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Newsletter

Daily Newsletter, Saturday, 7/31/2010

Table of Contents

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

Market Wrap

July Closes With A Whimper

by Jim Brown

Click here to email Jim Brown

The major indexes closed mixed for the day and flat for the week as July ends with the biggest monthly gain in a year.

Market Statistics

Economics were a market mover on Friday with the GDP revision a major force in the early morning market dip. The headline number on the GDP for Q2 fell to 2.4% compared to prior estimates of 3.0% and the Q1 GDP revised estimate of 3.7%. Dropping more than a full point was a shock to economists but the bigger shock was the revision to the last three years of quarterly GDP estimates.

The BEA revisions show that the recession was much deeper than previously thought. The revision showed that the bottom of the dip was a -6.8% drop in Q4-2008. The revision also moved the severity of the dip backward by a quarter from previous estimates. This discussion is going to be graphic intensive today. The first graphic shows the monthly GDP changes prior to the revision and the revised numbers from the BEA.

GDP Quarterly Revision Table

GDP Annual Revision Table

GDP Comparison Chart Pre/Post revision

The slowing growth in Q2 came from a dramatic increase in imports which produced a -2.8% drag on the GDP estimate. Offsetting that drag was a +2.1% increase in fixed investments including inventories. The improvement in inventories provided only a +1.1% boost compared to the +2.6% and +2.8% boost in the prior two quarters.

Consumer demand slowed to a gain of +1.6% after a +1.9% gain in Q1. The pace of growth in consumer spending is very slow but was still increasing in Q2. Business investment rose at an annualized rate of +17% in Q2. Government spending rose +4.4% and added +0.9% to the GDP number.

The GDP numbers for Q2 are just the first estimate and will be revised monthly. Until the labor market improves and unemployment begins to fall there will only be minor GDP gains. The 16% of U6 unemployment is going to be a drag on growth for at least another year. With this much unemployment the risks are higher for a double dip recession.

Mark Zandi of Moody's is going to revise his Q3 GDP estimates and he may cut them to less than 2%. (Some think it could be as low as 1%) He is worried about the declining inventory cycle and the potential for low job creation now that the stimulus impact is fading. Governments are going to reduce spending by about 1% of GDP in the last half of 2010 as a result of stimulus money drying up. Moody's believes as many as 500,000 government employees could lose their jobs.

GDP Pre-Revision Chart

GDP Post-Revision Chart

There was a small bit of good news in the final Consumer Sentiment revision for July. The headline number was revised slightly higher from 66.5 to 67.8 but that still represented a more than eight point decline from June. This is the lowest level since November. The present conditions component fell from 85.6 to 76.5 in July. The expectations component fell from 69.8 to 62.3.

Because of the slight improvement in late July the researchers are more convinced the decline in the stock market in early July was the main factor in pushing sentiment sharply lower. The key will be the levels we see in the August reports. If sentiment continues lower then it was not the market but the economy.

Consumer Sentiment Chart

The ISM New York improved slightly from 458.9 to 463.1 in July. The recovery is slowing in New York but at least it is still in recovery mode. The current conditions component fell from 69.3 to 58.4. The expectations component fell only 2 points from 69.6 to 67.5. However both of those components are at their lowest levels since August 2009. The Financial Regulation Reform bill could have weighed on sentiment from the New York area.

The Chicago ISM, also released on Friday, showed an improvement in activity. The headline number rose to 62.3 from 59.1 and the highest level since April. Analysts speculate this is only temporary and related to GM's decision to skip the retooling process this year and keep plants open and thereby boosting output. This additional demand probably impacted activity at all the parts suppliers and boosted the Chicago area activity.

This temporary boost in activity is likely to slow as the impact from the stimulus fades as the year progresses. The high unemployment is still going to be a drag on automobile sales as the summer ends.

Chicago ISM Chart

The minor improvements and revisions in various economic reports produced a positive week in the ECRI Weekly Leading Index. The index rose slightly from 120.7 to 121.1. That is not an earth-shaking move but there is a definite uptick in the chart after 16 weeks of a predominately down trend. However, the annualized growth rate ticked lower again to -10.7%. The WLI is likely to make a major move after the jobs report next Friday.

Weekly Leading Index (Moody's)

The economic calendar for next week has two important reports. The ISM Manufacturing is a national report on Monday and that is expected to be flat. A flat report may not produce a market crisis but any material decline or improvement is sure to create a triple digit move.

The big report for the week is the Non-Farm Payrolls on Friday. The official consensus estimate is for a loss of 75,000 jobs. The unofficial estimate today is for a loss of 150,000 jobs. This will have some census data that will cloud the picture again. Morgan Stanley believes the headline number will be a decline of 50,000 jobs but net of the census a gain of +135,000 jobs. That means they are expecting census terminations of 185,000 jobs. They have not been close in recent months but at least they are not afraid to put their estimate out there for the world to see.

This payroll report is going to be critical for market sentiment for the rest of the quarter. It will be looked at as a true read on whether the economy is improving or declining. Most of the weekly regional reports have seen the employment components improving even as the overall production components decline. This is going to be a tough report to predict and the market will probably be hesitant ahead of the news. There is a Fed meeting two days after the payroll report so another reason for the market to worry.

Jobless claims continue to hover in the 460,000 range and while down from the peak over 640,000 in early 2009 they are stubbornly refusing to return to normal in the 320,000 range. This suggests a high level of terminations are still ongoing.

Weekly Jobless Claims (Moody's)

Economic Calendar

The Dow dropped -120 points in the first few minutes of trading on the downgrade to the GDP or at least it was blamed on the GDP. This was of course month end and the last days for mutual funds to adjust their portfolios. July is not a big adjustment month but some funds have a trading plan that forces them to maintain certain ratios of stocks and bonds and that forces some portfolio shuffling at the end of each month.

The markets rallied strongly in July with gains in the 7% range across the board. This was possible because the markets hit eight-month lows on July 2nd. Yes there was a rebound but most of it came in the first ten days of the month.

The rebound was due to the oversold conditions of the market heading into the earnings cycle. Now that the earnings cycle is nearly over and the market is struggling at resistance the outlook is not as positive. The focus is going to turn from earnings back to economics and the big reports next week will be a jumping off place for the August market.

Based on the yield of the U.S. treasuries it appears investors are not expecting the economy to rebound. The two-year note yield fell to an all time low of 0.5493% on Friday. The yield on the ten-year note fell to 2.91% and is very close to lows not seen since April 2009 with the recession in full bloom. There are 110 stocks on the S&P-500 that have dividend yields that are higher than the ten-year note yield. This is helping consumers refinance their homes and stimulating continued purchases. The weekly mortgage applications index has been over 700 for the last four weeks. This is near a 52-week high.

Ten-Year Treasury Yield Chart

The dollar has fallen to a three month low and showing no sign of improvement. This is a combination of our weakening economy and signs of improvement in Europe. It is not necessarily negative for the stock market but more of an indicator of economic conditions relative to Europe. The dollar has declined -6% against the euro but only -3% against the yen.

Dollar Index Chart

Despite the negative economics I am seeing signs of improvement, faint but they are there. We saw guidance upgrades from FedEx, UPS and Expeditors (EXPD) and they are all reporting rising prices. That is not a sign of a declining economy.

Ethan Allen's CEO said high-end furniture is beginning to sell again. Fortune Brands (FO) posted earnings that more than doubled at 98-cents and beat estimates of 76-cents by a wide margin. They posted a 9.1% increase in revenue and raised their guidance for the full year.

Travel companies are seeing a boom in vacation travel. Hotels are seeing higher occupancy with a +6.2% increase in Q2 and AAA reported a 20% jump in bookings for cruises. Royal Caribbean spiked $5 last week on better than expected profits and bookings. Smith Travel Research said corporate travel was up 7.5% to 9% in Q2. Airlines are soaring with full planes and Travelocity says summer airfares were up +20% in Q2.

Granted these are anecdotal indicators but it appears the economy is going through a stealth improvement cycle. We are not seeing a rush to buy everything in sight but consumers are spending some money. They are just doing it selectively. The chain store sales report for July due out next Thursday could be a interesting indicator if it shows a gain rather than a decline.

I have not turned into a bull but to use an overworked term there are some green shoots sprouting up all around us. I still believe we are going to see some further market weakness this summer but I think we are going to see a big rally in the fall. We just need to see these green shoots mature into thriving plants and not die in the heat of the dog days of August.

In Europe we are seeing declining credit default swaps on every country but Greece. This is evidence of more confidence that the sovereign debt crisis has passed. Greece is still in trouble and will probably restructure their debt in the months to come but the worry over the other EU nations like Spain and Portugal has diminished completely. Jimmy Rogers says the EU stress test for banks was strictly a publicity move and should not be taken seriously but that is the same thing I said when the results were released. The banks passed if you don't discount their sovereign debt so this exercise is now over and they did not find any problems. Surprise, surprise.

China appears to be headed for a soft landing with the Shanghai market up 11% in July. That is good for everybody on the planet because the worry about a hard landing is fading. This was a big deal for the U.S. markets a month ago but now nobody is worried about China.

All around the world there are growing economies. Nearly a dozen countries have raised rates recently to slow growth. That is a clear sign the global recession is over. Even Mexico reported on Friday that its GDP grew by +7.0% in Q2 after a +4% gain in Q1.

Unfortunately back in the U.S. the Fed is worried about a deflation cycle. St. Louis Fed president James Bullard was on CNBC on Friday and he was very free with his comments. He is worried a Japanese style deflationary decade may be in our future. Fortunately he is speaking out to try and convince others that the Fed needs to take action now rather than wait until it has arrived. Bullard is a voting member of the FOMC this year and has been known as an inflation hawk in years past. He said on Friday the Fed does not need to worry about inflation but instead take action to head off deflation. He does not specifically want the Fed to take action today but he wants an emergency plan in place in case conditions worsen.

He believes the economy is on course for a gradual recovery but wants a backup plan in case it stalls. He believes that keeping the rates "exceptionally low" is counter productive because it fosters the belief that rates will be low for a much longer period. He favors further quantitive easing rather than keeping rates artificially low. Bullard's two-hour appearance on CNBC is a major change in the policy of Fed presidents to hold the party line and not rock the boat. However, Kansas Fed President, Thomas Hoenig, has also spoken out recently as well as Dallas Fed president Richard Fisher.

Fisher warned that regulatory uncertainty will make further monetary accommodation from the Fed ineffective. "No amount of further monetary policy accommodation can offset the retarding effect of heightened uncertainty over the fiscal and regulatory direction of the country. Businesses and consumers are being confronted with so many potential changes in the taxes and regulations that govern their behavior that they are uncertain about how to proceed. Until business operators are provided the clarity they need, they will continue to hoard their cash, limit their payrolls and constrain investment in new plant and equipment - none of which provides hope for the unemployed or will put us on a more forceful path to recovery." He said businesses were taking defensive positions until after the elections. These frank and potentially combative comments suggest the atmosphere in the Fed meetings is growing rather hostile. Bernanke may have his hands full in keeping all the chiefs in line.

The various Fed comments suggest there is a growing frustration level with the administration and lawmakers in Washington. The Fed is tasked with keeping the economy growing and lawmakers are working against this goal. Several Fed members have spoken out against letting the tax cuts expire in January. Letting the tax cuts expire is the Holy Grail for the democrats and now the Fed is preaching against it. Bullard was specific on Friday saying that raising taxes in a weak economy was not the right thing to do. Even a staunch liberal democrat like Paul McCauley at Pimco who has been advocating letting the tax cuts expire has now switched sides claiming they should be extended for two years. Most people don't realize that the top 5% of wage earners account for 33% of all spending and they are the largest creators of new businesses and new jobs. If you raise their taxes there is a multiplier effect on their spending reductions. Even Bernanke alluded to the need to extend the tax cuts when he testified last week.

I would bet that there is a major announcement a few weeks before the elections about extending the tax cuts. It will be the ultimate Hail Mary pass for democrats facing tight elections. I think it will be interesting to see how it will be phrased since letting the cuts expire was a major campaign platform plank in the last election.

Seventy five percent of the 336 S&P-500 companies who have reported earnings beat the street on earnings per share. Only 64% beat on revenue expectations but that is still a strong number. Q2 profits have risen more than 45% from those who have already reported. Obviously that number will go down as the smaller companies report but it is still light years ahead of the 26-30% that was being predicted just four weeks ago. This has been a very strong earnings cycle. Unfortunately that early cycle boost to the market has run out of steam.

The earnings calendar for next week is still busy with more than 350 companies reporting. However the quality of those reporters is declining. The list below is the highlights and I would bet 50% of those symbols are unknown to most investors.

Earnings Calendar

Making news next week is a new announcement from Research in Motion. There is a high profile press conference setup for August 3rd and rumor has it that they will announce a new touch screen Blackberry. The model number is expected to be 9800 and the code name is "torch slider." This version has been widely speculated for some time.

RIMM is also rumored to be preparing an announcement on a new tablet PC called the Blackpad. It will have a 9.7-inch touch screen and start at $499 with WiFi and Bluetooth. It will not have its own cellular interface but will share a connection with a companion Blackberry. The device is rumored to be loaded with business applications and will be targeted to corporations rather than individuals. RIMM bought the domain BlackPad.com but nothing has appeared there yet.

In the housing market there are a growing number of reports that claim there will be a housing shortage in 2012. JP Morgan is adamant that the current annual production rate of 500,000 is not sufficient to keep an adequate inventory level once demand begins to return. Over 300,000 homes are destroyed each year for various reasons including fire, highway right of ways, etc. Over 150,000 new households are created each month by marriages, graduations, legal immigration, etc. Once the surplus of distressed homes is absorbed there will be a housing panic until builders can ramp back up to the two-million plus rate prior to the recession. Since their crews have been laid off and land holdings cut to the bare minimum it will take 24-36 months to regain the ability to build a lot of homes. After being burned so badly in the crash many builders will not want to leverage up so quickly and be content to keep inventory low and raise prices. I sure hope JPM is right because my home is still 25% below its peak appraisal back during the boom. I could sure use a housing shortage. I scanned the homebuilders with an eye towards a long-term position and I think we are still early but just after the year-end holidays I think we could start adding them to our portfolio. That will get us past any potential second dip and through the next wave of foreclosures.

The House voted on Friday to end the drilling moratorium in the gulf. Of course that has zero to no chance of going anywhere because the Senate would also have to vote to end it and President Obama would have to sign it. We know that is not going to happen but it was a nice gesture on the part of the House.

Crude prices rallied back to $79 on the slightly better than expected ISM reports from New York and Chicago and the upwardly revised consumer sentiment. Demand did not pickup but the support under oil prices is amazing.

There is still no answer about the Japanese tanker that was attacked in the Straits of Hormuz on Wednesday but evidence is mounting that is was an attack rather than a freak wave or a collision. Windows were blownout on the bridge and rear of the ship but there was no water in the bridge or dining rooms where the windows were blown out. If there was a freak wave that knocked out windows 50 feet above the waterline then there should have been water in those rooms. Also waves don't leave dark smudges where the side of the tanker was damaged in a 25x25 foot area above the waterline. This mystery along with the falling dollar are helping keep support under oil prices.

Japanese Tanker Damage

Crude Oil Chart

We are headed into the dog days of August and volume is going to drop even more than we saw in July. There were only 7.5 billion shares traded on Friday and just barely 7.06 billion on Wednesday. This was a month end week and there should have been more volume from funds squaring positions. This suggests we could see some days below 7 billion in the near future. Low volume means higher volatility so be prepared.

The China PMI on Sunday night could be a market mover. The consensus estimate is for 51.1 with 11 estimates from 50.0 to 51.7 according to Reuters. The whisper number is below 50 and into contraction territory. The June number declined to 52.1 from 53.9 in May. You may remember the major market decline when that big June drop was announced. China's Shanghai Composite index closed at a nine-week high on Friday so their market is primed for a big move if the number disappoints.

The S&P did exactly what we expected last week. The rally to major resistance at 1113-1115 stalled at that resistance and the index retreated to 1100 to rest over the weekend. Since it was month end this was a good round number for support ahead of the China PMI and the U.S. ISM on Monday. This could be a launch point or a pause point for a breakdown.

I have been expecting further weakness into August but we have to recognize the potential for a rebound as well. The +18 point rebound on the S&P is clearly evidence that fund managers are not giving up hope. At least not prior to month end. Next week could be different. The potential for a breakout would occur if the 1115 level was tested again next week. This would be a retest from a higher low and technically the test should provide a breakout if it occurs. Nothing is set in concrete but a retest from the pullback to 1100 would have a good chance of success.

However, a break back below 1100 on something other than an opening gap would suggest a failure of support and a return to 1060.

The China PMI is the wildcard for Monday. We may not trade on our own merits if the PMI is significantly different than the expectations. To simplify the decision process I would consider being short under 1100 and long over 1115 next week.

S&P-500 Chart

The Dow was unable to move over resistance at the 100-day average at 10,525 and hold its gains. For five days it moved over 10,500 intraday but fell back below that level on increasing volatility. The last two days showed triple digit moves that ended with losses.

The majority of the Dow components have reported earnings and there is little in the way of news to push the Dow stocks higher. The excitement is dwindling and the Dow will have to depend on external news next week for motive power. The China PMI, U.S. ISM and the payroll report are sure to be big events but it will take a big surprise to push it over the 100-day with conviction. Initial support is the 200-day average at 10,400.

Dow Chart

The Nasdaq dropped back to support at 2225 on Thursday and Friday and rebounded both days to the 2250 level. This was impressive given the multiple downgrades to the chip sector. The SOX declined -6.2% from its Tuesday high thanks to the downgrades and guidance issues from several chip companies. The SOX came to rest on its 200-day average at Friday's close but I have no confidence it will hold as support. It has been violated repeatedly over the last three months. The summer is not normally kind to tech stocks and the chips are leading techs lower.

If the Nasdaq were to rally, a move over the 100-day average at 2325 would be a buyable event. Nasdaq 2300 is now resistance.

Semiconductor Index Chart

Nasdaq Chart

The Russell 2000 is stuck between support at 640 and resistance at 670 and the 100-day average. This is perfect set of signals for August. A decline below 640 would be a short and a breakout over 670 would be bullish. Traffic between those level could be easily tradable in a nice 30 point range using the IWM ETF or the Russell futures.

Small caps are not likely to do well in August but the closer we get to October the better chance we have of starting what could be a very nice move higher.

Russell Chart

In summary our markets on Monday will be controlled by the China PMI on Sunday night. Odds are every good that the number will be significantly different than expectations and a major move will result. Should that not occur the U.S. ISM on Monday will be our own version of economic motivation.

We saw some market weakness as I expected and I still believe we will trade lower in August. There are quite a few people who believe that way so a counter trend move could be violent and we do not want to miss it. If the S&P moves over 1115 traders should adopt a bullish bias. Conversely I would adopt a short bias under 1100. Of course maintaining those signals in a low volume volatile market could be tricky. We saw the S&P on Friday trade down to 1088 before rebounding to 1100. We need to be prepared for this volatility and use it to our advantage. Choose your entry and exit points in advance and stick to your plan.

Jim Brown


Index Wrap

Slowing Mo and Minor Double Tops

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Upside momentum stalled this past week as the S&P, Dow, Nasdaq Composite and the Russell 2000 formed minor double tops relative to their June highs. Probably a temporary stall but I always pay attention to renewed resistance implied by double tops. We are also in the summer 'doldrums' as the market gets choppy and somewhat trendless as seen on daily charts of late.

There's another aspect to slowing upside momentum here as the S&P 500 (SPX) and 100 (OEX) couldn't pierce resistance implied by their 200-day moving averages. The Nas Composite (COMP) also fell back under this average, although the big cap Nasdaq 100 (NDX), as well as the Russell 2000 (RUT) index, is holding above the 200-day average.

The charts and indicators are presenting a mixed picture, what an analyst I used to work with would call an 'indecision' pattern. Technical analysis of course reflects, in chart patterns, future earnings uncertainties among investors and traders. A double dip recession, should that occur, would of course be a negative for corporate earnings and this worry has resurfaced with the release of Q2 GDP.

While the major indexes broke out above what I see as bullish declining wedge patterns, there hasn't been the upside follow through that is a common next development. However, it's not rare either for pullbacks to develop that carry prices back to the area of previously pierced down trendlines. Once pierced to the upside, the various down trendlines featured on my index charts below, should now have 'become' an area of support/buying interest. Stay tuned on that!

I watched this past week's action from the far off time zone of Hawaii, where I much 'enjoyed' (:-) waking up in the middle of the night to catch the Opening. Falling back to sleep was then a blessing. Even more so was the close of the markets at 11am! Hey, surfs up around noon Maui time.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) has stalled in its rally after only limited follow through to the upside after SPX broke out above its bearish down trendline. With the formation of an approximate double top, I'd rate the chart as mixed. On the bullish side is that buying support has been seen on dips below 1100.

Prices could fall back to the previously penetrated down trendline, and provided that this line 'held' as support, SPX would still have a pattern of higher relative lows, maintaining a bullish trend. In terms of those long calls, I see profit-taking this past week as an appropriate move when the index stalled in 1120 area. Taking out the June intraday spike to 1131, the 1120 area was predominately where the June rally faltered and reversed. Hourly charts of a 2/2+ month duration is the go-to chart after the dailies to better pinpoint resistance and support areas. In this market it's better to take what the trend gives us given the lower volume choppy trade often associated with the summer doldrums.

Key resistance is in the 1120 area, which you may recall is where I pinpointed pivotal resistance last week; next resistance is well above 1120-1127 as implied by prior highs at 1170-1173.

Near support is suggested by the previously broken trendline, currently intersecting at 1068, with support also extending to the 1060-1057 area; next technical/chart support is well under 1060, coming in around 1020.

MARKET SENTIMENT:

The CPRATIO line above, representing daily readings for Trader sentiment, as well as the 5-day CPRATIO average, is neutral. Traders have got more cautious when the market stalled this past week. The appearance of double tops created a pick up in put activity.

A continued fall off in bullish sentiment would offer a contrarian bullish technical aspect, especially if occurring in conjunction with dips to technical support (e.g., back to the down trendline), assuming buying interest then surfaces.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) price action mirrors the larger SPX index; i.e., the rally couldn't carry above its prior June high either and has formed an initial double top. The pullback to date is finding buying support on dips below the key 500 area, suggesting no real 'collapse' in this stock group.

I'm taking a mostly wait and see attitude relative to the next move in OEX. The index is no longer 'oversold' like it was at 460 and may continue sideways awhile longer; a sideways move will (as well as a further pullback) will also bring the Relative Strength Index (RSI) back to at least a 'neutral' reading. Bullish and bearish factors, buyers and sellers, seem mostly in balance currently.

Key resistance is in the 507-510 area, and then isn't anticipated until or unless OEX crosses above 530 again.

Important potential technical support is anticipated at the previously broken down trendline, currently intersecting at 485; next support is 480. Major support begins in the 460 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Average (INDU) is holding up relatively well, if by 'well' we mean INDU is maintaining a level above its 200-day average and above near technical support in the 10400 area. So far at least the Dow has maintained closes above the prior June closing high at 10450. INDU's weekly chart (not shown) looks relatively bullish. This past week's INDU high was close to exceeding the top of the Right Shoulder (RS) of the massive 'projected' Head & Shoulder's top that the bears have been licking their chops over. I still don't buy into a massive top theme. Of course, there's a long way still to go to exceed prior highs above 11000.

So far, INDU has held above its prior recent top in the 10400 area, which makes for a bullish consolidation as resistance, once exceeded, 'becomes' subsequent support.

A number of key Dow stocks look like they're consolidating for a push higher. This coming week should give us more to go on in terms of how AXP, BA, CAT, CVX, DD, GE, JPM, KO, and UTX fare. All these stocks look to be consolidating for a next push higher. Stay tuned on this outcome!

I highlighted (red down arrow) near resistance around 10560, extending to the 10600 area; next resistance is well above this in terms of prior rally highs around 10900.

Near support/buying interest as already noted has showed up around 10400, with next technical support suggested by the current intersection of the prior resistance trendline at 10200; major support begins in the low-10000 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index has so far failed to follow through on its bullish breakout above it down trendline. I was anticipating a challenge to the prior 2341 intraday high or the prior Closing high at 2310. Instead profit-taking selling and shorting overwhelmed reluctant buyers, ahead of the GDP report. COMP sank below its 200-day average but held above the 50-day. We're looking at a potential bearish double top if prices continue to retreat from recent highs.

Near support is anticipated at the down trendline (resistance 'becoming' support), currently intersecting around 2200, with this area being a pivotal level technically; holding above the trendline keeps the index within still-bullish price action and expectations so to speak. Next lower support is assumed to lie at the recent 2160 (down) swing low, with major support beginning in the 2100-2077 area.

Key resistance is still close to where I noted it last week, at 2300, extending to around 2320 with further resistance at the prior intraday high in the 2340 area. A close above these prior highs would establish upside momentum.

MARKET SENTIMENT:

The CPRATIO line above, representing daily readings for Trader sentiment, as well as the 5-day CPRATIO average, is neutral. Traders have got more cautious when the market stalled this past week. The appearance of double tops created a pick up in put activity.

A decline in bullish sentiment would offer a contrarian bullish aspect, especially if occurring in conjunction with dips to technical support (especially back to the down trendline) assuming buying interest then surfaces.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish to mixed; 'mixed' in the sense that NDX has made another rally high that is BELOW the prior upswing high. On the other hand, the chart shows bullish technical potential as long as NDX holds above the down trendline it pierced with related upside promise the week before last.

Reaching the 1900 level was a trigger for selling and is NDX's key resistance currently. A move above 1900, especially on a Closing basis, would be bullish and suggest that the prior 1939 intraday high and potential next resistance, would get re-tested.

Near support is highlighted (green up arrow) at the previous bearish down trendline, currently intersecting at 1820; next support then is assumed at the prior downswing low at 1785. A break of this prior low would be bearish and 'set up' possible downside targets to the low-1700 area again.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 (QQQQ) tracking stock presents a mixed chart picture. The progressively higher 'stair-step' reaction lows made on the way up from the 41.7 low of July 1st is bullish. However, at some point the prior (47.7) rally high ALSO needs to be pierced to 'confirm' a bullish intermediate-term uptrend.

I've noted support in the 45 area, then at the prior low that formed around 44-43.8.

Key near resistance is at the recent 46.7 high for the month long advance, with next resistance at the previous 47.7 rally peak.

As is usually the case with QQQQ, volume expanded on the recent decline as speculative holders of the stock exited ahead of the Friday report. It was 'sell the rumor, buy the fact' as the actual lower than expected GDP figures brought in some buying when the market didn't totally fall apart on Friday. After all, business buying of new computers and software, a bright spot in the GDP report, was a factor in GDP being as high as it was.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) appears to be consolidating for a move higher. RUT's chart remains bullish if the Index continues to stay at or above near support in the 640 area, which was a prior resistance; rebounding from the area of a prior top is a bullish pattern. Next support is at the trendline, currently intersecting at 620; next lower support is then in the low-600 area.

Near resistance is at the prior highs made in the 670-672 area, extending to the previous (June) intraday high at 677.



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

Two New Candidates

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. I didn't get the answers I was looking for on Friday as trading was extremely volatile and there was a big disconnect between stocks and bonds (see my comments in the TBT play update). The economic data had a lot of noise which I think confused traders, me included. However, we should find out on Monday as the tone will be set early in the week so staying nimble is a must. For now I am reluctantly bullish because the bulls are still in control and until that changes we have to respect it. I do believe it could change very quick and this market has a knack for reversing trends on a dime. I have presented two new long plays with very tight stops and targets that are achievable. I like the set-ups of these trades but I am not married to them and suggest readers honor the stops and get out of the way if things turn south. Trade smart and keep your position size small. Please email me with any questions.


NEW DIRECTIONAL CALL PLAYS

Netflix, Inc. - NFLX - close 102.55 change +4.53 stop 100.80

Company Description:
Netflix, Inc. provides online movie rental subscription services in the United States. The company offers its subscribers access to a library of movie, television, and other filmed entertainment titles on digital versatile disc (DVD). Its members can get DVDs delivered to their homes and can instantly watch movies and TV episodes streamed to their TVs and PCs. As of December 31, 2009, Netflix served approximately 12 million subscribers. It also partners with consumer electronics companies to offer a range of devices that can instantly stream movies and TV episodes to members' TVs from Netflix. The company was founded in 1997 and is headquartered in Los Gatos, California.

Target(s): 106.25, 108.50, 111.35
Key Support/Resistance Areas: 114.00, 112.00, 108.50, 105.50, 103.00, 102.00,
Time Frame: 1 week

Why We Like It:
NFLX got hammered and has lost more than -15% since the company reported earnings on 7/21. The stock bottomed on Thursday and has bounced nicely. On the intraday charts NFLX has broken out of its recent downtrend line and is forming a bull flag in the $102.00 area which is a key support/resistance level over the past week. If NFLX can break higher I believe the stock should trade up towards $108.50 which is our second target. If the broader market is strong the stock could head up towards its 20-day and 50-day SMA's which are above our most aggressive target of $111.35. I have also listed an immediate target of $106.35 which was a prior support level in early July. The stock may find some resistance at this level so this is good area to tighten stops. I suggest we initiate long positions if the stock trades to $103.35 which is above Friday's highs. Aggressive traders may consider initiating long positions on weakness. We'll use a tight stop at $100.80 which is below the bull flag. If we are wrong I suggest we get out of the trade quick. NOTE: I consider this trade aggressive and it could be quick so I suggest readers use small position size and be ready to take profits when presented with the opportunity.

Suggested Position: Buy September $105.00 CALL if NFLX trades up to $103.35, current ask $5.85, estimated ask at entry $6.15

Annotated Chart:

Entry on August xx
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 3.5 million
Listed on 7/31/10


Oil Service HOLDRS - OIH - close 105.14 change -0.17 stop 102.35

Company Description:
Oil Service HOLDRS Trust issues depositary receipts called Oil Service HOLDRS, representing an undivided beneficial ownership in the common stock of a group of specified companies that, among other things, provide drilling, well-site management, and related products and services for the oil service industry. The Bank of New York is the trustee. The Trust will terminate on December 31, 2041, or earlier if a termination event occurs.

Target(s): 108.50, 110.30
Key Support/Resistance Areas: 110.50, 108.60, 107.00, 104.75, 102.80
Time Frame: 1 to 2 weeks

Why We Like It:
I'm sticking with an ETF here to eliminate some of the earnings noise and mitigate risk in individual names. Oil service stocks have been beaten down and are now showing signs of life. OIH is forming an ascending triangle on its daily chart and has made a series of higher lows since it bottomed on 6/1. The ETF is above its 20-day and 50-day SMA's which is providing further support. I'm comfortable with positions at current levels with tight a stop of $102.30 which is below the low from 7/23. We will either be right or right out of this trade. We are playing for a breakout above $107.00 into the $108.50 to $110.00 area which is near our two targets. $108.50 was a prior support level in the fall of 2009 so OIH could see some resistance there. As OIH approaches our targets I suggest readers be quick to take profits or tighten stops.

Suggested Position: Buy September $110.00 CALL, current ask $2.86

Annotated chart:

Entry on August xx
Earnings N/A (unconfirmed)
Average Daily Volume: 8 million
Listed on July 31, 2010


In Play Updates and Reviews

Biotech Play Surges

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Human Genome Sciences - HGSI - close 25.94 change +0.78 stop 24.35 *NEW*

Target(s): 25.95 (hit), 26.50, 27.00, 27.50
Key Support/Resistance Areas: 28.00, 27.10, 26.60, 24.70, 24.25
Current Gain/Loss: +4.4%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
7/30: HGSI printed a bullish engulfing candlestick and gained +3.1% in Friday's session. Our position is now back in positive territory. Our $25.95 lowered target that was added on Thursday for readers who wanted to protect capital was hit on Friday. This level is where HGSI found resistance on Thursday so there could be some give back before the stock makes another attempt to break through it. If there is immediate follow through early next week we should be on the fast path to hitting our targets of $26.50 and possibly $27.50. I suggest taking profits at one of these levels, or at least tighten stops to protect profits. If there is follow though I would also suggest quickly tightening the stop to either $24.70 or $25.25. For now, I have moved it up to $24.35 and plan to tighten it further on any strength.

7/29: HGSI pulled a repeat from yesterday's price action. My comments remain the same except that readers may want to consider adding a $25.95 target to protect capital. This is near today's highs just below Monday's intraday support and HGSI found strong resistance here. It is certainly a good level to consider tightening stops. For now the bullish thesis remains in tact per my comments below but the stock needs to bounce from here.

7/28: HGSI pulled back to its upward trend line and 50-day SMA as mentioned in last night's updates. The stock remains in its upward channel and above its 50-day and 20-day SMA's. I am looking for HGSI to bounce from here and believe this is a good entry point with a tight stop.

Current Position: September $26.00 CALL, entry was at $1.82

Annotated chart:

Entry on July 27, 2010
Earnings Date 10/25/10 (unconfirmed)
Average Daily Volume: 4.2 million
Listed on 7/24/10


ProShares UltraShort 20 YR Treasury - TBT - close 35.85 change -1.10 stop 34.25

Target(s): 36.90, 37.50 (hit), 38.00, 39.25, 40.50, 41.95
Key Support/Resistance Areas: 42.00, 41,00, 39.70, 38.25, 37.55, 34.65
Current Gain/Loss: -23%
Time Frame: Several Weeks
New Positions: Yes

Comments:
7/30: The price action in bonds on Friday has me scratching my head in amazement. Bond yields tanked and bond prices surged (i.e. money was flowing into the bond market as traders were snatching up bonds at ridiculously low yields) which caused TBT to gap lower and close -2.98% on the day. This was an uncharacteristic huge move and is not normal. What's more interesting is that bonds never gave anything back throughout the day as equities surged higher on Friday morning after their gap lower. One of the two following scenarios has got to give here and the tone should be set in trading on Monday. Either money will flow out of stocks and into bonds creating a big sell off in equities (bad for TBT) or money will flow out of bonds and into equities creating a rally in equities (good for TBT). Medium to longer term I am bearish on equities but in the short term I think the latter is going to happen and we will see stocks rally, or at least hold up, with money flowing out of bonds. This will get our position in TBT moving back in the right direction. I really like new positions in TBT at these levels as well. Looking at a longer term weekly chart of bond prices (i.e. /ZN or TLT) one might think bonds have room to run to their fall 2008/spring 2009 highs. But this was the financial crises and money markets were failing and there is simply no crises like that right now. The other side of that argument is that maybe we are on the verge of a crises and we should listen to what the bond market is telling us. While I believe another crises is bound to happen I'm just not buying that argument quite yet. I believe there can be a sell-off in equities without a surge higher in bond prices or drop in yields. Nonetheless, we have to manage the trade and $36.90 is a level readers may want to consider exiting TBT. This would close the gap lower from today while also booking a winning trade. In the end, I think today's sell-off in TBT was an anomaly that will either be corrected early next week or we are on the verge of a bigger sell-off in equities. Unfortunately, today provided us very few clues as to what will happen. The above targets can be used as guide to tighten stops or simply take profits.

7/29: TBT shot right up to its 50-day SMA this morning and then backed off closing nearly unchanged. The $37.50 to $38.00 area is acting as resistance as I have suspected. I remain bullish on TBT and suggest patience as it works its way through these levels. We've also been suggesting taking some profits off the table to book gains and protect capital and today provided another chance. For options traders, call positions could have sold for about $1.75 on the surge higher today which would have represented about +40% gains. Strength in equities will bode well for TBT so if you believe a big sell-off is pending I suggest protecting profits in this position. $37.50 is still a valid target and I recommend protecting profits if TBT trades up there again. If TBT keeps knocking on the door at this resistance level it should eventually open but there is nothing wrong with booking a gain in these market conditions.

7/28: TBT found resistance right at $37.50 as mentioned in last night's updates and this proved to be a good spot to take a portion of your profits off the table. TBT has intraday support at current levels and all the way down to its 20-day SMA which also corresponds to the backside of the broken downtrend line $36.25. The ETF could pullback down to this area and still be considered bullish. I'm comfortable giving this some room to work and am looking for a better reference point to tighten the stop.

Current Position: September $37.00 CALL, entry was at $1.23

Annotated chart:

Entry on July 26, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 3.8 million
Listed on July 24, 2010


ProShares Ultra Basic Materials - UYM - close 30.61 change +0.38 stop 27.20

Target(s): 30.35, 31.20
Key Support/Resistance Areas: 31.30, 30.50, 29.00, 28.00, 27.25
Time Frame: 1 week

Comments:
7/30: My comments about a potential double bottom pattern in UYM worked perfectly today. It took a lot of guts to step in and buy anything Friday morning but if you bought UYM you were handsomely rewarded. UYM remains in a bull flag and every time there is weakness in the ETF buyer step in. We've come within 40 cents of our trigger to enter long positions but UYM just won't let us in. UYM will eventually trade to its rising 20-day SMA which should be near our $29.00 entry this week. As such, I'm going keep this play open for a few more days to see if we can get filled and take advantage of the momentum building in the basic materials sector.

7/29: UYM is not letting us in. The ETF hit a low of $29.50 today and bounced hard. This could also be considered as an entry which may set-up a double bottom pattern on another pullback. I'll reevaluate the play this weekend and come up with a game plan. My comments from below have not changed.

7/28: Our trigger to enter long positions at $29.10 is getting close. $29.00 is a key support/resistance area dating back to the fall of 2009 which is why I am sticking with the $29.10 entry price. However, I will also add that the 38.2% retracement from the 7/20 lows to the 7/27 highs is $29.28, the 50% retracement is $28.54, and the 61.8% retracement is $27.78. And the 50-day SMA is near $28.00. All of these areas can be considered as good long entry points but it is a decision that needs to be made as market conditions develop. Conservative traders may want to consider lowering their entry to the $28.55 area but I'm just not certain UYM will make it down there. The broader market strength or weakness will determine how far UYM pulls back.

Suggested Position: September $30.00 CALL, current ask $2.95, estimated ask at entry $2.15 (I suggest entering this position with a limit order between the bid/ask spread. Try to enter at no more than 5 to 10 cents above the middle of the bid/ask spread)

Annotated chart:

Entry on July xx
Earnings Date N/A (unconfirmed)
Average Daily Volume: 1.9 million
Listed on 7/22/10