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Newsletter

Daily Newsletter, Saturday, 9/11/2010

Table of Contents

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

Market Wrap

September To Remember

by Jim Brown

Click here to email Jim Brown

Since the end of August the Dow has risen +460 points and appears poised to move higher in stark contrast to September's reputation as a bearish month.

Market Statistics

Is the double dip dead? Based on the stock market action in September you would think those analysts warning about a double dip have been regulated to the dustbin of history. However, although we have seen some slightly better economics it may be too early to be calling for Dow 12,000.

The only material economic report on Friday was the Wholesale Inventories for July. Inventories surged +1.3% and three times what analysts had expected. June's number was revised higher to +0.3%. Sales in July rose +0.6% after declining -0.5% in June. The headline number was the largest gain in two years. Analysts said the reversal into strong inventory accumulation mode suggested rebounding sentiment among wholesalers and a positive boost to Q3 GDP.

Personally I think the inventory accumulation surge started earlier in the year and this is not something that just occurred last month. You don't increase inventories of farm equipment overnight. Wholesalers can't call up John Deere and say give me 20 green harvesters, and 20 cultivators and a dozen each of these other models. It takes time to build them, ship them and a lot of paperwork to finance them. You would also want them to show up on your lot just before harvest time instead of early in the year so they can sit there and rust for six months before the buyers need them. They were probably ordered in the spring when the economy was thought to be rebounding strongly and they just arrived in July when this survey was being done. I could be wrong about this but I try to make sense out of the numbers and cycles rather than just report them.

Overall this was a skinny week for economic reports with the Beige Book the only major event. However, we did see a sharp drop in new Jobless Claims of -21,000 to 451,000 and the lowest level since July 10th. My personal view is that newly unemployed workers probably put off filing for unemployment last week because of Labor Day. "Gee Martha, I think I will wait until after the holidays to file so I can have a few days off before I am forced to start job hunting in order to get benefits." If I am right then we will see a spike in new claims over the next two weeks. If claims don't spike then we have a new trend developing and something to be bullish about.

There are still more than 10 million people receiving unemployment insurance payments and several million more whose benefits have expired. To say claims falling by 21,000 is bullish would be stretching it but even a journey of 1,000 miles starts with a few steps.

Next week's calendar has a few more events but none that are really strong market movers. The Retail Sales will be scrutinized for evidence of consumer spending trends for the back to school shopping season in August. If there was less weakness than analysts expected then it could be bullish.

The Philly Fed Survey on Thursday is the first of the major regional manufacturing reports and is seen as a preview of the rest. Analysts are expecting a major rebound from last months -7.7 reading. Consumer Sentiment on Friday is going to be a tough one to call. The survey period covered the end of August market decline and that is normally negative for sentiment. It also covered the period where analysts were talking double dip every day. It was also back to school season and that boosts sentiment so it will be tough to make a guess on the sentiment number.

Economic Calendar

There were a lot of stocks in the news on Friday including two separate pipeline problems. In San Bruno California, Pacific Gas and Electric (PCG) had a 60-yr old natural gas pipeline explode and nearly wipe a subdivision off the map. The fire was contained on Friday but the area was still too hot for firefighters to begin exploring in the 38 burned homes for bodies. There are four confirmed fatalities and more than 50 people with injuries. PG&E said the damage and claims would probably exceed its $992 million in insurance coverage.

PG&E Chart

Enbridge (EEP, ENB) reported another pipeline leak in Romeoville Illinois and was forced to shutdown a 670,000 bpd pipeline that supplies several Midwest refineries. The pipeline was leaking several hundred barrels an hour and had to be shutdown. The oil had bubbled to the surface and was flowing down a city street. Because the pipeline is deep underground and now soaked in thousands of barrels of oil Enbridge could not begin digging until late Friday.

Enbridge said it could be several days before the leak is fixed and the pipeline reopened. This caused the price of the front month contract of oil to shoot up on worries of a localized crude shortage. This pipeline also supplies Cushing OK and the delivery point for crude futures. I suspect this is a weekend challenge and reasonable thinking will return on Monday along with a decline in crude prices. Enbridge shares declined fractionally.

Crude Oil Chart

The Semiconductor Index was knocked for a loss on Friday after Texas Instruments (TXN) and National Semi (NSM) both lowered their forecasts on Thursday. Silicon Labs (SLAB) warned on Wednesday. Texas Instruments reduced their top end estimates but remained in the range analysts were expecting. After a steep intraday loss shares recovered to end flat.

National Semi had a more downbeat forecast. The NSM CEO said, "We'd all like to believe that consumer spending is onward and upward but I don't think it is." Both companies said weak demand for personal computers was a problem and consumers were not spending the big bucks on other electronics purchases. Ron Slamaker of TXN said consumers appear to be buying fewer TVs this quarter.

This corresponds with a new survey from Isupply. The company said there was a glut of LCD-TVs in Q2 with 36% excess inventory, up from 25% in Q1. This is pushing prices down at an accelerated rate. Prices are already down -24% in 2010 compared to a -30% drop in all of 2009. Another analyst said the deflation in prices would probably continue through this holiday season as retailers dumped inventory where technology was changing monthly.

This weekly bad news in the chip sector is holding back the Nasdaq but the damage could be worse. The SOX is still holding above a 10-month low set in August, but just barely.

Maybe things will improve for chips next week when Intel hosts its developer conference in San Francisco. Intel is expected to shed some light on some new products and that could help chip sentiment.

SOX Chart

Dell was downgraded to underweight by Morgan Stanley because of slowing PC sales and increasing competition in the server market. Analyst Katy Huberty set a price target on Dell shares at $11. They closed Friday at $12.06. Dell said its Q3 business slowed because of weaker back to school sales.

LULU, not the frizzy haired kid in the comics but Lululemon Athletica, reported Q2 profits that double last year's quarter and raised its forecast. Earnings of 30-cents compared to only 13-cents last year and revenue rose +56%. Same store sales rose +31%. LULU raised its full year guidance to $1.18-$1.22 from $1.05-$1.10. These are the kinds of metrics traders want to see in an earnings report. LULU shares rallied +13% to $40.53.

Transocean Offshore (RIG) rallied +3.52 on multiple news items. Transocean said it was appealing the Swiss regulatory body ruling on its proposed $1 billion dividend. The Swiss agency turned them down last quarter because of the uncertainty about potential liability in the oil spill.

Secondly BP's new CEO, Bob Dudley, was quoted by Bank of America as saying BP would not be going after Transocean and Halliburton because their contracts indemnified them against damages even due to gross negligence. If you think about the risk here that may be a good plan for BP. If they sue Transocean and Halliburton then those companies will try to prove gross negligence on the part of BP and drag every tiny detail out into the light of day.

If Transocean and/or Halliburton won their case against BP then the government would immediately tack on another $17 billion penalty against BP. Even if BP won against Transocean and Halliburton they could only get $3-$5 billion in expenses minus the monster legal bills and months of being dragged through the court system with all the dirty laundry being aired. Giving Transocean and Halliburton a free pass or maybe settling out of court for a billion each gives BP the high ground and no dirty laundry for the government to see. This story making the rounds on Friday was responsible for the big gains. However, after the close BP was quoted by a reporter as contradicting those original statements by Dudley.

FBR Analyst Robert McKenzie also helped the gains saying regardless of what happens he does not believe Transocean's liabilities will be as high as people expect. He was one of several analysts this week claiming Transocean will settle in order to end the warfare between the two companies. BP still leases multiple deepwater rigs from Transocean and they both need each other in the years ahead. RIG gained +6% on the news.

Transocean Chart

Computer Sciences (CSC) was named as a potential LBO target by Jeffries & Co. The company said in a note to investors that a LBO at $56 would produce a 25% return to the acquirer. That would be a +34% premium over Thursday's close at $41.72. Jeffries upgraded CSC to a buy from hold. CSC gained a buck on the news.

Chesapeake Energy (CHK) found a bid on a rumor Chevron might be considering a buyout of the struggling firm. CHK has overcommitted to shale gas acreage and the price of gas continues to decline. Chesapeake has said it wants to move more to drilling for oil than gas until gas prices move back over $6. They have been selling off large chunks of shale acreage in order to reduce debt and raise money for the switch over to oil. They have acquired one of the largest oil lease positions in North America making them a target for a larger diversified company like Chevron. The uproar over fracking problems in shale drilling is also a cloud over Chesapeake's stock price. One rumor suggested Chevron would be willing to pay $30 for CHK, currently at $21.

The financial sector is struggling to maintain its gains from last week ahead of the Basel III meetings on Sunday in Basel Switzerland. The new rules are expected to put stiffer new capital requirements on banks in order to prevent future financial crises. Many will be forced to raise additional capital and in some cases a lot of additional capital. It should force quite a few mergers as smaller banks find it easier to combine assets than find new ones. Analysts claim the new rules will probably make banking less profitable and restrain economic growth as banks cut back on lending as a way of increasing capital. The new rules won't take effect immediately and are expected to give banks up until 2018 to meet the new criteria. Banks are expected to be forced to raise their reserves by 3-5% to a level of 8-11%. There is also a set of new criteria for what capital will be required. Obviously they don't want 5% of the capital to be in Greek bonds or mortgage backed securities. Several of the top 20 U.S. banks do not have the reserve amounts that will be required. U.S. regulators are expected to go even further under the recent reforms and require an even stronger asset base.

Paul Volcker spoke on Friday in Canada and stressed that major structural reforms are required in the banking sector in addition to the Basel and U.S. changes in progress. He warned that the U.S. and China trade imbalance was "unsustainable." He also warned that stabilization in Europe was years away and not months.

It appears we are living in a pessimism bubble. Despite the markets recent gains and the sudden improvement in some economic reports the majority of consumers believe we are about to hit a double dip. Investors may already be discounting last month's double dip fears but a new survey claims consumers are not.

The StrategyOne Survey found that 65% of Americans believe a double dip is about to occur. Nearly 44% believe the second dip will be worse than the first with 21% believing it will be "much more severe." Only 21% believe the economy will recover by the end of 2011. Another 23% don't believe the economy will ever fully recover.

71% believe that America is fundamentally broken and not working. Since the American consumer is characteristically optimistic and resilient this marks a significant departure from the norm. Confidence has been materially damaged and real doubts are emerging about our future. The constant media reinforcement about unemployment and high government debt is proving to be a potent depressant.

In the survey Americans were very concerned about their money.

* 41% are planning to cut back on their spending over the next 3–4 months, compared with 8% who plan to increase it.
* 35% say they will plan to cut back their online spending over the next to 3–4 months, compared with 12% who plan to increase it.
* 79% say they are planning to spend less money for Christmas this year.
* 87% say they do not plan to make a big-ticket purchase (such as a house or car) in the next 3–4 months.
* 49% have already delayed making a big-ticket purchase during the past few months.
* 26% of Americans don't expect their personal finances to fully recover from the downturn until after 2011, and just as many (26%) think their personal finances won't ever fully recover.

It has been 34 months since the Great Recession began and normally we would already be setting new highs in economics by now. Of course I guess that is why they are calling it the Great Recession instead of a garden-variety recession.

When I started writing this weekend I had planned to focus on why I thought the double dip would not occur but in the course of reading nearly 100 articles in preparation for the weekend commentary I was reminded of some existing problems.

For instance you may remember Wednesday's Fed Beige Book said they were expecting "continued growth but were seeing widespread deceleration" through the end of August. Of the 12 Fed regions five banks reported "economic growth at a moderate pace." Two Fed banks saw "positive developments" but the remaining five banks said conditions were "mixed or decelerating."

While the economy as a whole does not seem to be slipping back into recession the outlook is still weak. Economists are now predicting that GDP will fall back to just over +1.0% growth compared to the 3% estimates at the beginning of July. That is definitely "widespread deceleration."

Growth from the $787 billion stimulus package is winding down and along with it the economic activity. Last week the president launched an election Hail Mary pass with the announcement of a "$350 billion jobs recovery" package but no democrat ran down the field to catch it. The term stimulus is now a four-letter word and no democrat wants to be heard uttering the word in public. Analysts claim the package has zero chance of being passed and was being offered because the president needed something to offset his floundering ratings, which fell to a new low on Friday according to Rasmussen. The future lack of progress on the recovery package can then be blamed on the republicans.

Make no mistake the expiring tax cuts and the coming changes in health care are a serious cloud over consumer sentiment. 99% of consumers could not tell you what tax cuts applied to them but they definitely don't want them to expire. Details about future changes in the health care system are starting to appear and consumers, other than those with uninsurable conditions, don't want those changes either.

Despite these negatives I still believe the markets are going to rally the closer we get to the elections. With the Dow up seven of the last eight days I am starting to believe in a September rally. There are reasons why we could see a continued move higher. The changes are subtle but there are changes in progress. Wholesale inventories rose +1.3% and the biggest gain in two years. The trade deficit on Thursday was better than expected. Jobless claims fell by -21,000, discounting the Labor Day factor. Corporate cash is at extremely high levels. Companies are starting to announce stock buybacks again. Mergers and acquisitions are at a pace not seen in three years. Companies are selling debt at a record pace to lock in cheap rates. They will have to put that money to work. Q3 earnings are expected to rise +25% or more. There is zero inflation. The nonfarm payrolls showed private hiring was still positive. Consumer electronics are declining in price on almost a weekly basis. Give Joe Worker a six-pack and a cheap large screen TV and sentiment will improve.

The reverse of this view would be an article last week by Nouriel Roubini and Ian Bremmer in the Institutional Investor titled "Paradise Lost." (Thanks to Art Cashin for the heads up) In it they claim crisis breeds denial. After a suitable period of healing everyone always believes that markets will set new highs. They claim the political, economic, financial and psychological hurdles standing in the way of this scenario today would require divine intervention to make new highs. It is a good article by Doctor Doom but far too long to discuss here. I think Roubini has to continue to write doomsday articles to justify his nickname although he has seldom been wrong. Read Paradise Lost

There are positives to this economy. I believe those positives are convincing funds to nibble at stocks. Bonds are actually being sold again and some of that money is making its way into stocks. The risk trade is coming back in vogue. Despite the constant stream of warnings in the semiconductor sector the Nasdaq is moving slowly higher.

Granted the gains over the last two weeks have come on extremely low volume but they are still gains. Friday's 5.6 billion shares was the lowest volume in two weeks. Volume for September month to date is -31% below 2009 levels. That should be over next week. Traders will be back at work and funds will have to make decisions on quarter end and year-end positioning. Do they position for a September decline or a slow grind higher into the elections?

LiquidNet reported on Friday they had to cut 12% of their staff because of the drop in volume. LiquidNet is a dark pool where institutions and funds send large orders to be matched with other buyers and sellers. The average share volume per trade is 50,000 shares. Volume has died and not just last week. The CEO said mutual funds saw outflows of more than $60 billion after the flash crash as investors fled the market.

Commentators including myself talk about September being the worst month of the year in historical terms. What does that mean in English? September is the only month that has averaged a negative change since 1950. That change (loss) is not large but it is still negative. What September does have a lot of is high volatility. Some years will have big gains and others big losses but nearly always high volatility.

If you look back at the last 15 years September has produced some monster gains and losses for the S&P. Only three years had changes of less than 2%. The average gain/loss for 15 years was only -0.25% but you can see in the table below that in directional years the numbers were huge. I thought it was also interesting that only six years were negative and nine were positive. Of course the entry for 2010 only covers seven days.

September Gains/Losses

I mentioned earlier about the $60 billion withdrawn from funds after the flash crash. I am beginning to believe that the volatility from May through August eliminated the need for a normal fund induced Sept/Oct dip. Over the last four months funds were either forced to liquidate to cover withdrawals or they did it voluntarily as the outlook changed. The last four months have been a killer for anyone in the market. This probably shook out the weak holders and weak positions in mutual funds. You may remember a couple weeks ago I reported on a fund manager that was holding 50% in cash and he claimed many other fund managers had equivalent positions. If that was the case then they have nothing left to sell and the improving economics, even slightly, and the impending elections are a reason to reduce that cash position in favor of equities.

Secondly, if equities begin to move higher the sell off in the bond market is going to explode. Once those hiding in the safety of bonds start to believe in equities again the reversal of that money flow is going to be dramatic.

I believe there will be a rally after the elections as long as control changes at least in Congress. Since it appears to be nearly a lock today the recent gains could be funds starting to establish positions. Two weeks ago Dow 10,000 reappeared as support and it was tested on four different days and was rock solid. That could have been the green light for funds. Hedge funds have been flat to down all year. They need to capture some performance before year-end to justify their fees. They can't afford to sit around and wait for November.

I realize I may be grasping at straws in my economic views and my thoughts on the +5.7% gain so far in September. Reader Rodney will remind me of the negative points when he gets this email. I agree there are plenty of negatives still undecided and still in play. I may be in denial as Roubini suggests of anyone hoping for a new bull market. Regardless of their views I have to look at the charts, economics and the calendar and come up with a judgment call. While I am not 100% convinced we are going higher I do have a bullish bias today. The charts are starting to sprout again as are the economics. I would like to think we are not going to see Dow 10K again this year but I can't promise it.

The S&P ground its way higher on Friday to close at 1109 and above several levels of key resistance. The last three days have been a picture of defiance of resistance and on very low volume. The S&P moved over the 100-day average at 1102. It also moved over downtrend resistance from April as well as horizontal resistance at 1100. The breakout was not huge, only about five points but there were several lines of defense and each was ground slowly away. Every dip was shallow and was quickly bought. Nobody was chasing prices higher but there was no shortage of buyers on the dips. The last two days there was no end of day sell off. The next resistance is the 200-day at 1115 and then the August resistance highs at 1127-1130.

S&P-500 Chart - Daily

The Dow has not yet broken free but it was wedging up for a potential breakout on Friday at 10475. It did edge over the 200-day at 10,450 but the 10,475 level is going to be critical. A break over that level targets 10,700. The Dow was handicapped on Friday by losses in HPQ, INTC and MSFT. They were lower by downgrades to expectations for PC sales. Also weighing on the Dow was losses in AXP, JPM and TRV.

I believe a move over 10,475 will happen on Monday as long as the Basel III outcome is not any more negative than currently expected. There is only one economic report and it is normally not a market mover.

Dow Chart

The Nasdaq finally moved over initial resistance at 2225 and has a speed bump at 2270 and the 200-day before encountering very strong resistance at 2300. It is a miracle the Nasdaq has done so well with the daily warnings and downgrades from the chip sector. Making any forward progress is amazing. I doubt there will be a major struggle at the 200-day but I do believe 2300 will be a major resistance barrier. However, since the S&P and Dow are leading and they could be well over their corresponding resistance levels and drag the Nasdaq through 2300 when the time comes. The corresponding levels would be 1130 on the S&P and 10700 on the Dow.

Nasdaq Chart

The Russell 2000 was a negative factor last week. The Russell lost ground with a seven-point loss for the week. That is more a factor of serious short covering the prior week rather than specific weakness last week. The Russell is fighting the 200-day at 645 and the 100-day at 650. The 100-day has been pretty strong resistance since late May.

The weakness in the Russell is a negative point in my theory that funds are starting to sneak into positions ahead of the elections. The weakness tells me that funds are still not confident enough to put money into small caps. When that happens and the Russell moves over 650 it will be a positive sign but we still need a move over 675 as confirmation of a new bullish trend. Support is 630.

Russell Chart

We should know pretty quickly next week if funds are buying stocks again. If they come back from the extended holiday and push the indexes higher then the bears should start to cover. It is one thing to be short going into September because of historical trends but another to remain short in a rising market. With the amount of pessimism we had two weeks ago the shorts should have loaded up again after the early September spike. When the markets did not immediately roll over it should be causing some sleepless nights. Next week should be exciting regardless of direction.

Saturday was the ninth anniversary of 9/11 and there were events planned all over the country. Vice President Joe Biden was at the WTC with Michael Bloomberg for a memorial. President Obama attended a ceremony at the Pentagon where flight 77 impacted and Michelle Obama and Laura Bush were in Pennsylvania for a memorial for flight 93 victims.

Sunday is a big FreedomWorks Taxpayer march to the front lawn of the Capitol building. They are expecting a million people with the theme "Remember in November."

Jim Brown


Index Wrap

Caution as Indexes Near Prior Highs

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

As anticipated, SPX and COMP struggled to pierce down trendline resistances. The more critical technical resistance is now ahead, at the June-August highs.

While the area of prior highs (e.g., 1129-1131 in SPX) could mark the top end of a broad trading range, it also should be noted that triple tops tend to be less common than rallies that break through a resistance zone on a third try. Working against the idea of a good-sized run above prior highs just ahead is that the 13-day RSI is approaching the area where an overbought market begins to be suggested. On the other hand (and relating also to technical indicators), as the major indexes get closer to prior highs, there has been a fall off in my bullish sentiment numbers which is positive, in a contrarian way, for at least a challenge of prior tops.

Not related to my market outlook, I was pleased to see that the SEC on Friday announced an expansion of the number of stocks covered by new 'circuit breakers' that can pause the kind of crazy volatile trading seen in the sharp May 6th market plunge. Not only are more stocks in the S&P 500 on the circuit breaker list, but all stocks in the Russell 1000 are also covered.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart continues on a bullish track with SPX's recent breakout above its down trendline and the top end of its bearish downtrend channel. The pivotal test for the bulls will be an ability to take the Index above its prior 1129-1131 highs. Given that the 3% upper envelope line has 'contained' recent months' rallies and SPX is nearing an overbought situation in terms of the RSI, I'm not overly bullish on the prospects for a decisive upside breakout above prior highs. I can't also say that I'm ready to play the short side of this market until I see further price action, especially what happens if the index gets to or near the 1130 area.

Triple tops aren't all that common, as would be the case if SPX challenged its prior highs but then started falling again. On the other hand, in trading range markets numerous tops (e.g., 4-5) in the same area aren’t uncommon. A recent fall in bullish sentiment is a mildly bullish note from a contrarian perspective.

Support is at 1080, with fairly major technical support beginning around 1045. Technical resistance comes in around 1120, extending to 1129-1131.

S&P 100 (OEX) INDEX; DAILY CHART

The chart is the same for the S&P 100 (OEX) Index in terms of the index having penetrated its down trendline resistance; in OEX, in the 500 area. The intermediate trend would turn UP if OEX has a sustained move above prior highs in the 512 area. Any new closing high should see some follow through buying in subsequent days or look out for only a temporary, or 'false', breakout. I think there's a better than even chance that the 512 area will again be tested, but I don't have a view that OEX can climb much beyond this area.

Resistance is anticipated in the 506 to 512 zone. Major resistance is then likely in the 530-532 area, extending to around 540.

Immediate support is at 493, the bottom end of the recent upside gap and extending to 488, at the 21-day moving average; I've noted next support at an emerging up trendline, currently intersecting at 475.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 had some further upside momentum in the past week; not a lot, but it was a slightly higher weekly close. A next key technical test for the bulls occurs at the down trendline, currently intersecting around 10560 as noted on the chart below. The most critical test of resistance occurs at prior highs in the 10700-10720 area. If INDU gets, and stays, above 10700, it would suggest a reversal in the intermediate-term trend from down to up. (The long-term trend remains bullish.)

I don't rate it as highly probable that INDU will achieve a decisive upside breakout above 10700. If bullish sentiment continues to moderate the prospects get a bit more favorable.

Near support is at 10300-10315, then at 10250, at the current 21-day moving average. No change in the suggestion that major support should be found in the 10000 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index continued its recovery rally dating from the basing type action seen in the 2100 area, when COMP also finally got to a 'fully' oversold extreme.Moreover, this past week's rally pierced the down trendline dating from the April highs.

Technically, the most important resistance is in the 2300 area, at the cluster of prior highs made in late-July/early-August; resistance also extends to the 2321-2341 area, the highs made this past June. As with the other major indexes, a decisive upside penetration of prior highs above 2300 would shift the intermediate-term trend to up in terms of the chart. As indicated with my S&P 500 commentary, bullish fell off this past week going into the weekend.

If bullish sentiment continues to moderate as the Index works higher, this divergence works in favor of increased bullish price potential. Working somewhat against the view of a major breakout ahead is the fact that if prices continue higher, the 13-day RSI will indicated an initial overbought condition.

Immediate resistance begins around 2260-2361, extending to 2300-2310; with next key resistance at 2321-2341 as already noted.

The 21-day average, currently at 2180, is noted as initial support, although 2200 should offer immediate near-term support. Major support continues to be seen in the low-2100 area.

NASDAQ 100 (NDX) DAILY CHART:

My general comments on the chart and its indicators are basically the same as for the Composite above; i.e., bullish near-term upside momentum continued this past week with the breakout above the bearish down trendline. A true chart turnaround (intermediate trend) occurs IF prices pierce prior highs.

The recent close hit 'resistance' implied by the 3% upper envelope line; a line that floats 3% above the centered 21-day moving average. This envelope line is not resistance in a classical chart sense, rather is an area where the index may be overly extended and vulnerable to selling pressures.

I speculated last week on NDX possibly being in a 1900-1750 trading range and the index nearly hit 1900 this past week; stay tuned on a further attempt to climb above 1900. Currently, I doubt that NDX is going to break out above resistance implied by its prior highs, especially if the RSI climbs to overbought levels again. The fall off in bullish sentiment is a bit encouraging for a further advance but we'll have to see if bullishness picks up substantially again.

Pivotal resistance is at 1910-1920, then at 1925, extending to 1939-1940. The 1840 to 1853 area should be initial support, with lower next support implied by the 21-day average, at 1825 currently. The emerging up trendline, currently intersecting at 1768 may act as a major support if there's another bid dip ahead.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

My take on the Nasdaq 100 (QQQQ) tracking stock chart and indicator picture is the same as the underlying Nas 100 index comments posted above. With QQQQ the key resistances are at the prior highs between 47.2 and 47.7. A future move above and away from these highs would turn the intermediate trend higher in terms of the chart.

As long as the On Balance Volume (OBV)line keeps pointing higher, this is a volume 'confirmation' for the advance seen in QQQQ.

Near support: 44.9-45.0

Next support: 44.0

Near resistance: 47.2

Next resistance: 47.7

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) price action this past week basically was a consolidation and churning just below 640. RUT was down on the week. I noted last week that "...further upside potential isn't ruled out in the chart but I don't see a lot of upside ahead..."

Substantial resistance may come in at the 200-day moving average, currently at 645; assuming RUT can climb above its 200-day average, an even more key resistance area is at 665 extending to 672. RUT has achieved an upside penetration of its down trendline, which is a bullish plus but buying so far has failed so far to lift the index above the other key chart points.

Near support looks like 628, with pivotal support starting at 600. On the chart below the line drawn between the two key lows is captioned at a 'possible' double bottom. The reason for indicating this formation this way is that 'confirmation' for a double bottom hasn't occurred; it happens IF/WHEN the rally off the second low exceeds the high that lies between the two lows, which is at 672 in this case.



GOOD TRADING SUCCESS!


New Option Plays

Good News For This Stock

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Transocean Ltd - RIG - close 58.82 change +3.52 stop 53.40

Company Description:
Transocean Ltd. (Transocean) is an international provider of offshore contract drilling services for oil and gas wells. As of February 2, 2010, the Company owned, had partial ownership interests in, or operated 138 mobile offshore drilling units. As of February 2, 2010, its fleet of 138 rigs consisted of 44 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 26 Midwater Floaters, 10 High-Specification Jackups, 55 Standard Jackups and three Other Rigs. In addition, it had five Ultra-Deepwater Floaters under construction. The Company operates in two segments: contract drilling services and other operations. Contract drilling services, the Company's primary business, involves contracting Transocean's mobile offshore drilling fleet, related equipment and work crews primarily on a day rate basis to drill oil and gas wells. The other operations segment includes drilling management services, and oil and gas properties.

Target(s): 62.95, 64.50, 66.50
Key Support/Resistance Areas: 55.50, 58.35, 63.90, 64.90
Time Frame: 2 to 4 weeks

Why We Like It:
RIG exploded on Friday after BP's new CEO said that BP does not intend to seek compensation from RIG for the oil spill disaster unless the DOJ finds gross negligence on their part. Reports from FBR and BofA/Merrill state that they don't believe the DOJ will be able prove gross negligence. RIG is also a cheap stock trading at a PE below 7. Technically, the stock broke out of a downward trend line that started on May 27th on heavy volume. The stock has made a series higher lows and higher highs which I think will continue. I suggest we open positions at current levels. More nimble traders may want to time an entry on a retracement of some of Friday's gains or a breakout above Friday's highs. Our initial stop will be $53.40.

Suggested Position: Buy November $65.00 CALL, current ask $2.09

Annotated daily chart:

Entry on September xx
Earnings 11/3/10 (unconfirmed)
Average Daily Volume: 8 million
Listed on September 11, 2010


In Play Updates and Reviews

Targets Hit

by Scott Hawes

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Current Portfolio:


CALL Play Updates

ConocoPhillips - COP - close 54.75 change +0.02 stop 52.30

Target(s): 55.85, 56.90, 57.75
Key Support/Resistance Areas: 58.50, 57.00, 53.00 to 53.50
Current Gain/Loss: +2%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/11: Nothing has changed from my previous comments.

9/9: COP is consolidating above support, all of its moving averages, and is maintaining and upward trend line from 8/31. The broader market is at resistance and is probably due for a pullback so we may need to exhibit a little patience. However, if we breakout higher first I suggest readers be quick to take profits or tighten stops to protect them. I've adjusted the targets down slightly to account for this scenario.

Suggested Position: Buy November $57.50 CALL, entry was at $1.05

Annotated chart:

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


Int'l Business Machines - IBM - close 127.99 change +1.63 stop 125.90 *NEW*

Target(s): 127.40 (hit), 128.90, 129.75
Key Support/Resistance Areas: 132.00, 128.00, 127.50, 123.00
Current Gain/Loss: +35%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
9/11: Our gain is currently +35% as our first target was hit on Friday, so taking at least some profits off of the table is probably the smart thing to do. We're going to raise the stop to below Friday's low and I'm also adding another target of 128.90. I suggest closing the trade at this target or trailing the stop up to see how much more you can get out of it.

9/9: IBM has traded to just below our first target in 3 of the past 4 sessions, but keeps getting smacked down near some moving averages and resistance at $127.50. The stock is making higher lows but hasn't been able to breakout. I've lowered the first target 35 cents and suggest we take profits or tighten stops at this level if it is reached tomorrow. I would rather book a profit than sit through a pullback. I've also tightened the stop to $124.25.

Current Position: Long October $130.00 CALL $1.92, 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


iShares Russell 2000 - IWM - close 63.72 change +0.20 stop 59.80

Target(s): 66.50, 67.75
Key Support/Resistance Areas: 68.00, 67.00, 64.50, 62.00
Time Frame: 2 to 4 weeks

Comments:
9/9 & 9/11: IWM is backing off from its 200-day SMA near $64.50. Our trigger to enter long positions at $62.50 is below the 50-day and above the 20-day moving averages. I like the long set-up, now we need to get triggered. More nimble traders may want to try to time an entry near $62.00 which is closer to the 20-day SMA which is starting to turn up.

9/8: We are waiting for our trigger of $62.50 to enter long positions in IWM. We are going to need a strong down day which could come at anytime, perhaps after tomorrow's jobless claims report. I suggest being ready to take advantage of the dip. My comments from below remain the same. Note: I incorrectly listed the wrong November strike price in the play release last night. It has been corrected and I apologize for the error.

9/7: I believe any further weakness in the Russell 2000 and broader market present buying opportunities for an early fall rally and into the mid-term elections, of which will probably result in gridlock in Washington which is generally good for equities. Fund managers will begin reallocating their portfolios and cash on the sidelines should be put to work. Let's use a trigger of $62.50 to initiate long positions in IWM which is near the 38.2% retracement from the lows on 8/24 to the highs on 9/3. Our initial stop will be $59.80. Our targets are near the June and July highs.

Suggested Position: Buy November $65.00 CALL, current ask $2.55, estimated ask at entry $2.00

Annotated chart:

Entry on September xx
Earnings N/A (unconfirmed)
Average Daily Volume: 60 million
Listed on September 7, 2010


NVIDIA Corp. - NVDA - close 10.07 change -0.11 stop 9.15

Target(s): 10.75, 11.35, 11.80
Key Support/Resistance Areas: 11.85, 11.45, 11.00, 10.25, 10.00 9.45
Current Gain/Loss: -14%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
9/9 & 9/11: NVDA remains above $10.00 and its 20-day and 50-day SMA's. Any pullback to these areas would be good long set-ups for new entries.

9/8: NVDA hit our breakout trigger to enter long positions. The stock has now officially printed a higher high which confirms the higher low made last week. The stock has closed above its 50-day SMA and its 20-day SMA is rising. We also have an upward trend line as a good reference point to manage the trade going forward. I think pullbacks can be bought for readers who do not have open positions. $10.00 is a solid support level but I'm not convinced NVDA will trade there unless broader market weakness surfaces in earnest, which is certainly a possibility.

9/7: We are waiting to be triggered in NVDA. The stock closed above its 50-day SMA for the first time since 4/15. If the market rebounds tomorrow we will most likely get triggered on the breakout.

Current Position: Long October $10.00 CALL, entry was at $0.72

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 21.74 change +0.57 stop 21.14 *NEW*

Target(s): 20.75(hit), 21.30 (hit), 21.85, 22.65
Key Support/Resistance Areas: 23.50, 21.40, 20.00, 19.50, 19.00, 18.00
Current Gain/Loss: +60%
Time Frame: 3 to 5 weeks
New Positions: No

Comments:
9/11: RAX broke out of the ascending triangle I mentioned below and gained +3.5% today. The stock has gained more than +10% from our entry and our options have gained +60%. Taking at least some profits off of the table is the smart thing to do. It wouldn't surprise me to see RAX pull back to the $21.35 area before a continuation higher if the broader market strength continues this week. Regardless we are going to keep a tight leash on this trade and move the stop all the way up 21.14. I would also watch out for a possible double top with Friday's high at 21.86 so I have lowered the next target 10 cents to 21.85 and the final target is 22.30. Essentially, we are looking to book gains on this position n the coming days. One of the reasons I released this play was takeover chatter circulating in the sector and around the company. We all saw what happened with 3Par. Hanging on to a small position could pay off but take profits off the table so you are at least playing with the houses money, per se.

9/9: We currently have a +30% gain in RAX. Let's move our stop up to $18.95 which is just below the 200-day SMA and primary upward trend line. The stock is forming an ascending triangle over the past couple of weeks and a breakout, coupled with broader market strength, could catapult RAX to our more aggressive targets. If this happens be ready to take profits or tighten stops to protect them.

9/8: RAX double bottomed with yesterday's lows and closed almost +2% higher on the day. We are looking for a continuation of the recent move higher and if the broader market cooperates I'm looking for RAX to hit our 2nd target of $21.30 and possibly $21.95 this week. As these targets approach be ready to take profits or tighten stops to protect them.

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 14.48 change +0.07 stop 13.78 *NEW*

Target(s): 15.45, 15.90, 16.30, 16.95
Key Support/Resistance Areas: 14.40 to 14.70
Current Gain/Loss: -33%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/11: I've lowered the stop 12 cents to 13.78 which is just underneath the 20-day moving average. The 14.40 level is the logical place for SWC to bounce but we are going to need the broader market strength to continue. My comments from below remain the same.

9/9: SWC is at a critical support level and if it breaks I am concerned SWC could head towards $13.00. As such, I suggest we tighten the stop to $13.90 and step aside if it gets hit. I've lowered the targets to take advantage of higher highs should SWC turn back higher from here.

9/8: SWC is consolidating recent gains and is maintaining an upward trend line that began on 8/25. The stock has strong support all the way down to the $14.00 level. We're looking for SWC to find support soon and make another higher high.

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

Annotated chart:

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


Vale SA - VALE - close 27.43 change -0.18 stop 25.80

Target(s): 28.38, 28.75, 29.25, 29.70
Key Support/Resistance Areas: To Follow
Current Gain/Loss: +8%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/11: VALE traded right down $27.25 and bounced so we are now long October 29.00 calls at 50 cents. I've added a lower target right underneath the 200-day SMA. My primary targets on this trade are the first two. If the first target is reached our 50 cent options should be worth about 80 cents which is a +70% gain. As these targets approach I suggest we keep a tight leash on the trade get out with a winner.

9/9: We are waiting to be triggered at $27.25 which is just above the 50-day SMA and Tuesday's lows. I'm looking for this area as a bounce point in VALE back up towards its August highs. NOTE: I incorrectly listed the wrong monthly option as November in the play release last night. It should be October and has been corrected. I apologize for the error.

9/8: VALE is an international basic materials producer. Demand is increasing from emerging markets and various other developed countries whose economies are growing at a more rapid pace than in the US. RBC cut VALE to sector perform in the pre-market on 9/2 and the stock has lost about -5% since. However, VALE is maintaining two upward trend lines and bounced hard off its 50-day SMA on Monday. I suggest we use the weakness to our advantage by initiating long positions if VALE trades to $27.25. Our stop will be $25.80 with our primary targets near the stock's August highs.

NOTE: I have chosen a further out of the money call than normal to reduce risk on the trade should the stock break lower.

Current Position: Long October $29.00 CALL at, entry was at $0.50

Annotated chart:

Entry on September 10, 2010
Earnings 10/28/10 (unconfirmed)
Average Daily Volume: 17 million
Listed on September 8, 2010


PUT Play Updates

Abercrombie & Fitch - ANF - close 34.85 change +0.52 stop 35.65

Target(s): 34.60 (hit), 34.20 (hit), 33.55
Key Support/Resistance Areas: 38.20, 37.25, 32.75, 34.00, 30.50
Current Gain/Loss: -23%
Time Frame: Several weeks
New Positions: No

Comments:
9/11: ANF just won't let go under $34.00 but if there is broader market weakness this week it could go quick. I'm leaving this open more as a hedge on our long positions with a tight stop above last week's highs. All of the targets above remain valid. My comments from below remain the same.

9/9: ANF hit our third target and we have one more. We have a tight stop at $35.65 and the broader market looks like it could pullback here. If it does ANF should head lower in earnest. Our final target is $33.55 which we will use to close positions if we are not stopped out first. Continue to use weakness to close positions.

9/8: ANF came within 9 cents of our $34.05 target so this has been raised to $34.20. ANF posted its lowest close since 7/21 on Wednesday and the stock looks ready to make another leg down, but we are going to need to see broader market weakness. I suggest readers continue to use weakness to close positions or tighten stops. I've lowered the stop $35.65 and adjusted the final two 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


McDonald's Corp. - MCD - close 75.01 change +0.64 stop 75.75

Target(s): 72.05, 70.90
Key Support/Resistance Areas: 75.35, 73.60, 71.50, 70.50
Current Gain/Loss: -9.5%
Time Frame: 1 week
New Positions: Yes

Comments:
9/11: I expected MCD to fill some of the its gap lower on Thursday but was a little surprised the stock traded to $75.00. On the hourly chart MCD closed right on its 20 and 50 period moving averages which it is testing from below. This is a logical spot for the stock to turn lower but we will most likely need broader market weakness. If MCD heads higher first a nice short set-up would be in the $75.30 area. This would create a bearish head and shoulders pattern on the hourly chart.

9/9: MCD printed a new all-time high of $76.36 yesterday. The recent surge higher was due to the company reporting +7% y/y same store sales in early August. Today MCD reported that August same store sales were up only +4.9% y/y compared to the prior +7% gain. This wasn't good enough for investors as they began dumping the stock on heavy volume. I believe the selling will continue at least to a key support level near $72.00 which was prior resistance in May. I suggest readers initiate short positions to take advantage of the momentum and possible broader market pullback. The gap down today hasn't been filled but I don't think it will prior to breaking lower. Let's use a trigger of $74.60 or a breakdown to $73.55 to open positions. We'll use an initial tight stop of $75.75 which is below yesterday's high and get out early if we are wrong.

Current Position: Long October $72.50 PUT, entry was at $0.84

Annotated chart:

Entry on September xx
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 6 million
Listed on September 9, 2010