Option Investor
Newsletter

Daily Newsletter, Saturday, 9/4/2010

Table of Contents

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

Market Wrap

Bipolar Market

by Jim Brown

Click here to email Jim Brown

Better than expected economic news turned the bears into bulls and despite an ugly start to the week the sprint to the finish was strong.

Market Statistics

It started with China's better than expected PMI and the U.S. ISM on Wednesday and the markets gapped significantly higher on short covering. Thursday saw a drop in jobless claims, stronger factory orders and better than expected pending home sales. The markets fought to a draw after the opening gap but eventually finished up higher as shorts again were forced to cover into the close. On Friday the weaker than expected ISM Services report was ignored after the Non-Farm Payrolls came in better than expected. Those shorts that had failed to cover found themselves behind the curve once again as the clock wound down into the holiday weekend. The reversal of fortunes was dramatic after resting for six days on critical support. Not a bad start for the worst month of the trading year.

The major economic report on Friday was of course the Non-Farm Payrolls. The headline number came in with a loss of -54,000 jobs compared to the final consensus estimate of -110,000 jobs. The July job losses were also revised down to only -54,000 from their prior estimate of -131,000. While the report was not bullish it was much better than expected.

The drop in the headline number came from continued terminations of census workers. The private sector actually hired +67,000 workers and without the census terminations the report would have been positive. There was additional hiring of temporary workers, which normally precedes an upturn in full time hiring. However, state and local governments lost -10,000 jobs because of the decline in stimulus spending.

There was an increase of 550,000 in the labor force as those workers who skipped job hunting for the summer returned to look for work. The unemployment rate rose slightly as a result to 9.6%. There are currently 14.9 million workers unemployed and 6.2 million of those have been out of work longer than 27 weeks. The number of workers underemployed for economic reasons rose to 8.9 million from 8.5 million. That means they took a part time job waiting tables to pay the rent while they search for a full time job in their field.

With job gains of less than 100,000 per month it will take a very long time to put nearly 15 million people back to work. Analysts believe there are 150,000 new workers entering the job market every month. Job gains have to be over 150,000 for us to actually make some progress in putting people back to work.

In reality the payroll report was "less bad" than actually good. Since the market was expecting a much higher job loss number the shorts did not get the dip they were expecting and were forced to cover rather than face another potential gap higher on Tuesday.

Non-Farm Payroll Chart

The ISM Non-Manufacturing number came in at 51.5 and well below the consensus estimate of 53.5 and the prior level of 54.3. The headline reading was the lowest level since January. Declines in employment and new orders drove the index lower. New orders dropped -4 points to 52.4 and employment turned negative at 48.2. Order backlogs fell -2 points to 50.5 and right on the verge of falling into contraction territory.

Since analysts tell us we are now a service economy rather than a manufacturing economy the drop in the services ISM is a bearish indicator. In August the gap between the Manufacturing ISM at 56.3 and the Services ISM at 51.5 was the largest since November 2008. Since the service sector is commonly believed to be the strongest creator of new jobs this does not bode well for the next few months.

Were it not for the better than expected jobs report the market would have focused on this report and responded negatively. Instead the 8:30 release of the jobs numbers had already fueled the short covering gap open. By the time the 10:00 ISM Services report was released the direction and the race to cover was already well underway.

ISM Non Manufacturing Chart

Last week's economic calendar was stuffed full of important reports. Next week will be just the opposite. The calendar next week only has two reports that are important to the market. Really only one but the jobless claims has taken on an added significance in recent weeks.

The jobless claims fell a minute -6,000 claims to 472,000. This was far from material but the lowest level in the last five weeks. Analysts regarded the release as though it was a lost symphony by Beethoven. It was a clear case of looking for something positive to justify their trades. This week the estimate is for another drop of -7,000 claims.

The biggest report of the week is the Fed's Beige Book on Wednesday. Last month the Fed said things like overall activity "continued to increase." Obviously they were not yet seeing light at the end of the tunnel. The labor market was "mixed" and they felt manufacturing "continued to move up." All of those comments showed a Fed that was struggling for adjectives to describe an economy on life support but hopefully improving.

They will be even more stressed this month. Employment is still a problem and despite several positive economic reports over the last week the economy is still on life support. The jobs report was not dire enough to suggest the Fed will embark on another quantitive easing program so the expectations are for the Fed to continue to say hopeful things and wait patiently for the economy to improve. That means the Beige Book language is going to be a lesson in double speak that would make Greenspan envious.

The Fed is faced with a problem. If they tell the truth in the release the market could tank. At the same time they can't afford to be a cheerleader on nonexistent facts. It will be a verbal tightrope walk. If by chance the report has actually improved the market will launch into a major rally and we will be testing resistance at a new level.

The skinny calendar will be met with equally skinny volume as traders stretch the last holiday of the summer as far into the week as possible.

Economic Calendar

The better economic news lifting the global markets started with China's PMI on Wednesday. The index rose for the first time in four months. This started the global rally but there was some other news as well. India announced it was upgrading its GDP estimates significantly. The headline number remained unchanged at +8.8% for the April-June but they raised the consumption component from +3.7% to +10%. Private consumption was revised to +3.7% from +0.3%. Government expenditures were revised to +14.2% from a negative -0.7%. Investments doubled from +3.7% to +7.6%. To say this was a major revision would be an understatement. For India to revise estimates this strongly suggests India is exploding out of the recession.

Australia reported its economy grew at the fastest pace in three years in the second quarter due mostly to demand from China and Asia. Compared to India the +1.2% growth in Q2 is anemic but better than the +0.7% in Q1. Australia did not decline as much as the rest of the world due in part to Asia's voracious appetite for coal and minerals produced in Australia. Exports grew by +5.6% in Q2.

When you add in the current economic boom in South America and the global picture is rapidly improving. The U.S. is lagging the globe but the prospects for continued slow growth are increasing. The double dip story is suddenly less likely even though it was almost accepted as a hard fact just two weeks ago. This is another reason the Fed Beige Book on Wednesday is going to be so critical.

I am not writing in a euphoric cloud this weekend. I am only reporting what has changed market sentiment over the last two weeks. You may remember a couple weeks ago I said I did not believe we would see a double dip. About ten days ago I said I was on the fence because of a flurry of negative data. If we take the last week's input the pendulum has swung back in favor of the slow growth scenario.

The weight slowing down the economy is the 15 million unemployed workers. I am sure you have heard the term jobless recovery enough over the last 20 years to be sick of it. In reality there is no jobless recovery. There may be slow growth with minimal increases in employment but no real recovery. Today it looks like it could be 3-5 years before we are back to full employment and that could be a tough five years.

No employment means weak sentiment, weak housing, weak consumption, weak recovery. It does not mean the stock market will not go up. Companies have cut their expenses to the bone in anticipation of a double dip. They are highly profitable even though much of their profits are still derived from cost cutting. For Q3 earnings are now expected to be over 25% and that is an improvement from just a couple weeks ago.

We can have a year-end market rally that will probably extend for several years as long as the slow growth scenario continues. Eventually companies will no longer be able to get by with their skeleton staff and will have to start hiring again. New jobs means new spending and new consumption and companies will have to ramp up manufacturing. It is a vicious circle that will eventually take us back to prosperity but first we have to get past the uncertainty. The economic uncertainty is holding back the economy, employment and the markets.

The economic news pushed the oversold markets to the best pre Labor Day week in two decades. The Dow roared back from early week losses to post a +3% gain for the week. The Nasdaq posted nearly a 4% gain and the Transports +5%. After the week's home sales news the housing index gained +5.4% and the bank index +5.5%.

Is the market done going down? Is this the start of the new bull market? I doubt it but you could not tell it from the markets. Just remember that the volume was very low. On both Thursday and Friday volume was only 6.5 billion shares. It was a holiday week and next week will be light also.

The economics may have perked up slightly but companies are still cutting guidance and warning that revenue for Q3 will be lower. Stock prices overall are also lower. The PE ratio of the S&P was 11.8 last week. That has nearly always been considered a bargain price. This is why there are so many mergers and acquisitions being announced. Companies are looking around at the relative bargains and deciding to spend some of their cash on acquisitions. This is bullish for the market because acquisitions would not be occurring if corporations were still afraid of the dark.

I believe they are looking into the future and seeing growth. Maybe not this quarter or the next but they are seeing business trends that may be firming slightly but more importantly those trends are not declining. Banks are finally making some loans for business and private debt is so cheap any company worth their salt should be loading up on long term debt and making acquisitions with the money while corporate valuations are so cheap. If you look around that is exactly what is happening.

We know from experience that market tops come when investors are irrationally exuberant. Ask Alan Greenspan. The opposite of that trade is when markets become irrationally pessimistic and bottoms tend to form. I believe we saw that in late August. I don't believe we specifically saw a bottom but I believe the bottom is in the process of forming. It could be behind us but it could just as easily occur in the next 4-6 weeks because of structural processes that occur when fund managers rebalance their portfolios for year-end.

We also have the election factor, which I described last week. Investors will become more bullish the closer we get to the election because they believe it will produce gridlock for the next two years. The election is less than two months away so anyone planning on getting long in advance to profit from the historical +4.5% Nov/Dec gain needs to do it over the next 4-6 weeks.

Hedge fund managers plot these things out like a big Monopoly game or maybe a chess match where they can anticipate multiple moves or events and the probable reaction to those events. Right now they are plotting their expectations for economic firming and market actions to that firming. They are plotting the October portfolio shuffle and the election trade ahead of year-end. As of today I seriously doubt they are pricing in economic disaster. I suspect they are setting in motion plans to be long in early October. They may get there by nibbling at the dips through September in hopes of a normal September decline to provide a buying opportunity.

We will know if this is true by the market action on the next couple of dips. If the dips are bought on decent volume then it is time to get long. Fund managers who were trying to raise 50% cash as I reported last week probably missed the three-day rally. They can't afford to sit back and wait and hope the market comes back to them. If we don't see some weakness next week to reassure them the short squeeze was just a bear market spike then they will be forced to start adding positions. They will be forced to chase the market higher.

Another possibility that could be creating some uneasiness is the possibility of another flash crash. There are quite a few people who now believe the first crash was done on purpose. Those responsible did not mean to knock 1,000 points off the Dow and the magnitude of the damage was far more than they expected.

It appears now that there is a comprehensive attack on the electronic systems by hedge funds and high frequency traders. According to an article in the WSJ they have figured out that they can overload the NYSE system and others by flooding the network with quotes. Lots of quotes. The NYSE is rated at 20,000 quotes per second. During the flash crash those numbers hit 50,000 quotes per second. No trades, just tens of thousands of computer generated quotes.

When the NYSE system becomes overloaded the routing process for trades bogs down. Researchers at Nanex LLC, a market data provider, have analyzed the system in the wake of the crash and have proved that a latency lag can be created by quote stuffing where the official quote can be 50-cents to a dollar away from the current prices. The lag time can be several seconds while the system sorts through the hundreds of thousands of quotes being forced upon it. The term drinking from a fire hose is very appropriate.

Any computer programmer with knowledge of this latency and the ability to create it at any time by flipping a switch can make a fortune. In the space of 30 seconds they could flood the system, drive down prices, execute some trades then reverse the process and exit the trades. There does not have to be a lot of volume or a big spread to make a profit. Pick a different stock every day and scam 50 cents on a couple hundred thousand shares and you can make a nice living. Researchers claim this is now being done on a daily basis. I won't bore you with the details but they have started capturing electronic records of these mini crashes.

T3 Capital has been tracking the quotes on the Nasdaq. On one day the Nasdaq traded 1.247 billion shares but there were orders submitted to buy or sell roughly 89.7 billion shares. The majority of these orders were submitted and canceled within seconds and they were well outside the actual price. This is quote stuffing in an effort to manipulate the stock price by giving the allusion of volume away from the price and an effort to slow down the system.

Nanex reported an attack on Abbot as an example. ABT averages 38 orders per second to buy or sell shares on the NYSE. On August 17th in the span of one second there were 10,704 orders followed by 5,483 a second later. All but 14 of those 16,000+ orders were canceled within one second. Eric Hunsaker, a founder of Nanex, said there were dozens to hundreds of these attacks on different stocks every day.

The SEC is supposed to release a report next week on the flash crash and the methods they propose to keep it from happening again. Some of that is already in place with the mini circuit breakers but those kick in at too high a level. That still allows a hedge fund programmer to scam 25-50 cent increments almost at will.

If the people doing this high frequency flooding think that the SEC is going to make it illegal then they will probably want to escalate their programs to capture as much money as possible before the rules change. With all the publicity about the flaw you can bet it is not just one firm but now multiple firms, maybe hundreds of firms, all with their little high frequency scam picking up millions of nickels and dimes from the holes in the system. The next step could be another forced major flash crash, this time with full knowledge and programs ready to capitalize on the drop. You can bet that every hedge fund has already reprogrammed their computers to look for a repeat of the flash crash and act accordingly. How that will turn out is anybody's guess. When hundreds of computers start tripping over programs triggered by others and then reacting to the changes the results could be startling.

The only sure thing is that the SEC has to change the rules and do it soon in order to restore confidence from investors. How they will slow down or regulate the volume of traffic is going to be a major challenge. With a dozen exchanges and 40+ non-exchange venues including anonymous dark pools executing orders in increments as small as a tenth of a cent the amount of data flowing is enormous. Valid data must be allowed through and quote stuffing must be blocked. How to tell the difference is the key. The SEC has proposed a Consolidated Audit Trail (CAT) that would be a database of every quote and trade that moved across any exchange. The cost of this system is projected to be $4 billion up front and $2.1 billion annually. In theory they could track backwards any quote stuffing attempts or any other schemes that programmers concocted.

The worry is not that programmers can game the system. The worry for us today is the possibility of a rapid increase in gaming ahead of the rules changes that could create another flash crash and further harm market sentiment just as traders are coming back into stocks for the year-end rally. Many investors have already been scared out of the market by the flash crash and high frequency trading. We need for conditions to calm down rather than become more hectic.

One trader pointed out that in recent weeks we have had nine reversals that averaged a 7% move and each reversal occurred in less than ten days. Truly a bipolar market! If you are an average trader how do you deal with a 7% change in direction every two weeks? By the time you are comfortable with a direction change and are ready to enter a play the direction changes. I believe this volatility will end after the election and probably several weeks before the election as funds go long for year-end.

Another sign of economic recovery is the increase in Americans traveling this weekend. According to AAA 9.9% more Americans will be traveling for Labor Day. More than 34 million will hop in the family car (91% of those traveling) and head for the beach, mountains, farm, lake, etc. Five percent of travelers will be going by air. The average family will spend an average of $697, up $50 from 2009. I have been watching the gasoline prices this week and in the Denver area they have climbed more than a dime a gallon as service stations try to gouge travelers for a few extra dollars on every fill up. Normally there is a 5-7 cent range on the stations in my area. On Friday that had widened to 17-cents with the corner stations on high traffic intersections charging significantly more than those stations a few blocks off the beaten path. We can expect those prices to decline sharply next week. Notice the various prices as you drive in your neighborhood. I think you will be surprised.

I know you get tired of hearing me say it but the gains over the last three days were predominately short covering. Despite the slightly better than expected economic news the gains were mostly on the opening gap and the closing spike. Shorts cover at the open and before the close. The S&P does not rally +6.5% in three days because investors suddenly wanted to own stocks now that the ISM was slightly higher and jobless claims fell -6,000. It was the change in sentiment not the magnitude of the change. Traders were heavily short on Tuesday after a two-week slide and the change in economic sentiment forced them to cover. It is not rocket science.

The S&P-500 gapped up to 1105 on Friday and then wandered down and sideways all day only to close with another spurt that took it back to 1104. The 1100 resistance level was erased at the open but functioned as support late in the afternoon. Resistance at 1104 was solid with the 100-day average at 1106. This is also downtrend resistance from April. The 1104-1106 level should be strong resistance followed by 1130. If we move over 1106 on Monday I believe we will test 1130. The rally may have been started and fueled by the shorts but fund managers will have to chase it should the rally continue. Support should be well back at 1080.

S&P-500 Chart

The Dow has rebounded +500 points in three days from the 9941 low on Tuesday. The short covering was frantic on Wednesday and again at Friday's open. The ISM Services report on Friday knocked some of the wind out of the Dow's sales but shorts came back at the close to push the index to the 200-day average at 10450.

Like the S&P there are three levels of converging resistance but they are not quite as neatly grouped as on the S&P. A move over 10500 will probably run to 10700 on additional short covering. Support is well back at 10260.

Dow Chart

The Nasdaq rallied +6.3% in three days. Yes, it was short covering. You may remember on Tuesday the Gartner Group cut their estimates for 2010 PC sale by another 2% and Dan Niles was saying short anything with chips. What a difference a short squeeze can make. The Nasdaq rallied +132 points and +118 of those points were on the opening gaps. The evidence is clear it was short covering. On Wednesday and Friday the opening gap high was the high of the day and there was only 7-point difference on Thursday as traders covered shorts at the close rather than hold over the Jobs report.

Just because all but 14 points were opening gap short covering does not mean it is not a rally. Granted there is little fundamental basis for the gains but should those gains stick on Tuesday there will be some seriously nervous fund managers. Prior resistance a 2225 was support on Friday afternoon and that is the level I would watch for a breakdown. Resistance it 2251 and the converging 100-200 day averages at 2270.

Nasdaq Chart

In summary the bulls were rewarded with a great three days thanks to the severely oversold conditions on Tuesday and the better than expected economic news starting on Wednesday. The news was not outstanding, just better than expected. There is very little on the calendar next week but the one major report on Wednesday is going to be critical. Since the Federal Reserve minutes last week suggested conditions were weakening there is a good possibility the Fed Beige Book could say the same thing this week. If the rally is still in progress on Wednesday that revelation could be a buzz kill.

We are still facing the historically weakest period of the year before an equally historic trend of a bullish ramp into the elections. Volume is going to be very slow because of the holiday week and that could accentuate the volatility. Tuesday should be very slow with many traders wanting to see the Beige Book data before taking any new positions. I would recommend an extended weekend and chores around the house on Tuesday like servicing the furnace and changing the filters ahead of winter. It will probably be more rewarding than trading.

Jim Brown


Index Wrap

Let Loose the Bulls!

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

My commentary will be more condensed than usual as I can't sit up for extended periods to write the darn thing. This due to minor surgery I had a few days ago. I wanted to, at a minimum, present my up to date charts with highlights I consider key technically. Beyond that, I'll comment as usual but perhaps more focused on just the pivotal chart/indicator aspects.

The Dow 30 and Russell 2000 indexes highlighted last week as good bets for a bounce outperformed my immediate expectations. Where to from here is the next big question as the major indexes approach prior highs.

The market of course had a good run last week. The buying opportunity was on the initial breakout move, when risk to reward on calls was good. Further upside from Friday's levels may be slow going. One, the market is overbought on short-term oscillators. Second, we're at the top end of SPX and COMP's downtrend channels, which can offer tough resistance especially initially. Third, is the approach to prior highs within striking distance in the S&P and Dow, and within a couple of more strong upswings in the Nas 100. In a market cycle like our current one there's a tendency for buyers to hold up on further accumulation as prices get increasingly closer to prior highs.

All important for a reversal in the intermediate-term trend from down to up is that the indexes manage to pierce and stay above, their August tops. In the S&P 500 (SPX), a further advance to the 1128-1130 area would mark the third time that the index has been to this price zone. Triple tops are less common than the times in a third price swing that leads to a break out above 2 prior tops.

In the current trading range market, it's been useful to see 'extremes' by use of the 21-day moving averages with upper and lower envelope lines set to a percentage above/below the center moving average. That percentage tends in my use of it to start out at 3 percent, expanding to 4-5 percent on the sell side of the market currently; i.e., where the sharp price swings have occurred. Old trader's saying: "They Slide faster than they Glide".

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bullish on a short term momentum basis and the intermediate trend would turn up if the prior highs in the 1129-1131 area were exceeded on a sustained basis. More immediately, SPX is at resistance implied by the upper end of SPX's downtrend channel. A move above this line would be a bullish plus with the key test still taking out the prior highs.

There are a number of trading opportunities on both sides of the market in a period such as we're in. Another thing is that the current trading range seems to be narrowing 'in' some. The moving average envelope indicator is a good one for conditions and price swings in such a market.

Support is at 1080, with fairly major support beginning at 1040, extending to the low-1000 area. Technical resistance is at the upper channel line (1105, Monday), then most key, at 1128-1131, the prior 3-month highs. A breakout could hit 1200 at some point, a breakdown below 1040-1000 in a new down leg could hit 950.

MARKET SENTIMENT:

As seen in my 'CPRATIO' indicator above, bullish sentiment has been hitting recent levels that are 'too' high for me to trust that things are going to go the way the bulls are anticipating. Bullish sentiment this high before the market has proven its ability to advance in a new sustained up leg, is speculative at best. Because of my current market sentiment readings I am a guarded bull in terms of seeing a lot more upside in September. This, contrary to my tendency to see last week's run up as impressive, especially the way NDX ripped.

S&P 100 (OEX) INDEX; DAILY CHART

The chart is the same for the S&P 100 (OEX) Index in terms of the index being close to testing a key down trendline, currently intersecting at 501-502. The intermediate trend turns up if OEX pierces prior highs in the 512 area. Any new closing high should see some follow through buying in subsequent days or look out for a false breakout.

There may be tougher going on further rallies now that the bears would no longer be caught by surprise; unlike this past week. Immediate resistance is 501-502; then around 510-512; major resistance begins at 540.

Immediate support is at the 21-day moving average (490 currently); next support, 472 area, with major support beginning around 460.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I was looking for decent further upside in the Dow 30 Average (INDU) and it got to and through 10400 quicker than I imagined. There was a good 'base' of support however, suggested by those several back and forth price swings between 9930 and 10150.

Resistance at the 21-day moving average was minor on the recent rally; the key technical test is an ability for INDU to climb to higher than 10600 for this current move. Above 10600, the key trend changing resistance is at the prior highs in the 10700-10720 area.

Initial support, as implied by the 21-day average, is at 10290, with major support at 10000.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart has made a pretty good recovery rally off its recent basing action in the 2100 area, when COMP also finally got to a 'fully' oversold extreme. The market is now overbought on a short-term basis.

Further upside potential is suggested if the index can continue through and above technical resistance at the high end of the COMP downtrend channel; on Tuesday, this line intersects at 2235. Key resistance in terms of the determining the (intermediate-term) trend, is at prior highs in the 2300-2309 area.

The 21-day average at 2188 may provide initial support if prices begin to slide. Major support begins at 2100.

MARKET SENTIMENT:

[Repeating from my comments above:

As seen in my 'CPRATIO' indicator above, bullish sentiment has been hitting recent levels that are 'too' high for me to trust that things are going to go the way the bulls are anticipating. Bullish sentiment this high before the market has proven its ability to advance in a new sustained up leg, is speculative at best. Because of my current market sentiment readings I am a guarded bull in terms of seeing a lot more upside in September. This, contrary to my tendency to see last week's run up as impressive, especially the way NDX ripped.

NASDAQ 100 (NDX) DAILY CHART:

A strong rally this past week. The intermediate trend prospects start to shift if the Nasdaq 100 (NDX) can break out above the upper boundary of its downtrend channel, currently with a top line intersection at 1883. Then, the BIG change would be a move that climbs above prior highs around 1919.

The 21-day average, at 1828 currently, may act as near support, with next support at 1800, then at 1750.

Looks like some more upside, but limited. We may be in a 1900-1750 trading range.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 (QQQQ) tracking stock is at its key juncture of 46.0 and the top end of the downtrend channel dating from the April top. The key upside resistance target is at prior highs make at 47.2 to 47.7. We don't often see triple tops, so a continuation of the current advance could be the one to carry through the prior double top.

Low volume rallies, even sizable ones, are more or less the 'norm' for the Q's and that's what we saw last week. As long as the OBV line keeps pointing higher, that's the only volume confirmation we're likely to see for a continued advance.

Near support: 44.9

Next support: 44.0

Near resistance: 46.0

Next resistance: 47.2

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart looked moderately bullish to me last week but a stronger 4-day rally (from 600) than I was expecting, followed. Beyond my expectations was that the Friday close would end up ABOVE a key technical resistance at the top of RUT's downtrend channel. Tuesday/Wednesday in the coming holiday shortened week, may see some selling pressures given a short-term overbought condition.

Beyond any short-term stuff, further upside potential isn't ruled out in the chart but I don't see a lot of upside ahead or much potential for expanding the current trading range to above 670-677.

645, at the 200-day moving average is a potential resistance. The key resistance area in terms of trend direction is at prior highs at 665-672. Initial support is at 630-632; next technical support is noted at 600. A double bottom would be 'confirmed' if RUT got above its previous 672 high.



GOOD TRADING SUCCESS!


New Option Plays

Integrated Oil Play

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. Regardless of whether last week's rally was short covering or not, we have to respect the move. I believe the market sent a strong message to us last week, and that message is that the market is not ready to go lower, at least not yet. I'm not saying we go straight up from here but I do think dips will be bought. As such, I plan to exploit those dips by focusing more on long positions in the coming days/weeks. We will also tread lightly in the coming days to get a better sense of how far a pullback will take us, but SPX 1,080 offers strong support. Another scenario is that we go straight up to 1,130 resistance and the market doesn't let us in new long positions. We'll have to see how things play out this week. Trading will inevitably continue to be choppy so picking your exits and sticking with them is the right plan of action for now. Please email me with any questions.


NEW DIRECTIONAL CALL PLAYS

ConocoPhillips - COP - close 55.05 change +0.62 stop 52.85

Company Description:
ConocoPhillips is an international, integrated energy company. It has six segments. Its E&P segment explores for, produces, transports and markets crude oil, natural gas, natural gas liquids and bitumen on a worldwide basis. The Midstream segment gathers, processes and markets natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, predominantly in the United States and Trinidad. Its R&M segment purchases, refines, markets and transports crude oil and petroleum products. The LUKOIL Investment segment consists of its equity investment in the ordinary shares of OAO LUKOIL. Its emerging businesses segment represents its investment in new technologies or businesses outside its scope of operations.

Target(s): 56.65, 57.50, 58.25
Key Support/Resistance Areas: 58.50, 57.00, 53.00 to 53.50
Time Frame: 1 to 3 weeks

Why We Like It:
Whether you believe the economy is improving or not, Oil companies should do well with the slimmest prospects of economic growth. Even if that growth is at a slower pace at least it is a contracting scenario we've been dealing with throughout August. Technically, COP has made a series of higher lows and is now above all of its moving averages. I would like to see some retracement of last weeks gains which I think will be bought. I suggest readers initiate long positions on weakness in the stock, using a trigger of $54.70 which is near Friday's lows and above the 20-day SMA. More nimble traders could consider buying a breakout over Friday's highs or wait for a larger retracement to the $54.00 area. But I'm not so sure we are going to get it prior to the stock advancing higher. I am looking for a $2 to $3 move higher and if triggered our profit projection for the first two targets is +55% and +80%. Our stop is $52.85.

Suggested Position: Buy November $57.50 CALL, current ask $1.23, estimated ask at entry $1.12

Annotated daily chart:

Entry on September xx
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 8.9 million
Listed on September 4, 2010


In Play Updates and Reviews

Four Positions Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Int'l Business Machines - IBM - close 127.58 change +2.58 stop 121.90

Target(s): 127.75, 129.90
Key Support/Resistance Areas: 132.00, 128.00, 127,00, 123.00
Current Gain/Loss: +43%
Time Frame: 1 to 2 weeks
New Positions: Yes, on a pullback

Comments:
9/4: Today's gain in IBM takes some of the sting out of our loss in AAPL. IBM is approaching our first target of $127.75 but we my experience a pullback early this week. Any pullback to the $126.50 to $126.25 area could be considered for new positions. However, if IBM goes higher first I suggest being quick to take profits.

9/2: We are long IBM calls as our $125.25 entry was triggered. IBM traded within yesterday's range so there is not much report. Tomorrow's employment has the potential to hurt or help us. If the report is bad and the market sells off readers may want to consider placing a tighter stop in the $123.80 area.

9/1: We closed a short winner in IBM a couple of weeks ago and we are now back with a long play. I suggest readers take advantage of the 9 point wide channel the stock has traded within over the past 4 to 5 months. Today's reversal in the broader market was either a huge head fake or the start of a bigger rally. I think we go higher before breaking the recent lows. Let's use a trigger of $125.25 to initiate long positions and target a $2.50 to $4.50 move higher over the next one to two weeks. If triggered and our two targets are reached the profit projection is +45% and +75%, respectively. Our stop is below the recent swing low at $121.90.

Current Position: Long October $130.00 CALL, entry was $1.50

Annotated Chart:

Entry on September 1, 2010
Earnings 10/18/2010 (unconfirmed)
Average Daily Volume: 5.5 million
Listed on August 28, 2010


NVIDIA Corp. - NVDA - close 9.89 change +0.32 stop 9.15 *NEW*

Target(s): 10.75, 11.35, 11.80
Key Support/Resistance Areas: 11.85, 11.45, 11.00, 10.25, 9.45
Time Frame: 1 to 2 weeks

Comments:
9/4: In my opinion the odds of the broader market going higher are greater than it going lower, although there will probably be a pullback so the bulls can regain their energy. As such, I think NVDA can be bought and I suggest readers initiate long positions using a trigger of $9.72 (just above the 20-day SMA and today's low) or a breakout at $10.30 (above the 8/23 high). Ideally, it would be nice to get the lower price as I have been advocating in recent updates but either has the potential to produce a nice winning trade. Our new stop will be $9.15 initially. I've updated the targets and the play release from 8/28 below.

9/1 & 9/2: More nimble traders may want to consider bullish positions in NVDA now as the stock is almost 7% below our plan to buy it on a breakout. Officially we will wait for the breakout but if that doesn't happen in soon the play will most likely be dropped.

8/28: NVDA has been absolutely obliterated after lowering guidance earlier this year. On 8/12 the company missed earning estimates but the stock has been bought ever since. NVDA is now forming an ascending triangle on its daily and intraday charts and looks ready to break out higher. After the broader market reversal on Friday I believe we may be in for a mini rally and this should catapult NVDA up towards our targets. The plan is to buy calls if NVDA trades to $9.72 (just above the 20-day SMA) or $10.30 (above the 8/23 high). If triggered at $9.72 our first two targets are +10.5% and +17% higher. Our stop is below the stock's recent swing low and the 20-day SMA which is starting to turn higher.

Suggested Position: Buy October $10.00 CALL with a trigger of $9.72 or $10.30, current ask $0.54

Annotated Chart:

Entry on August xx
Earnings 11/4/2010 (unconfirmed)
Average Daily Volume: 23.5 million
Listed on August 28, 2010


Rackspace Hosting, Inc - RAX - close 20.79 change -0.12 stop 17.95

Target(s): 20.75(hit), 21.30, 23.00
Key Support/Resistance Areas: 23.50, 21.40, 20.00, 19.00, 18.00
Current Gain/Loss: +30%
Time Frame: 3 to 5 weeks
New Positions: Yes, on a pullback

Comments:
9/4: RAX consolidated gains today and finished relatively flat after selling off early in the session. New positions can be considered on pullbacks. I've added a $21.95 target and I think this will get hit later this week after a possible dip early.

9/2: This marks the second time our first target has been hit. My comments from remain the same. Also, if tomorrow's employment report is bad readers should consider closing positions.

9/1: We are looking good here as RAX is above the key $20.00 support level and the ascending triangle that has been forming since June. Now we need follow through. If RAX spikes back up to our first target protect profits or consider taking a portion of your position off of the table.

Current Position: Buy December $21.00 CALL, entry was at $1.40

Annotated Chart:

Entry on August 25, 2010
Earnings 11/9/2010 (unconfirmed)
Average Daily Volume: 1.75 million
Listed on August 25, 2010


Stillwater Mining - SWC - close 15.28 change +0.53 stop 13.95

Target(s): 16.30, 16.95, 17.65
Key Support/Resistance Areas: 14.40 to 14.70
Current Gain/Loss: +8%
Time Frame: 1 to 3 weeks
New Positions: Yes, on a pullback

Comments:
9/4: We are long SWC as of today's open. The stock opened at our trigger and we are looking for a continued move higher. Readers may want to consider opening new positions on pullbacks, perhaps around $14.75. This would fill the gap higher today. Considering the impressive run in SWC over the past 4 days a pullback should be expected.

9/2: Industrial metals such as silver and palladium that SWC mines are in demand and prices are increasing. SWC has broken out and closed above a key pivot level in the $14.50 area. I suggest readers buy SWC calls if the stock trades to $15.05 which is above today's high of $14.98. If the broader market rallies on good a employment report tomorrow SWC should eventually trade up towards its 52 week highs. If the broader market sells off on a bad employment report we may consider entering at a lower price next week. There is a lot of support below. If triggered our initial stop will be $13.95.

Suggested Position: Long October $15.00 CALL, entry was at $1.20

Annotated daily chart:

Entry on September 3, 2010
Earnings 11/4/2010 (unconfirmed)
Average Daily Volume: 1.62 million
Listed on September 2, 2010


PUT Play Updates

Abercrombie & Fitch - ANF - close 35.69 change +0.53 stop 37.40

Target(s): 35.55 (hit), 35.05, 34.60, 34.05
Key Support/Resistance Areas: 38.20, 37.25, 32.75, 34.00, 30.50
Current Gain/Loss: -30%
Time Frame: Several weeks
New Positions: No

Comments:
9/4: My comments from below remain valid. Sellers stepped in again when ANF tried to move higher and the stock closed near its lows. The chart looks terrible but ANF should benefit from a strong broader market so I urge readers to be cautious. We don't want to be swimming against the current. I'm expecting some market weakness early this week and suggest readers use it to tighten stops or close positions to protect capital. I've narrowed the targets significantly.

9/2: There is obviously a big seller of ANF which makes me think the sell-off could continue in the stock. However, tomorrow is a wild card so I urge readers to be cautious with positions if the broader market rally continues. I've tightened the stop and adjusted the targets.

Current Position: Long October $34.00 PUT, entry was at $2.10

Annotated Chart:

Entry on August 25, 2010
Earnings: 11/11/10 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on August 24, 2010


NUCOR Corp. - NUE - close 38.68 change +0.24 stop 39.25

Target(s): 38.35, 38.10, 37.60, 36.05 (hit),
Key Support/Resistance Areas: 43.00, 40.30, 37.00, 35.00
Option Current Gain/Loss: -53%
Time Frame: 4 to 6 weeks
New Positions: No

Comments:
9/4: It is time to look for an exit in NUE. After the stock hit our first target of $36.05 on 8/25 it has surged +8%. We have to respect this move and step aside if our stop is hit. More aggressive traders may want to consider a looser stop up near $41 but if NUE marches higher before a pullback your option premium will get crushed. Our official stop is above the 50-day SMA which is where NUE closed on Friday. In addition, NUE has broken and closed above a trend line from May (see dashed line) and is sitting just underneath a secondary trend line from 6/14. This is natural spot for NUE to retrace some of the recent gains which is when I suggest looking for an exit. I have provided three near term targets to consider. Be ready to protect capital on pullback because it could come quick.

9/2: My comments below remain the same. I've adjusted the immediate target and tightened the stop, which is above the 50-day and downtrend line. This is the place for pullback but if we don't get it NUE could breakout higher so I suggest getting out of the way and protecting capital.

9/1: I've added a $37.40 as a target and suggest readers begin to look for an exit in NUE. The stock's 20-day, 50-day, and downtrend line are all just overhead which should provide a pullback and exit point, even it is a loss.

8/31: After hitting our target of $36.05 on 8/25 NUE has traded within a $1 range between $36.40 and $37.40. NUE is forming a bear flag and should break lower but the stock and broader market are simply not cooperating. Our stop is above the 20 and 50-day SMA's and a downtrend line. Readers should consider closing positions on any further weakness to protect profits or use a tighter stop to protect capital if there is a more meaningful bounce.

Current Position: Long October $35.00 PUT, entry was at $0.96

Annotated Chart:

Entry on August 20, 2010
Earnings Date 10/21/10
Average Daily Volume 2.9 million
Listed on August 19, 2010


United Technologies - UTX - close 68.26 change +0.82 stop 69.11

Target(s): 67.65, 67.05, 66.40
Key Support/Resistance Areas: 69.00, 68.50 67.50, 66.50, 64.75,
Current Gain/Loss: -33% Time Frame: 1 to 2 weeks
New Positions: No

Comments:
9/4: UTX closed just below its 20-day and 50-day SMA's. I'm expecting the stock to turn back lower here but I don't the selling will last long so I suggest readers begin to look for a exit. We have to respect this week's turnaround in the market and use weakness to close positions, even if that means a loss. I've provided three near term targets readers should use to consider closing positions or tightening stops as they approach.

9/1: We got filled at the higher trigger in UTX so we are now long October $65 puts for $1.60. Considering the turnaround in equities today I suggest readers use caution in this position. I've narrowed the targets to account for the higher fill and suggest readers consider taking profits or tightening stops to protect them at these levels.

8/31: A strengthening US dollar is bad for multinational companies who derive income from abroad. After a sell-off in the dollar over the past couple of months it looks poised to break out higher and UTX looks poised to break down lower. The plan is to short UTX if it breaks down to $64.50 but I would also suggest shorting UTX if it trades up to close the gap from 8/24 at $67.00. If we get filled at the higher price our stop will be $69.11. If we get filled at the lower price our stop will $67.61.

Current Position: Long October $65.00 PUT, entry was at $1.60

Annotated Chart:

Entry on September 1, 2010
Earnings: 10/20/10 (unconfirmed)
Average Daily Volume: 4.4 million
Listed on August 31, 2010


CLOSED BULLISH PLAYS

Cameron International - CAM - close 38.92 change +0.29 stop 37.50

Target(s): 38.40 (hit), 38.95 (hit), 39.15 (hit)
Key Support/Resistance Areas: 45.00, 42.50, 41.00, 38.75, 36.00
Final Gain/Loss: -10.5%
Time Frame: Several weeks
New Positions: Closed

Comments:
9/4: Our final target was hit in CAM today and we are flat the position for a -10% loss. We've squeezed as much out of the position as possible and it is time to walk away with a loss. The sad thing is the price of the stock is higher than our entry so our position clearly suffered from time decay. Nonetheless, our final target was just below the 200-day SMA which is where CAM turned back down today. The stock remains in an uptrend and can probably be bought on a pullback towards the primary trend line.

9/2: Tomorrow's tone will be set early with the employment report before the bell. Our stop is in if there is a sell-off, if not CAM should hit our final targets and I suggest closing the position to prevent further time decay which is really going to accelerate over the next two weeks.

9/1: The whipsaws continue. Another target was hit in CAM today but this time there could be follow through so I am content giving this a little room to work. I think it is prudent to close positions this week regardless of what happens to prevent further time decay. I've adjusted the targets with $39.35 as the final target underneath the 200-day SMA.

Closed Position: Long September $40.00 CALL at $0.85, entry was $0.95

Annotated Chart:

Entry on August 16, 2010
Earnings Date 11/3/2010 (unconfirmed)
Average Daily Volume: 4.6 million
Listed on August 14, 2010


FMC Technologies, Inc - FTI - close 66.58 change +0.67 stop 63.75

Target(s): 66.25 (hit), 66.95 (hit), 68.25
Key Support/Resistance Areas: 69.00, 65.50, 62.40, 59.00
Final Gain/Loss: +77.2%
Time Frame: Several weeks
New Positions: Closed

Comments:
9/4: Our patience has paid off with FTI and we have closed the position for a +77% gain. The chart of FTI is strong and if there is a strong market this stock may go retest its 52-week highs. Pullbacks down to the $63 to $64 level can probably be bought. This is just above the 20-day SMA and upward trend line. If that happens readers may see this play again.

9/2: FTI looks on the verge of breaking out but tomorrow's employment report will likely determine the fate of the breakout. Our first target has been hit and we have a +30% gain. Protect profits. Our targets above have been adjusted slightly down and the stop has been raised to protect against a hard reversal.

9/1: We now have a +23% gain in FTI and are back on track with options expiring in October. $65.25 has been reached once and I suggest not letting the stock reverse on us again. I've added a target a of $66.25 which will fill a long standing gap from 5/5.

Closed Position: Long October $70.00 CALL at $1.95, entry was at $1.10

Annotated Chart:

Entry on August 16, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on August 14, 2010


CLOSED BEARISH PLAYS

Apple, Inc - AAPL - close 258.77 change +6.60 stop 256.50

Target(s): 246.50, 244.00, 240.00 (hit), 237.50
Key Support/Resistance Areas: 266, 258, 256, 246, 240, 231, 235
Final Gain/Loss: -71%
Time Frame: Several weeks
New Positions: Closed

Comments:
9/4: On Friday 8/27 AAPL reached a low of $235.56 and this trade was close to reaching our targets. However, APPL has since bounced $23 (10%) without pause. I have been warning readers for several days to strategically exit AAPL and offered possible levels on some sort of pullback, but the stock cut through all of its moving averages and primary downtrend line like they weren't even there. It was just Tuesday of this week when the broader market, and AAPL for that matter, looked ready to step off of a cliff but it wasn't meant to be (the stock was forming a bear pennant). In any event, this is a disappointing loser and we have closed the position for a loss. AAPL is now testing the backside of its broken primary uptrend line from the March 2009 lows. Some sort of retracement back to its moving averages or to fill a gap higher is most likely going to happen. And once AAPL regains its energy, and if the broader market is strong, AAPL could easily head back up towards its 52-week highs.

9/2: My comments below remain the same. Readers should consider exiting this position to preserve capital, especially if the broader market rallies on the employment report. If that happens, taking the loss is the right thing to do.

9/1: AAPL historically sells off in the ensuing days after their conference but the strong broader market reversal today has me very concerned. Readers should consider exiting positions to preserve capital. I've added 2 near term targets that are support areas and I suggest tightening stops or exiting positions as they approach.

8/31: AAPL has not been able to make it above the $246 level since breaking through it last week. The stock has been a strong performer the last couple of days, probably because of the hype surrounding a "music-themed" press conference tomorrow that Apple is hosting. Rumors have it that the company will announce a new iPod Touch and new iPod Nano at the event. Although there are no confirmed reports of any new products, Apple has repeatedly introduced new iPod models at their September press conference. This could produce a pop in the stock so readers may want to exit positions ahead of the conference. However, if the conference fails to impress the stock could experience a set-back. The targets above should be considered as exit points and readers may want to consider tighter stops in the $249 to $252 area. The 20-day SMA is $250.27 which should keep bounces in check but we are going to need to see broader market weakness for AAPL to reach our targets.

Closed Position: Long October $230.00 PUT @ $2.00, entry was at $6.90

Annotated Chart:

Entry on August 24, 2010
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 23 million
Listed on August 14, 2010


Occidental Petrol. - OXY - close: 78.32 change: +0.48 stop: 78.85

Target(s): 76.60, 75.80, 74.50
Key Support/Resistance Areas: 75-74.00, 70.00, 65.00
Final Gain/Loss: -47.8%
Time Frame: Several Weeks
New Positions: Closed

Comments:
9/4: Our stop was hit by 6 cents on Friday so we are out of OXY with a loss. The stock has closed above two downtrend lines and the 50-day SMA. There will inevitably be a retracement from the +8% rip over the past 4 days but ultimately OXY looks like it is headed higher as the stock has hung on to a pivotal support level at $72.00. Retracements to the $76.50 level or the 20-day SMA may provide intriguing long set-ups with tight stops.

9/2: The melt-up continues in OXY and we are close to being stopped out. My comments from below remain the same. The 50-day SMA and the 8/10 is our last line of defense. If OXY moves above these we need to step aside. I've raised the stop a 24 cents due to an unfilled gap in the area.

9/1: OXY ripped +5% higher today and closed right on a downtrend line, while the 50-day SMA is just overhead. If the stock breaks through these areas we need to honor our stops and step aside. However, I would be looking for a pullback to exit the position. I have provided two logical near term targets above.

8/31: OXY continued its slide today and has almost retraced all of the gains from Friday. We have small gains in the trade and suggest readers use weakness to consider closing positions. $72.25, $71.60, and $70.25 are the immediate targets. $72.25 is near last week's lows which is where OXY found support. $71.60 is just above the 52-week low at $71.44.

Closed Position: Long OXY November $70.00 PUT at $1.80, entry was at $3.45

Annotated Chart:

Entry on August 25, 2010
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume 4.4 million
Listed on August 7th, 2010