higher. NOT quite yet all around!

My longer-term outlook remains guardedly bullish, especially if the wedge pattern develops further and shows greater and greater compression; i.e., price swings (rallies and declines) continue to shorten.

The 1100 area was a show stopper and offered tough resistance as buyers stepped away. I've noted resistance at 1090, then in the 1120 area.

Nearby technical support is at 1060 and next in the 1015-1011 area.

MARKET SENTIMENT:

The CPRATIO line above represents the 1-day readings for Trader sentiment, which finally fell significantly per my expectation of another period of bearish extremes before SPX would be 'ready' for another sustained advance. It's apparently going to be more than true this year to 'sell in May and go away'; at least until a fall bottom let's say.

It looks like the recent rally failure marks another disappointment period for the bulls. There's been enough sharp retreats in stocks to dampen bullish sentiment. This is often the way it is ahead of a next advance setting up. I believe a resumption of the bull market is coming still, but the time to 'event' is not easy to pinpoint. Summer tends to have more volatility historically as volume falls off.

S&P 100 (OEX) INDEX; DAILY CHART

As noted last week, "The S&P 100 (OEX) chart remains bearish until or unless there is a breakout above its (upper) down trendline, currently intersecting at 495, followed by a move above the prior 510 upswing high." OEX got slightly above 495, but couldn't surmount the psychologically important 500 level. The index fell back 'inside' a wedge formation, a pattern which I still take as longer-term bullish. Stay tuned on that!

Further price action called for revising my prior down trendline and the new (light blue) one connects more points, always the goal in drawing an internal trendline. It's also worth repeating that the wedge pattern typically unfolds over time, with the upper trendline representing resistance. Prices often bounce back and forth between the two trendlines but in a narrowing price range which represents price 'compression' ahead of a spring to the upside.

Key resistance is at 500, extending to 510.

Near support is at 480, with next lower support in the 460 area. If the index fell back to the lower trendline, fairly major technical support should be found in the 450 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

One revised trendline later, the Dow 30 Average (COMP) remains within its downward sloping 'wedge' pattern. This formation has bullish potential as long as the two opposing trendlines contain all price swings for a while longer, especially at a time closer to the apex or the point in the future where the two lines join. Usually after such 'compression', as buying and selling get more closely balanced, there is a strong breakout move to the upside.

As to the possibility that a major top has formed, I discount this forecast currently. On the bearish side however, looking at the individual charts involved (just 30 to scan) only 4 have a chart that isn't looking bearish or, at best, with a neutral interpretation. Look for lower levels ahead in the Dow. Most of the component stocks are showing at least minor downside reversals.

Near support is in the low-10000 area, then back at the prior 9614 low; beyond that, at the low end of the pie-shaped wedge, intersecting at 9537 currently.

Near resistance is at the down trendline is 10365, with next resistance at 10450, an important prior high close. A still bearish pattern of descending rally highs is what we're seeing.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart is bearish as the index remains within a downtrend pattern and as no prior rally high has been exceeded since the correction began 10 weeks back.

There's some bullish potential suggested by the pattern of back and forth price swings that get narrower and narrower; the resulting trendlines narrow in over time and intersect. Such price action is usually a type of buying and selling 'compression' ahead of a sharp move. If the slope of the 'wedge' is down, a springboard move is usually higher once buying and selling get in balance; as seen graphically by shortened price swings. That said, selling pressures still eventually rule the day currently and momentum has swung from up to down.

Support levels are unchanged from what I proposed last week: initial support at 2150, then at 2080, extending to the prior 2061 low. As time goes on, the lower trendline is declining toward 2000 which should offer major support.

Key overhead resistance is at 2250, extending to 2260. The prior highs in the 2321 to 2341 area form a pivotal resistance zone that, if exceeded on a rally, would suggest a shift in intermediate term momentum from down to up.

MARKET SENTIMENT:

The line above representing the 1-day 'reads' on Trader sentiment (the CPRATIO line) which finally fell significantly per an earlier expectation on my part of more bearishness ahead before COMP was 'ready' for another sustained advance. It's apparently going to be more than true this year to 'sell in May and go away'; at least until a fall bottom!

It looks like the recent rally failure marks another disappointment period for the bulls. There's been enough of a sharp retreat in stocks to dampen bullish sentiment. This is often the way it is ahead of a next sustained advance. I believe a resumption of a dominant up trend is coming, but the time to 'event' is not easy to pinpoint. Summer tends to have more volatility historically as volume falls off.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart remains bearish in its pattern of declining rally peaks. Momentum is still with the sellers pushing prices lower. There is also the same emerging bullish falling wedge pattern on this chart as the others. If this bullish pattern should continue to unfold, it counters the idea of a major top formation. If support and resistance continue to be found at the two converging trendlines, an eventual upside breakout would be an expected outcome. Assured? No, not like the sun will come up tomorrow. It's the Market after all! Bullish potential for the future aside, NDX will likely see more selling of its component stocks ahead.

Resistance was found at the top of the most recent NDX rally as the index bumped hard against its down trendline (at 1863). Near resistance is now seen in the 1850 area, extending up to the prior 1863 high. Fairly major resistance is expected on any climb back to the 1925-1939 area.

Near support is noted at 1780, then at 1750, with major support at 1700.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nas 100 (QQQQ) tracking stock's chart remains bearish. My revised light blue trendline is showing the point of intersection (45.7) where technical resistance came into play on the last rally attempt. Later, reasons were offered as to 'why' the rally reversed when it did. By the looks of the downside reversal and the point where that reversal came in, etc., look for the stock to continue to work lower.

Above 45.7, at current trendline resistance, a next pivotal resistance comes in around 47.

Support is anticipated at 43.7, unchanged from my prior week's commentary, with next support at 42-41.7 and major support at the lower trendline, intersecting at 41 currently.

Higher volume was seen at the recent top on the QQQQ chart above. I finally have concluded that the volume/price trend relationship in the Q's is an inverse one: higher volume on declines, lower volume on rallies. However, there wasn't the jump in volume that you might expect given how far the stock fell on Friday.

RUSSELL 2000 (RUT) DAILY CHART:

After the recent rally failure, the Russell 2000 (RUT) remains within its falling wedge pattern I've written about recently. It looked like RUT was going to not only break above the down trendline (constructed up to that point) but would keep on its upward romp. 'Looks' as they say can be deceiving. It's still relatively early for 'completion' of a bullish falling wedge pattern. Most often in a wedge pattern price swings narrow in and come closer to the projected 'apex' of the narrowing triangle before breaking out. I anticipate that this recent rally 'failure' means that an (upside) breakout is further away, not that it's not coming.

The down trendline I was working with got revised per my note below. Key resistance implied by the revised light blue downtrend line is at 640. Next key resistances are at 650, then around 670.

Prior support appeared in the 595 area, extending down to the prior low in the 587 area.



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

Intrepid Potash, Inc. - IPI - close 22.48 change -0.74 stop 20.90

Company Description:
Intrepid Potash, Inc. is a domestic producer of muriate of potash. It is also engaged in the production and marketing of potash and langbeinite. The Company markets the langbeinite under the name of Trio. As of December 31, 2009, the Company owned five active potash production facilities, including three in New Mexico and two in Utah. During 2009, the Company produced approximately 504,000 tons of potash.

Target(s): 22.85, 23.20, 23.80
Key Support/Resistance Areas: 23.25, 22.00, 21,00
Time Frame: 1 to 2 weeks

Why We Like It:
Ag stocks are gaining momentum and I like IPI on any further weakness. IPI has longer term support/resistance at $22.00 and $21.00. The stock broke below those areas during the weakness in the early July but has since rebounded and broken out of the resistance on strong volume. The stock retreated from its 50-day SMA on Friday on significantly lighter volume. I'm looking for a little more pullback and suggest readers initiate long positions if IPI trades down to $21.80. Our stop will be $20.90 which is below the 20-day SMA and the important $21.00 support level.

Suggested Position: August $22.00 CALL, current ask $1.60, estimated ask at entry $1.25

Annotated Chart:

Entry on July xx
Earnings Date 8/4/10 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on 7/17/10


NEW DIRECTIONAL PUT PLAYS

Wynn Resorts - WYNN - close 79.57 change -3.45 stop 85.50

Company Description:
Wynn Resorts, Limited (Wynn Resorts) is a developer, owner and operator of destination casino resorts. It owns and operates two destination casino resorts Wynn Las Vegas, on the Strip in Las Vegas, Nevada, Encore at Wynn Las Vegas located adjacent to Wynn Las Vegas, and Wynn Macau, located in the Macau Special Administrative Region of the People’s Republic of China (Macau). The Company is also constructing Encore at Wynn Macau, an expansion of its Wynn Macau resort.

Target(s): 74.50, 72.25
Key Support/Resistance Areas: 85.00, 84.00, 76.50, 72.00
Time Frame: 1 week

Why We Like It:
I'm looking for WYNN to break down from here and touch its longer term upward trend line that began in November. This is at about $74.50 which is our first target. If the broader market is weak I see no reason why WYNN won't trade down to its 200-day SMA which it hasn't done since last July. The stock also broke below its 20-day and 50-day SMA's on Friday. I suggest readers initiate short positions if WYNN trades to $80.80 or $79.10 which is below Friday's low, whichever occurs first. NOTE: I view this trade as being aggressive and potentially quick.

Suggested Position: August $108.00 PUTS, current ask $2.64, estimated ask at entry $2.35

Annotated chart:

Entry on July xx
Earnings 7/29/10 (unconfirmed)
Average Daily Volume: 2.92 million
Listed on July 17, 2010


In Play Updates and Reviews

Back on Track

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Good Evening. Our short positions have come back to life and I am expecting more downside this week. We may incur a bounce but I think any strength will be sold into. I've adjusted targets and stops on most positions and I want to ride the short positions as long as we can to exit at the best price possible. The targets I have listed are good areas to tighten stops on the way down. Please email me with any questions.

Below are the June results for all recommended trades. We had a phenomenal run during the last half of June and overall had a winning month.

Current Portfolio:


CALL Play Updates

Merck & Co - MRK - close 35.91 change -0.58 stop 35.38 *NEW*

Target(s): 36.30, 36.55, 36.95, 37.45
Key Support/Resistance Areas: 39.50, 38.75, 38.00, 36.35, 35.80
Current Gain/Loss: -8%
Time Frame: 1 to 2 weeks
New Positions: Yes, with a tight stop on weakness

Comments:
7/17: MRK broke out to new daily highs on Friday not seen since April but the breakout failed and the stock looks vulnerable to the down side. The stock has long term horizontal support between $35.80 and $35.60 and its 20-day, 100-day, and 200-day SMA's (all right at $35.60) are below Friday's closing price. This should provide support for the stock but if this sell-off gains steam I doubt MRK can hang in at these levels. If this support is broken the next stop will most likely be somewhere just below $35.00 which could also set-up an inverse head and shoulders pattern(see ovals on chart). This area is also near an upward trend line and its 50-day SMA. So the question is should we adjust our stop down a bit and sit through a -2% to -3% pullback if the $35.60 support level breaks? Considering the broad market sell off on Friday when even the more defensive sectors like pharmaceuticals were down over -2%, I say no. I am going to keep a tight leash on this trade and raise the stop to $35.38 while also bringing down the targets to see if we can make this a winner. MRK may go test the aforementioned SMA's prior to bouncing and I suggest we sell positions into strength using the above targets. These are good areas to consider tightening stops to see how much we can get out of the position.

7/13: MRK closed above resistance of $36.35 and looks like it is headed towards our targets. If the broader market continues bouncing we should have no issues hitting our target(s) and MRK could also act as a defensive play if there is a pullback.

7/12: MRK traded down to $35.84 in early trading which triggered our long entry. The stock then drifted higher throughout the day. MRK appears to be forming a bull flag on its daily chart. A break above Thursday's high of $36.40 should get things moving higher relatively quick. Since we were able to get the lower entry trigger today I am going to offer a lowered 1st target of $37.20 which is a good place to consider at least consider tightening stops. I've also adjusted our primary target of $37.95 down 20 cents to $37.75.

Current Position: August $36.00 CALLS, entry was at $1.21

Annotated Chart:

Entry on July 12, 2010
Earnings Date 7/30/10 (unconfirmed)
Average Daily Volume: 18 million
Listed on 7/10/10


United States Steel - X - close 41.36 change -1.56 stop 39.75

Target(s): 43.25, 44.60, 46.20
Key Support/Resistance Areas: 48.70, 46.25, 50-day SMA, 43.50, 40.80, $40.00
Current Gain/Loss: -22%
Time Frame: 1 week
New Positions: Yes, with tight stop

Comments:
7/17: Friday was blow to the bullish thesis on X but many things still exist to support it. X has intraday support at $40.80 and longer term support from June at $40.00. It also sits near its 20-day SMA and there are some important retracement levels from the July lows to recent highs in the $40.00 to $41.00 area that may support X on this pullback. I still think X should trade up near its 50-day SMA prior to moving much lower so I am sticking with the set-up on this trade but will be out if our stop is hit. Considering Friday's broad sell off I've adjusted the targets offered a lower first target of $43.25 which is good place to consider tightening stops or taking profits. I chose a further out of the money call than normal with a small delta of .28 to limit risk on this trade. NOTE: I view this an aggressive and potentially quick trade. Please use proper position size to manage risk.

7/15: X traded down to just under $42.00 this morning which triggered our long entry. The stock made another higher low and looks poised to break higher toward its 50-day SMA. My comments from below have not changed.

7/14: The steel sector has been beaten down and it appears to be gaining momentum and ready for move higher. X has broken out of its primary downtrend line from its highs on 4/6 and has now closed above its 20-day SMA 3 out of the past 4 days. The stock is creating an ascending triangle on its daily and intraday charts and I believe it should easily trade up to its 50-day SMA before the company's earnings on 7/27. I suggest readers initiate long positions on weakness in the stock. Our official trigger is $42.05 but readers may also consider $41.05. I'm just not convinced $41.05 will be triggered prior to the stock advancing. Our stop is relatively tight at $39.75 so if this is a false break out our losses will be limited. NOTE: I view this an aggressive and potentially quick trade. Please use proper position size to manage risk.

Current Position: August $46.00 CALLS, entry was at $1.38

Annotated Chart:

Entry on July 15, 2010
Earnings Date 7/27/10 (unconfirmed)
Average Daily Volume: 13.5 million
Listed on July 14, 2010


PUT Play Updates

Deere & Co. - DE - close 59.73 change -1.35 stop NONE *NEW*

Target(s): 59.10, 58.20, 57.05, 56.30, 55.40
Key Support/Resistance Areas: 59.00, 58.00, 56.85, 56.15, 55.00, 54.15
Current Gain/Loss: -59%
Time Frame: 1 to 2 weeks
New Positions: Yes, with a tight stop

Comments:
7/17: DE gave some back on Friday and I expect the selling to continue, at least in the short term. Since May DE has made 4 round trips between $60 and $55. Obviously I never thought that the stock would do it again when the trade was released so now we are left to manage the exit at the best possible price. My plan going forward is to trail DE's decline with stops to see how much we can get out of the trade. The problem right now is that I do not see a proper level to place a new stop just yet. So for now I am keeping the trade open without one. Once a better reference point is established I will place a new stop. I've adjusted the targets above which are just above the updated key support/resistance areas. DE may find some support near these areas on the way down so I suggest readers use these levels as a guide to exit positions. $58.20 is just above the stock's 20-day and 50-day SMA's and is an area of high interest. The overall strength or weakness in the broader market should determine how far we can take this.

7/15: Well ladies and gentlemen the pain has set in on this trade as DE is defying gravity. The stock has gained +12% in 7 trading days and with little to no pause. Even when the market was lower this morning DE was not. It was hovering around $60 until the afternoon strength and when looking at the open interest in the July strikes the market makers do not want DE to be under $60.00 as there are a ton of puts. I could not have been more wrong on this one and should have kept a tighter leash. However, losses are part of trading and we have some damage to repair. Here is how I want to manage exiting the trade. I want to temporarily remove the stop until after OPEX tomorrow. DE will retrace some of these gains and when it does we will be ready to exit at a better price and/or tighten stops to get the most out what's left in our option premium. Ideally, DE should turn back to test its 20-day and 50-day SMA's which is also near the gap higher on 7/13. I've listed the revised targets above.

Current Position: August $55.00 PUTS, entry was at $3.00

Annotated Chart:

Entry on July 6, 2010
Earnings 8/18/2010 (unconfirmed)
Average Daily Volume: 5.4 million
Listed on July 3, 2010


Ingersoll-Rand - IR - close 34.37 change -0.56 stop 35.75 *NEW*

Target(s): 34.20, 33.70, 33.25, 32.55
Key Support/Resistance Areas: 37.00, 36.50, 35.60, 34.20, 33.11, 31.50, 30.12
Current Gain/Loss: -12%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
7/17: IR held up better than I thought it would on Friday's sell off but still closed down -1.60%. The stock almost hit our first target again. This is obviously a key support level so if breaks through we will have a chance to take profits. The stock remains in a bear flag on the daily chart and appears to be consolidating before breaking lower. I've adjusted the targets above and suggest readers use these as a guide to tighten stops and exit positions if the stock heads lower from here. I've also tightened the stop to $35.75 which above the 200-day SMA.

7/15: IR was under pressure early and came within 1 penny of our first target before reversing. As a result, this target has been adjusted up 5 cents. IR is forming a bear flag on its daily chart and any broader market weakness should send this stock lower, and fast. My comments from below remain the same.

7/13: IR printed a big green bodied candle and appears to be headed for its 200-day SMA from below. This is only about 25 cents higher and will be its first re-test. IR broke through it on 6/30. When we get a pullback in the broader market I expect IR to retrace today's gains and possibly retest its lows near $33.25. I've listed $34.15 (raised to $34.20) as a target to consider exiting positions to preserve capital. We should see this level quickly on any on any meaningful pullback in the market.

7/12: IR spiked higher this morning but was met with selling which sent the stock lower, and it never really recovered. If there is any weakness in the broader market I expect IR to break lower and easily trade down to our first target of $33.25. Our primary target is $32.05.

Current Position: August $35.00 PUTS, entry was at $2.25

Annotated Chart:

Entry on July 8, 2010
Earnings 7/19/2010 (unconfirmed)
Average Daily Volume: 5.4 million
Listed on July 7, 2010


Lululemon Athletica Inc. - LULU - close 38.00 change -1.60 stop 40.42

Target(s): 38.00 (hit), 37.25, 35.80, 34.55
Key Support/Resistance Areas: 42.25, 39.75, 37.00, 35.16, 32.75
Current Gain/Loss: +0.00%
Time Frame: 1 week
New Positions: Yes

Comments:
7/17: My comments from 7/15 haven't materially changed so I am adding to them in the 7/17 post. LULU is being contained by its 20-day and 50-day SMA's and the backside of its broken upward trend line that began in February. I expect this resistance to hold and LULU to turn lower. Friday's -4% decline took away 6 prior days gains. Our target of $38.00 was hit on Friday but I am looking for more downside. $37.25 is now the immediate target below but if LULU breaks its upward trend line that began last July this could gain steam to the downside towards the 200-day SMA. I've tightened the stop to $40.42.

7/13: LULU managed to eek out a 26 cent gain today as the market catapulted higher. This is under performance and confirms my bearish outlook for the stock. We could get a little more bounce in this position but when the market pulls back LULU should go lower relatively quick. However, in the spirit of following the market we need to be careful and not get too greedy by expecting LULU to simply rollover and give us a big gain. As such, I've added $37.95 as the first target which just above yesterday's low. This level is -3% lower from our entry price and if you bought options they should return about +15% at $37.95. Tightening stops at this level is suggested to see if we cn get more out off the position.

Current Position: August $35.00 PUTS, entry was at $1.30

Annotated Chart:

Entry on July 12, 2010
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 700,000
Listed on July 1, 2010


PowerShares QQQQ Trust - QQQQ - close 44.34 change -1.26 stop 46.10 *NEW*

Target(s): 44.40 (hit), 43.75, 43.25, 42.55
Key Support/Resistance Areas: 46.77, 45.25, 44.46, 43.50, 42.50, 41.00
Current gain/loss: -8%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
7/17: QQQQ hit our target of $44.40 and we are now approaching breakeven on the trade. I've moved the stop down to $46.10 which just above last week's highs. I'm comfortable giving this some room to work and suggest we ride it as far down as we can. Friday didn't really give us a good reference point to place a tighter stop but there is an intraday congestion area between $45.00 and $45.40 so a tighter stop could be placed above there. QQQQ may bounce and retrace some of Friday's losses but I expect the selling to resume. I've adjusted the targets above and suggest readers tighten stops as they are hit to protect against a reversal. $43.25 is a high area of interest to tighten stops or take profits. This level should give us a nice +30% gain.

7/15: Google is down -$20 in the after hours after their earnings report. This should keep the Q's in check tomorrow. However, the good news about the GS settlement and the oil spill in the gulf is boosting sentiment despite the terrible economic data that was released today. My comments from 7/13 remain the same except I would place the tighter stop at $46.25 as opposed to $46.15. QQQQ's close on 12/31 was $45.75 which is near the highs of the past two days. We are at the bottom of January's congestion area and this is an important reference point. We've got some wiggle room and think the market moves lower prior to any significant move higher. I've tightened the targets and added $45.00 which is just above QQQQ's 20-day SMA. This is good place tighten stops. Current Position: August $45.00 PUTS, entry was at $1.85

Annotated Chart:

Entry on July 8, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 100 million
Listed on July 7, 2010


Starbucks Corp. - SBUX - close 25.35 change -0.78 stop 26.05 *NEW*

Target(s): 25.30, 24.85, 24.25, 23.70
Key Support/Resistance Areas: 26.50, 26.00, 25.25, 24.80, 24.00, 23.60, 22.50
Current Gain/Loss: -27%
Time Frame: 1 to 2 weeks
New Positions: Yes, with a tight stop

Comments:
7/17: On Friday morning SBUX closed its gap lower on 6/29 (referred to in the update below) and then took a nose dive and closed its gap higher from 7/13. All of the stock's weekly gains were essentially erased with Friday's -3% loss. Similar to the Q's above SBUX didn't give us a good reference point on Friday to place tighter stop so I have moved the stop down to the top of last week's congestion area at $26.05. This should be enough room to see how far we can ride SBUX back down so we can turn this trade into a winner. The targets can be used as a guide to for potential bounce points on the way down.

7/15: SBUX was headed for our target this morning but reversed with the broader market. The stock has retraced about 50% of its recent decline and is below its 50-day SMA. We need a reversal and are looking to exit. I've tightened the targets and suggest readers exit on weakness. Ultimately SBUX should fill its gap higher on 7/13 (near $25.30) and I think it will prior to moving much higher. But the stock may be headed for $26.40 to close the gap down on 6/29. This is about +1% higher than current levels. I suggest being patient and waiting for a pull back to exit positions.

Current Position: August $25.00 PUTS, entry was at $1.40

Annotated Chart:

Entry on July 8, 2010
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on July 3, 2010