Option Investor
Newsletter

Daily Newsletter, Thursday, 9/16/2010

Table of Contents

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

Market Wrap

FedEx Warns, Economic Data Mixed

by James Brown

Click here to email James Brown

Market Stats

The stock market's upward momentum has stalled in the last couple of days. British retail sales were worse than expected and the market was poised for some profit taking at the opening bell. The PPI report and weekly jobless claims came in slightly better than expected. Yet the Philly Fed report was a disappointment. Meanwhile the government said poverty has hit its highest levels in 15 years. Prior to the open FedEx delivered some bad news with an earnings miss, 1,700 in job cuts, and a less than bullish outlook.

The U.S. dollar was weak and gold hit a new high. There is growing speculation that the U.S. Federal Reserve is poised to announce more quantitative easing, which helps drive gold higher. Gold futures hit a new high of $1,279.50 an ounce this morning and the GLD gold ETF set a new closing all-time high of $124.63 this afternoon. Meanwhile stock market volume remains very low suggesting investors are still cautious and unsure of the rally. Fortunately, a late-day rebound in stocks pared their losses. The S&P 500 and Russell 2000 posted small losses but the NASDAQ and the Dow Industrials eked out gains. Technology was one of the best performing sectors on Thursday.

Foreign markets were trending lower. The Japanese NIKKEI index tagged a new five-week high this morning only to reverse course and close in negative territory. Yesterday the Japanese government sold an estimated two trillion yen in the currency markets to try and weaken its currency after a string of new 15-year highs against the dollar. This was the first currency intervention by Japan in six years and a record-breaking one-day sale. Yet the short-covering in the Japanese stock market stalled and the yen's decline slowed on Thursday. The NIKKEI ended the session off -0.07%.

In China the Hong Kong Hang Seng lost -0.16% after setting a one-month high on Wednesday. The Shanghai index displayed more volatility with a -1.89% correction. There could be more volatility tomorrow as traders react to comments from U.S. Treasury Secretary Tim Geithner. There is speculation that the U.S. will take a stronger stance on China and the trade deficit between the two countries. A few months ago China said it would allow the yuan to fluctuate but Geithner claims the yuan is not being allowed to move fast enough. The yuan did close at its high levels against the dollar since 1993.

European stock markets slipped toward new one-week lows. Economic data out of Britain didn't help matters. Economists were expecting U.K. retail sales to climb +0.3%. Instead the U.K. government said retail sales fell -0.5% in August after a +0.8% gain in July. This was the first decline in seven months. The English FTSE index lost -0.28%. The German DAX closed down -0.2%. The French CAC-40 fell -0.51%.

The major economic report out this morning was the August Producer Price Index (PPI). Economists were expecting a rise of +0.3%. The Labor Department reported an increase of +0.4% following a +0.2% gain in July. The headline number relieves some of the worry over deflation. Gains were driven by a big increase in energy costs. Analysts were expecting another rise in food prices but foods actually fell -0.3%. The "core-PPI", which excludes more volatile food and energy sectors, rose +0.1%, which was in-line with expectations. Tomorrow we will see the Consumer Price Index (CPI) where economists are also expecting a +0.3% increase.

The weekly initial jobless claims are improving, albeit slowly. Analysts were expecting an increase from 453,000 to 460,000. Yet the Labor Department said initial claims actually fell to 450,000. The trend has been improving after claims peaked at 504K back on August 13th. The four-week moving average fell from 478K to 465K. Continuing claims contracted 84K to 4.485 million.

One of the biggest disappointments today was the Federal Reserve Bank of Philadelphia's general economic index. Economists were hoping to see an increase from -7.7 in August to +2.0 in September. Unfortunately, the Philly Fed index came in at -0.7. It is improvement but readings under 0.0 indicate contraction in the Delaware, southern New Jersey, and eastern Pennsylvania region.

Another big disappointment today was earnings from Fedex (FDX). Wall Street was looking for a profit of $1.21 a share on revenues of $9.38 billion. The company delivered $1.20 a share on $9.46 billion. FDX said its FedEx ground, FedEx Express, and International Priority segments improved. The bigger headline was FDX's earnings warning for the current quarter, which is expected to see a profit in the $1.15-1.35 range compared to analysts' estimates at $1.36. Alan Graf, the CEO, said, "We expect continued strong demand for our package transportation services through at least December" but that may have left Wall Street wondering, what about next year? On the conference call the CEO, Frederick Smith, said "We expect a phase of somewhat slower economic growth going forward," which help set the bearish tone for FDX stock.

On a more positive note management did narrow their 2011 EPS estimates to $4.80-5.25 versus prior estimates of $4.60-5.20. FDX also claims that by consolidating some of its FedEx freight services they'll see increase profitability. This comes with a cost of 1,700 job cuts. For the quarter that just ended FDX saw revenues rise +18% to $9.46 billion. Operating income was up almost +100% to $628 million. Margins improved year over year from 3.9% to 6.6%. FDX is seen as a bellwether for the economy and the initial reaction to the news was bearish. The stock gapped open lower and closed down -3.7% at $82.72. Rival UPS lost -1.3% to close at $66.72.

In other news the U.S. Senate voted 61-38 to pass a tax-cut bill for small business. Democrats claim the new bill will create a $30 billion lending program with a focus on small business. The new bill also includes about $12 billion in tax breaks, mostly on depreciation of assets. The $30 billion in loan money is supposed to be headed for smaller banks and includes changes to the Small Business Administration's loan process that lowers fees and raises loan limits. The bill now heads back to the House for final approval. The government's Census Bureau reported this morning that our poverty level rose to 14.3% in 2009, the highest rate in 15 years. That equates to 43.6 million Americans with a family income of less than $21,954 a year or less than $10,956 for an individual. Analysts are estimating this number will hit 16% over the next ten years. Currently Mississippi, Arizona, and New Mexico have the highest levels of poverty at 20.6%, 19.6%, and 19.3% respectively.

The government-sponsored mortgage lender Freddie Mac said 30-year mortgage rates rose again for the second week in a row. Fixed rates inched up to 4.37%, which remains near all-time record lows. Unfortunately it's not helping the housing market and consumers are still finding a hard time getting approved. The Mortgage Bankers Association said mortgage applications fell 9% from a week ago. At the same time foreclosures are surging. RealtyTrac reported this morning that August was the worst month on record with foreclosures hitting a new high of more than 95,000 homes repossessed (this is the third new record in the last five months). The state of Nevada saw foreclosure filings decline 25% to one out of every 84 households. Sadly Nevada has spent the last three and a half years stuck at the top of the list for the highest foreclosure rate. Florida, Arizona and California round out the top four worst states for foreclosure filings. Housing stocks were down sharply on the news. The HGX index lost -1.9%. The DJUSHB index fell -2.9%. Shares of Pulte Group (PHM), one of the largest U.S. builders, helped lead the way with a -3.8% loss.

On a brighter note the tech sector could lead the market higher tomorrow. After hours there was bullish news from Oracle, Research in Motion, and Texas Instruments. Oracle (ORCL) reported earnings that beat the street. The company delivered a profit of 42 cents a share on revenues of $7.59 billion. Analysts were only expecting 37 cents on $7.27 billion. Operating margins improved to 39.0%, which were also better than expectations. Shares of ORCL closed at $25.36 but they were trading near $26.50 in after hours. Currently ORCL's 52-week high is $26.63.

Research In Motion (RIMM) reported earnings after the closing bell. Sentiment for the company has soured lately. The stock is down almost -40% from its highs in April. Investors are worried that RIMM is losing the smartphone battle to AAPL's iPhone and GOOG's Andriod line of phones. RIMM managed to surprise Wall Street with a profit of $1.46 a share, which was 11 cents better than expected. Revenues jumped +31% to $4.62 billion, which beat estimates for $4.47 billion. The company also raised their Q3 guidance to $1.62-1.70 a share compared to consensus estimates at $1.39. The earnings surprise and the improved guidance should have a positive impact on the stock tomorrow. RIMM closed up +2.1% at $46.49 during the regular session but shares were trading above $48.60 in after hours. Look for potential resistance near $50.00 and the 50-dma.

Semiconductor giant Texas Instruments (TXN) added to the bullish tone after hours when they announced a stock buyback program and dividend increase. Management approved an additional $7.5 billion share repurchase program on top of the $1.3 billion buyback still in place. Plus they raised the quarterly dividend to 13 cents a share. The next cash dividend is payable on Nov. 22nd to shareholders on record as of Nov. 1st. The stock was trading up over +3% in the afterhours market.

Technically the market looks tired. Stocks have seen a very sharp three-week rally that has stalled at the top of its trading range near resistance. Maybe the strong earnings news from ORCL and RIMM can provide enough of a spark to get stocks over this resistance. Maybe not. Beware an intraday reversal that sees a brief rally above resistance that fails to close over key levels. Right now the S&P 500 index looks overbought with a rally from 1040 to 1130 in a very short time. A close over resistance near 1130 could ignite a new round of short covering. A close over 1130 would also break the neckline to an inverse head-and-shoulders pattern and forecast a move toward 1240.

Daily Chart of the S&P 500 index:

Weekly Chart of the S&P 500 index:

The NASDAQ Composite could end up being the leader tomorrow. If the overnight action in ORCL and RIMM carries over then we could see the NASDAQ breakout past resistance near 2300-2310. Currently the NASDAQ looks very overbought with an almost non-stop rally from 2100 to 2300. My concern is we might see an early morning spike that fades away forming a bearish reversal pattern. If the NASDAQ fails to close over 2310 we can probably count on some profit taking. Look for a pull back toward the 2250-2230 zone.

Chart of the NASDAQ index:

The small cap Russell 2000 index has been consolidating sideways like the big cap names. However, the $RUT has yet to challenge its August highs. While I still see a bullish double bottom for the small caps this index is still trading with a bearish trend of lower highs. If stocks can mount another rally I would expect the $RUT to rise toward the 660-665 zone.

Chart of the Russell 2000 index:

Investors will continue to keep a close eye on economics. Tomorrow we'll get the consumer price index (CPI). Economists expect the CPI to rise +0.2% versus a +0.3% gain a month ago. The Core-CPI is expected to rise +0.1%. Friday will also bring the Michigan Sentiment numbers. This could be a wildcard report. Back-to-school shopping was better than expected, which suggests consumer sentiment has improved. Yet this report will also reflect attitudes during the August sell-off in stocks. Currently analysts are expecting sentiment to rise from 68.9 to 70.0.

Overall I'm optimistic given the market's recent strength but I would hesitate to launch new bullish positions with stocks overbought and struggling with resistance. I would prefer to see a correction and watch stocks build up more steam for a stronger breakout in a week or two than see a breakout tomorrow. We still have six weeks until the midterm elections.

-James


New Option Plays

Tough Spot Heading Into OPEX

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. The broader market is in a tough spot heading into OPEX. It appears we may get a breakout tomorrow on the heels of good earnings reports from RIMM and Oracle after the bell. But considering how extended this move higher has become the risk of "buying a top" is extremely high, while the risk of shorting remains elevated because prices have not started to turn down yet. Obviously there are stocks making individual moves but in general it is best to be swimming with the current, and not against it.

So it's a "catch 22" where you stand to lose in both long and short positions. Although the outlook has certainly tilted to the bullish side, the bottom line is we are stuck in an overbought situation that is unconvincing and unenthusiastic with moves in either direction. For swing trades it is smart to take a step back and wait for these conditions to be resolved which will present a lower risk situation for directional trades. I'm in the camp that dips will be bought but we need to see the retracement and it could come at anytime. And my biggest concern with a breakout is that it will turn into a head fake which is why I think it is a good idea to consider closing long positions, especially if a breakout occurs prior to a pullback.

Considering the circumstances, opening new positions without knowing a direction is not a smart move. There may be some opportunities with stocks tomorrow to short a breakout or buy pullbacks but we will not know a direction until we see the price action. Therefore, I have re-listed the two long trade set-ups from last night and have also provided two new short trade set-ups below. There is a good chance one or two of these plays will make it into the model portfolio but I wanted to give readers a heads up in case you want to time an entry. We will have new plays this weekend. Please email me with any questions or comments.

Short Set-ups:
DECK: The retail sector has been higher for 7 consecutive days but DECK looks vulnerable. The stock is consolidating below its 50-day SMA and forming a descending triangle on its daily chart. Target a move to the 200-day SMA which is about -8% lower than current levels.

TIN: The stock is close to falling out of an ascending channel formed on light volume after a strong move higher. If the pattern fails target a -$1.50 lower, which is -7.5% lower than current levels.

Long Set-ups (re-printed):
HD - Look for a pullback into the $29.00 to $29.25 area. A breakout could be considered but it a riskier trade for more nimble traders.

FWLT - The stock poked its head above prior resistance on Tuesday but closed below it today. Look for a pullback to the $23.00 to $23.50 area.



In Play Updates and Reviews

Breakout Tomorrow?

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

ConocoPhillips - COP - close 55.36 change -0.20 stop 52.30

Target(s): 55.85 (hit), 56.25, 56.90, 57.75
Key Support/Resistance Areas: 58.50, 57.00, 54.00, 53.00 to 53.50
Current Gain/Loss: +10%
Time Frame: 1 to 3 weeks
New Positions: Yes, only on pullbacks

Comments:
9/16: COP hit our first target of $55.85 and backed off. Positions could have been closed for a +25% gain. COP and the broader market certainly look due for a pullback, however, they could just as easily breakout. Regardless, at this point pullbacks appear they will be bought so we are leaving this position open with options that expire in November. I've added another near term target and will be looking to take profits on breakouts, especially if there is not a pullback first.

9/14: COP traded to within 12 cents of reaching our first target today before closing about 40 cents lower. Our current gain is +10% but it appears the broader market is going to pullback here so readers may want to consider exiting positions now if they do not want to endure a pullback. However, I do believe the pullback will be quick, plus our options expire in November so I am not concerned about time decay yet. If we do happen to go higher first I suggest readers be quick to take profits or tighten stops to protect them. The stock has solid support all the way down to $54.00

9/13: COP is nearing our first target. Considering the overbought conditions in the broader market readers should considering taking profits or tightening stops to protect them at this level.

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

Entry on September 7, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 8.9 million
Listed on September 4, 2010


iShares Russell 2000 - IWM - close 64.94 change -0.41 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:
9/16: Let's raise the trigger to $63.55 which is just above the 50-day SMA. I view weakness in IWM as a buying opportunity and the rising 50-day is a good entry as IWM will test it for the first time since it began turning up. Patience will pay off for us. I'll adjust the stop once we are in the positions.

9/14: We are going to get a pullback and our trigger to enter is just above IWM's 50-day SMA, which should act as a launching point for a move back towards recent highs. I suggest readers be prepared to buy the dip which could easily happen in the next day or two.

9/13: IWM has left the train station without us and is now well above our trigger to enter long positions. I still like the play on a pullback but the question is how far will it come. This could get tricky considering its OPEX week but I do believe a pullback to the 50-day SMA will hold. Let's raise the trigger to $63.15. The 50-day is currently just under $63.00.

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.

Suggested Position: Buy November $65.00 CALL, current ask $3.09, estimated ask at entry $2.20

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


NVIDIA Corp. - NVDA - close 10.56 change +0.00 stop 9.55

Target(s): 10.75 (hit), 11.10, 11.80
Key Support/Resistance Areas: 11.85, 11.45, 11.00, 10.25, 10.00 9.45
Current Gain/Loss: +17%
Time Frame: 1 to 2 weeks
New Positions: Yes, on a pullback

Comments:
9/16: NVDA could easily breakout tomorrow as RIMM and Oracle earning's reports may help boost the tech sector. If so, $11.10 may get hit which is just below the 100-day SMA. This is a good area to take profits or tighten stops to protect them. If this target is hit our profit will be approaching 80% to +90%.

9/14: I like the potential of this trade but we may need to exhibit some patience with NVDA on a pullback. If we head higher prior to pulling back be ready to take profits or tighten stops. Our $10.75 target was reached yesterday and still remains a valid target.

9/13: NVDA surged +5.66% today and looks poised to test its 100-day SMA which is declining. We have a +33% gain so protecting profits is advised. I've raised the stop to $9.55 and lowered the 2nd target $11.10. If we head higher prior to pulling back be ready to take profits or tighten stops.

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.

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

Entry on September 8, 2010
Earnings 11/4/2010 (unconfirmed)
Average Daily Volume: 23.5 million
Listed on August 28, 2010


Stillwater Mining - SWC - close 15.81 change +0.03 stop 14.20 *NEW*

Target(s): 15.45 (hit), 15.90 (hit), 16.30, 16.95
Key Support/Resistance Areas: 14.40 to 14.70
Current Gain/Loss: +21%
Time Frame: 1 to 3 weeks
New Positions: Yes, only on pullbacks

Comments:
9/16: SWC looks great but I suggest readers begin to look for an exit to protect profits, especially on further strength before a pullback. Our second target was hit today and $16.30 looks like the next stop. I've raised the stop to $14.20 but tighter stops could be considered between $14.90 and $15.25.

9/14: SWC traded all the way up to our first target today before backing off. The stock continues to look bullish but I am concerned about a broader market pullback and the double top the stock made with the 9/7 high. However, SWC gained +3.28% today and mining stocks can do well if stocks fall. Further, with precious/industrial metal commodity prices rising miners are benefiting. Caution is advised.

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.

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

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


Transocean Ltd - RIG - close 59.86 change +0.08 stop 53.40

Target(s): 62.95, 64.50, 66.50
Key Support/Resistance Areas: 55.50, 58.35, 63.90, 64.90
Current Gain/Loss: -7%
Time Frame: 2 to 4 weeks
New Positions: Yes

Comments:
9/15 RIG is forming an ascending triangle on multiple different time frames and looks poised to breakout. We have some time with November options and expect RIG to shoot higher in the coming days/weeks. My comments from below have not changed.

9/14: We may need to exhibit some patience here as RIG is consolidating gains. The volume pattern looks great as the pullbacks are on lighter volume than the breakout. Broader market weakness will most likely pull RIG down but I believe the dips will be bought. Our options expire in November so I'm not worried about time decay yet. I like new positions on any further weakness.

9/11: 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 on heavy volume that started on May 27th. 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.

Current Position: Long November $65.00 CALL, entry was at $2.25

Entry on September 13, 2010
Earnings 11/3/10 (unconfirmed)
Average Daily Volume: 8 million
Listed on September 11, 2010


Vale SA - VALE - close 28.07 change -0.01 stop 25.80

Target(s): 28.38 (hit), 28.65, 28.90, 29.30
Key Support/Resistance Areas: 29.30, 28.45, 28.00, 27.25
Current Gain/Loss: +16%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/16: I like the support VALE has at current levels and just below and with broader market strength the stock should hit our more aggressive targets. My comments from below remain the same.

9/14: VALE came within 4 cents of our primary second target before backing off and closing near its lows of the day. Options could have been closed for about 85 to 90 cents on the surge higher this morning which would have been a +70% to +80% gain. Nonetheless, our current gain is +44%. It looks like VALE is due for more pullback so readers should consider protecting profits. I do believe the dips will get bought and VALE should head back higher once the selling subsides. I've adjusted the targets and suggest we close positions as targets approach again.

9/13: Vale surged +3.39% higher today and our first target has been hit. I'm looking for $28.75 and suggest we close positions or tighten stops at this level.

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 +60% gain. As these targets approach I suggest we keep a tight leash on the trade get out with a winner.

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

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


PUT Play Updates

Freeport-McMoRan - FCX - close 81.73 change +0.33 stop 84.55

Target(s): 78.00, 76.80, 75.75
Key Support/Resistance Areas: 84.25, 76.50, 75.00
Current Gain/Loss: -20%
Time Frame: 1 week
New Positions: Yes

Comments:
9/16: I'm concerned the market could break higher tomorrow after good earnings reports from RIMM and Oracle and FCX will most likely go with it. FCX has gone up in a straight line with little to pause since 8/25. I suppose the stock can go higher but the stock remains in a tough spot. Whether it breaks higher or lower I believe both scenarios will reverse rather quickly, i.e. dips will get bought and breakouts will be sold. I believe FCX will see $78.00 at some point in the coming week but it could spike higher first, of which would set-up a better shorting opportunity.

9/14: FCX has gained nearly +20% since its low on 8/25 less than 3 weeks ago. The stock has surged higher, virtually in a straight line with little to no pause. FCX has rallied right into its primary downtrend line from its January highs and also closed at a prior resistance level from mid-March. This type of move is not sustainable and I suggest readers open short positions at current levels and play for a retracement of the stock's recent gains. Our primary target is $76.80 which is about -5.5% lower than current levels, and also just above a 38.2% retracement from the 8/25 lows to today's highs. For options traders, if this target is reached it should produce a gain of approximately +60% to +65%. This could be a quick trade and a good strategy would be to immediately place a "good til cancelled" or "one cancels the other" order immediately after the position is entered and be ready to take profits or get out should our stop get hit.

Current Position: Long October $75.00 PUT, entry was at $1.75

Entry on September 15, 2010
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on September 14, 2010


McDonald's Corp. - MCD - close 74.80 change +0.09 stop 75.75

Target(s): 73.25, 72.05, 70.90
Key Support/Resistance Areas: 75.35, 73.60, 71.50, 70.50
Current Gain/Loss: -22%
Time Frame: 1 week
New Positions: Yes

Comments:
9/16: After looking terrible on Tuesday and Wednesday morning MCD has recovered all of its losses and is now drifting higher. I believe our stop is in the right place but caution is advised.

9/14: MCD is headed lower and I suggest readers begin to look for exits on any further weakness. My comments from below have not changed.

9/13: MCD lost -0.59% while the broader market surged higher today. The stock traded right up to $74.30 and sold off hard before bouncing late in the day. I'm looking for MCD break through its 20-day and head towards its 50-day SMA but we are most likely going to need to see a broader market pullback. I've added a target of $73.25 which will fill a gap higher on 9/1. This should give us nearly a +50% gain and is a good place to consider taking profits or tightening stops to protect them.

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.

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

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


SPDR S&P 500 ETF - SPY - close 113.05 change -0.07 stop 116.25

Target(s): 110.65, 109.60
Key Support/Resistance Areas: 115.00, 113.00, 110.60, 50-day, 20-day
Current Gain/Loss: -17%
Time Frame: 1 week
New Positions: Yes

Comments:
9/16: The S&P 500 looks like it may breakout higher tomorrow on the heels of favorable earnings reports from RIMM and Oracle. This position is meant to be a hedge against our longs but we could experience another short squeeze. Readers may want to consider exiting SPY early and trying to re-enter a short position at a higher price. Regardless, I believe breakouts will be sold into and dips will be bought. I'm looking for a retracement in SPY over the next week or so to fill some gaps and retest its converging 100-day, 50-day, and 20-day SMA's from above. This is when we will close the position and consider a new long entry.

9/14: SPY closed the day just about where it began. My comments from the play release remain the same. We are looking for the S&P 500 to turn lower here, fill a few open gaps higher, and test its rising 20-day and 50-day SMA's from above.

9/13: The market is overbought and needs a healthy pullback to regain its energy. SPY has rallied right into resistance from its June and August highs. I'm looking for the S&P 500 to turn lower here, fill a few open gaps, and test its rising 20-day and 50-day SMA's from above. I suggest readers open short positions at current levels and look for a $2 to $3 pullback in the coming days (equivalent to 20 to 30 S&P 500 points). Our profit targets should produce +40% and +60% gains.

Current Position: Long October $109.00 PUT, entry was at $1.56

Entry on September 14, 2010
Earnings: N/A (unconfirmed)
Average Daily Volume: 198 million
Listed on September 13, 2010