Option Investor
Newsletter

Daily Newsletter, Saturday, 9/18/2010

Table of Contents

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

Market Wrap

Living A Charmed Life

by Jim Brown

Click here to email Jim Brown

The daily gains have not been spectacular but so far September has far exceeded trader expectations. The problem with fairy tales is that they always end.

Market Statistics

The gains for the week were deceptive. We really did not have a day with a big gain but the trend continued to creep slowly higher. Negative economic reports, guidance warnings, estimate cuts and broker downgrades kept the bulls from running but the bad news could not keep them down.

Some of the bad news on Friday came from the Consumer Sentiment report for September. The preliminary number declined to 66.6 from 68.9 and the lowest level since August 2009. The decline came exclusively from the expectations component, which fell from 62.9 to 59.1. The current conditions component actually gained .1 to 78.4 from 78.3. The -3.8 point decline in the expectations is a material decline and suggests the short term rebound from the back to school season has faded.

Consumers claim they are worried about the economic outlook. This report is at odds with the recent retail sales reports from last week, where companies like JC Penny, Best Buy and Macy's said spending was improving. Some companies said it was the best back to school season in years.

For the period covered in this report there was a lot of chatter in the news about the potential for a double dip recession. We also saw gasoline prices rise and another drop in headline employment. Home sales fell off the cliff and home prices are declining again. Politicians are talking down the economy in order to explain how they would fix it.

All of these things weigh on sentiment but a continued rally in the stock market would go a long way towards improving the consumer outlook.

Consumer Sentiment Chart

Also weighing on sentiment is the drop in their net wealth over the last year. The Federal Reserve said on Friday that household debt declined by -2.3% in Q2 and the largest decline on record since tracking was initiated in 1952. This is a combination of paying off debt and defaulting on debt. Consumers who can have been deleveraging as quickly as possible and paying down balances in case the economy does get worse. Also, if you file bankruptcy your debt is erased.

Household net worth declined by $1.5 trillion in Q2. That was driven by declines in stockholder equity and mutual funds, which declined by $1.3 trillion accounting for the majority of that number.

Real estate values were slightly higher in Q2 but the ratio of debt to equity rose to 40.7%. That could be a combination of a lower valuation and/or a refinance to garner a lower interest rate. The majority of refinancing loans include the fees as new principal and quite a few have cash back at closing, which raises the amount owed.

Federal borrowing rose by 24.4% while state and local government borrowing declined. State and local governments are held to a tighter standard in most cases with the voters and local oversight groups leaning on lawmakers to limit spending and taxes. When politicians are elected to a Washington post they become insulated from the local process and tend to get caught up in the attempt to improve the bigger picture and increase pork barrel spending for their home state.

Unfortunately Q3 results are expected to be worse on all areas mentioned above.

The Consumer Price Index was also released on Friday and the headline rate rose +0.3% but it was all due to spikes in food (+1.2%) and energy (+3.8%) prices. The core rate was flat at 0.0% after three months of minimal gains. Analysts claim the "shelter index" restrained the core rate. The rent on primary residences fell for the first time since November 2009. That was probably due to the summer rental window closing and landlords reducing rent to avoid having a vacancy over the winter. There is no inflation in the economy and the Fed will have no reason to change their bias at next Tuesday's meeting.

Food prices were up due to the droughts around the world and the fires in Russia. That spiked U.S. grain prices due to export demand and raised prices for that grain in the USA. Energy prices were up because of increasing demand in Asia, the Middle East and Latin America.

Next week is housing week for economics. There are four major housing reports and they should all be negative. Expect a decline in prices and a rise in inventories. This will test the resolve of the stock market bulls unless there is a very unexpected improvement in sales.

Real estate analysts have been lowering numbers almost weekly for the last month in order to remove the optimism from their prior estimates. Even with the downgrades existing home sales are projected to have risen slightly in August but it is only a calendar blip as the last rush of home sales to close before school started. If housing numbers came in better than expected next week I doubt there would be a major rally on the news because of the negative longer-term outlook.

Moody's is predicting another 8% decline in home prices because of the number of pending foreclosures. They expect the market to bottom in Q3-2011. I heard another bank analyst last week claiming a -10% decline but I can't remember which bank.

The most important event next week is the FOMC meeting on Tuesday. There are conflicting expectations for another quantitive easing announcement. Some believe they will announce it to start after the elections in November and others believe they won't announce until after the elections so there won't be any claims of politics involved in their actions. I believe if the Fed believes there is enough justification for a new QE program to provide additional stimulus for the economy they would also believe it best not to wait for two months to start.

This QE2 conundrum will be the focus of commentators on Monday. Analysts will also be waiting for the Fed's outlook on the economy in order to compare it to their outlook from the August 10th meeting.

The Tuesday FOMC meeting will be a pivotal event for the market and the rally could end there if the FOMC statement is bearish.

Economic Calendar

The Jobless Claims on Thursday will be the key to watch for an uptick in claims. The next reading is the one that will correct for any abnormalities in the Labor Day reporting cycle. Moody's is saying it would take a +2.9% GDP rate to produce a positive jobs picture. Anything under 2.9% would result in a net jobs drain. Based on current estimates our Q3 GDP should be something in the 1.3% growth range or less than half what it would take to actually grow jobs. That suggests negative net employment should be with us for several quarters to come.

In stock news FedEx was still declining and holding down the transportation index after saying on Thursday it was closing 100 of its trucking terminals and cutting 1,700 jobs because of the problems in the economic recovery. The closures will come on Jan-30th after the busy holiday shipping season. FedEx reported earnings of $1.20 per share for Q2 and that missed analyst estimates by a penny. The FedEx freight division has been a drag on profits because the demand for shipping items like refrigerators and washing machines continues to be weak. FedEx Freight collects single lot items or less than truckload lots from many manufacturers and consolidates them into single loads for delivery. FedEx Ground ships small packages up to 150 pounds. Under the new plan FedEx is going to consolidate Freight and Ground with FedEx Ground the surviving name.

Oracle (ORCL) reported earnings of 42-cents compared to analyst estimates of 37-cents. Revenue was $7.5 billion, up +48% from the $5.05B in the comparison quarter. Oracle revenue rose on the inclusion of Sun Microsystems into Oracle results. Oracle license fees also rose about 25% while maintenance and support rose +12%. Oracle shares jumped +8% on the news.

Oracle Chart

Research in Motion (RIMM) also reported earnings and raised guidance but the market was not as kind to RIMM shares with a barely positive finish. RIMM said it added 4.5 million new subscribers in the quarter, which was slightly less than their own guidance. RIMM said the new BlackBerry Torch model was finding broad market acceptance even though it was only available through AT&T in the USA. It will be rolled out to 75 other countries this quarter. RIMM showed that sales of BlackBerry phones in the rest of the world were still hot although RIMM is up against some stiff competition in the U.S. with the iPhone, Droid, EVO and Galaxy. Several analysts cut estimates on earnings for future quarters. At one point RIMM had a near monopoly on smart phones but that has changed dramatically in the last two years.

RIMM Chart

Texas Instruments announced a $7.5 billion stock buyback and raised its dividend by 8%. This helped push the semiconductor index higher even though it really did not impact the future sales for the sector. TXN shares jumped +3% to $25.73.

TXN Chart

BP entered the final chapter on the Horizon disaster on Friday when it began pumping cement into the bottom of the Macondo well. The relief well that has taken three months to drill using the Transocean Development Driller II finally received approval to intercept the Macondo well nearly 3.5 miles beneath the surface, which it did early Friday. At 1:30 ET Friday it began pumping cement into the broken well. Once the cement cures and BP completes a pressure test the relief well will also be plugged and abandoned. BP has completed pumping the cement and the final pressure test is scheduled for 11:PM on Saturday.

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That will end this chapter in the Horizon disaster. The three rigs holding position above the well will head off to wherever they anticipate working next and the appointment calendar for BP will be endless courtroom appearances with their lawyers. BP saw about $70 billion erased from their market cap and they have spent close to $10 billion to date on the well and the cleanup. They have another $20 billion committed to the fund for people harmed in some way by the disaster.

When the well was flowing unobstructed into the sea there were estimates from major analysts with gigantic numbers for a final bill for BP. Goldman at one point mentioned $125 billion as the price tag. Now that the oil has all but disappeared from the gulf the estimates are coming back to earth and I have not heard one in weeks over $50 billion. The consensus seems to be in the $30 billion range today.

That does not mean that BP is suddenly a buy. There are a lot of legal attacks still to be launched and depending on the outcome of various investigations BP could still be looking at another $18-$20 billion in fines and penalties. That would be worst case and require them being found "grossly negligent." Once the well is closed this weekend the future news will be all bad. The news will be focused on monster settlements, court awards and findings towards that eventual negligent ruling. The administration no longer appears to be trying to put BP out of business so that is an improvement. It does not mean they won't try to extract the biggest fine possible in order to be seen as tough on big oil. BP may be closing the book on the well but the book they are opening as a sequel is going to be just as painful.

BP Chart

Gold made another new high on Friday at $1,282 intraday on multiple reasons. Investors are expecting further quantitive easing by the Fed that will further devalue the currency. They are also worried that the U.S. debt load is going to push us into a severe problem in the years ahead and it is a currency play given the monster moves in the dollar, yen, yuan and euro over the past weeks. In times of currency stress the yellow metal seems to find a flood of willing buyers.

The obvious question would appear to be "is the move over?" The rally in gold has brought the gold bugs out of the woodwork and the gold scams onto the cable TV airwaves overnight. Real gold analysts claim we could easily hit $1500 before year-end if the Fed goes on another easing binge. Others believe anything over $1,260 is a sell signal because the gold carry trade is running on empty. There are too many points to cover here but basically those analysts expect an implosion in gold prices as changes in currency valuations make it less profitable to do things like borrow yen to buy gold. Of course the bears have been claiming the trade was over for the last $50 of the move and they have been wrong. I personally would not want to chase it at this level.

Gold Chart

The tone on Monday is going to be set by President Obama. He is going to hold a quasi town hall meeting on CNBC at noon. This is a real coup for CNBC for ratings but I wonder if it will drive conservative viewers away. CNBC Washington reporter John Harwood, will be doing the interview and based on his past reporting style he will be lobbing pre-scripted softball questions at the president so all the right answers are produced.

The question is really "which president will show up." Will it be the president advocating class warfare, tax the rich, I want to make it perfectly clear it is Bush's fault. Or will it be a new kinder to business, gentler to entrepreneurs, non teleprompted merchant of hope and change? This would be a real opportunity to steal some of Fox's thunder if Harwood would ask some real questions that real voters want to know. I am sure because this is the president he will get preferential treatment and it will end up being a dog and pony show rather than a hardball interview.

If he dashes hopes for the extension of the tax cuts or appears to be anti business the market could head south quickly. Businessmen and investors are not gullible people and any attempt to turn this into a political lecture may not end well. Several times recently the market has tanked while president Obama was speaking. Hopefully whoever organized this performance understands that CNBC is a direct line to business and the market and scripted it accordingly.

The Dow and Nasdaq ended with gains on Friday that put them on a streak of 11 wins out of the last 13 trading days. The S&P has been up 10 of the last 13 days. That is an extremely overbought scenario even though the daily gains have been minimal. Art Cashin used the analogy the markets were sleepwalking at resistance. The Dow and S&P are scratching out a handful of points every day but unable to manage a breakout. Dips are being bought but breakouts have been hard to find on the Dow and S&P.

Art Hogan at Jefferies is predicting an upside breakout for the market because it is counter to the consensus of a decline into October. He said fund flows were improving and domestic ETFs were seeing positive money flows. He said Jefferies has been waiting for this to happen for six months as a sign investors are moving back into the markets. This news is contrary to the actual $10.7 billion in outflows from ETFs in August. Morningstar said $6.6 billion flowed out of the SPY or S&P-500 SPDR. Year to date $19.1 billion has moved out of the SPY. Meanwhile $4.2 billion flowed into emerging market ETFs in August. Hogan claims that has reversed over the last couple weeks to inflows in domestic funds and that would be bullish.

The market has been getting progressively stronger as evidenced by the internals. The new 52-week highs hit 366 on Friday compared to 81 new lows. However, that was the most new lows since August 31st so there is still an undercurrent. Sectors losing ground on Friday included banking, housing, HMOs, brokers, airlines and energy.

The S&P finally rallied to test strong resistance at 1130 on Friday and it was a very quick test. The index was immediately slammed back to 1122 and it traded sideways the rest of the day. The opening spike to 1131 was a result of the quadruple witching. The closing value on the S&P options are determined by the opening print on the S&P on Friday. Tape jamming was active at the open to pin the index at that 1130 level for expiration. The rest of the day was a non-event.

The key to a stronger rally next week will be that 1130-1133 resistance level. If it can't be pierced then the rally will eventually fail. We can't levitate at 1125 for the rest of September. The bulls will eventually tire of the lack of progress and pull the bids to allow a market reset. I am surprised the bears have not been more effective at this strong resistance. The dips have been shallow and lackluster. Volume on Friday was over 8 billion shares so they had plenty of opportunity but could not do anything with it.

Support is currently 1120 with resistance 1130. That is a very narrow range for a market with all the conflicting drivers we have today. I suspect we are about to see a major breakout but in what direction? I would like to believe it is higher because the technicals point to a test of 1240 if the S&P can move over 1133 on volume. That would be a huge run ahead of the election and makes me wonder what would then happen after the election when the rally is "supposed" to occur.

Fortunately the narrow range will give us a clear signal when the move begins. A break to either side should be strong enough for a decent trade. I am still in buy the dip mode but a break below 1120 could signal a change in the trend rather than just another dip. I would love to remain bullish but we are still seeing earnings warnings and downgrades so there is no guarantee the rest of September will be like the first half.

S&P-500 Chart

Unlike the S&P the Dow has not yet reached the August resistance highs at 10,700. The Dow spiked to 10,567 at Monday's open and closed at 10,604 on Friday. That means it spent all week fighting to gain another +37 points. That is not very awe-inspiring but the trend is still up. Slowly up but still up. One has to wonder what will happen if it actually makes it to 10,700 next week. Will it have the strength to power through or spend the next couple weeks chipping away at resistance 10-12 points a day?

Fortunately by the time the Dow gets to 10,700 the S&P, if it continues leading the Dow, will have broken through the 1133 resistance and be targeting much higher levels. The Dow would likely be drug across 10,700 rather than be leading the charge. The Nasdaq already broke through its corresponding resistance at 2300 so a confirmation move by the S&P next week makes the Dow's attack on 10,700 only a footnote. If the broader indexes can move past strong resistance then the Dow does not matter. It should follow obediently in due time. That just makes SPX 1133 even more important.

Dow Chart

The quadruple witching expiration plus the boost from Oracle's earnings and Texas Instrument's $7.5 billion buyback combined to push the Nasdaq over strong resistance at 2300. The $64 question is can the bulls hold it above 2300 when the opex excitement fades?

Thank you ORCL and TXN but now that is old news. What new event is going to maintain the forward momentum on Monday? There are no material tech earnings on Monday although Adobe reports on Tuesday. The economic report on Monday is the Housing Index and not likely to boost tech stocks. PC sales estimates are still being cut with FBR cutting Microsoft estimates and targets on Friday on falling PC sales. Personally I don't see what has been pushing techs higher since most of the tech news is negative.

How long can this continue? How much longer will the bad news bulls keep buying tech stocks in the face of guidance warnings and downgrades? This is the question that will be weighing on techs next week. I would love to see them retain their leadership role but unless some new tech company announces another multi billion dollar stock buy back or multiple acquisitions I believe we could be in trouble.

Fortunately a constant steady rise in the stock market is like the tune from the Pied Piper. Investors can't seem to resist a slow methodical rise in the markets. The look at the charts and their mind is clouded by the hypothetical projections of trend lines moving higher. That has an even greater pull on trader sentiment than an earnings beat by Oracle. When it comes on the backs of shorts forced to cover the gains are even sweeter.

I am not going to tell you the Nasdaq is going higher. I believe it will over the next couple months but not necessarily over the next week. If it does move higher next week I will be the head cheerleader. Personally I am in buy the dip mode instead of running with the bulls. Support is 2290 followed a long way off at 2230. If 2290 breaks I would immediately start thinking "October correction" and be looking for shorts rather than an entry point for longs.

Nasdaq Chart

The Russell 2000 gained +14 points for the week and it was all on Monday. The close on Monday was 651.89 and the close on Friday at 651.40. There were four dips in the Russell, three to 643, and all were bought but nobody chased the index higher.

This appears to me to be a lack of fund participation and a lack of confidence in the rally. Small caps were just along for the ride and not a favored asset class. That suggests fund managers are still stashing money in liquid large caps where they can exit quickly if the September's Dr Jekyll suddenly turns into Mr. Hyde.

The Russell broke through the 200 day average on Monday at 645 then used that level as support the rest of the week. The Russell is well below critical resistance at 670 and showing no leadership qualities. Until those qualities surface I remain cautious on the market rally.

I mentioned last week that Russell 650 was going to be a major test and that is exactly where it stopped last week.

Russell Chart

In summary, like a lot of traders I am skeptical of this rally and remain in "buy the dip" mode rather than chase the winners mode. Option expiration was a major factor in last week's "pin" on the numbers. (10,600, 1130, 650) The Nasdaq was pinned to 2300 until the ORCL/TXN news ruined the plans of the market makers.

The President's town hall on Monday, the FOMC on Tuesday and four housing reports should be a blanket of bad news that depresses investor sentiment. If we survive next week without a material dip I will be a stronger convert to the bullish case.

Jim Brown


Index Wrap

Nasdaq Resumes Leadership

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Tech stocks are again leading the rally and the big cap Nasdaq 100 has cleared its 3-month highs. There was a clear cut upside weekly chart break out for the Composite. I need to also be aware that the major indexes are also overbought and am cautious in projecting a lot more upside.

I wrote a Trader's Corner article this past week (9/15) on the subject of the Bollinger Band indicator. You can go this article online by clicking HERE.

Bollinger Bands (BB) combine a centered simple moving average, which is part of the indicator but this 20-day moving average is not commonly shown as in my next chart. Unlike simple moving average envelopes, each Bollinger band is a fluctuating line that is equal to two standard deviations relative to closing prices. Theoretically, 95% of all price action will occur within the upper and lower lines. Each band or line represents implied support or resistance.

The upper Bollinger band seen in my first chart, plotted on the Nasdaq Composite (COMP) index, indicates that recent closing levels for COMP are 'high' on a relative basis. It does not tell us how LONG this might continue to be the case as prices can keep going up and 'hugging' the upper band. The BB indicator at a minimum suggests that there is a substantial risk for a correction, either a sharp pullback OR more of a sideways move. Combined with an 'overbought' RSI and the fact that the S&P and Dow haven't yet cleared prior key highs, there is further reason for caution regarding downside risk.

A final general note is that Bullish sentiment readings over the past week are not suggesting 'excessive' bullishness, so this key indicator isn't flashing the degree of caution as other technical measures of the current market.

On many of my index charts, I show an upper envelope line that is set to the same percentage (above the center moving average) as was seen at the lower envelope line intersecting the last lows. When the trend reverses strongly to the upside, the next top often at least makes an equal percentage gain above the 21-day (center) moving average, as was seen below the average at the last bottom.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is back up at the top end of its 3 month range and overbought. Not a great prospect for another big up leg from here. I view 1140 as tough resistance in the coming week. It looks like S&P is along for a ride with the rally in tech stocks. This chart shows hesitation at prior highs as most of the heat (as buying enthusiasm) is over at Nasdaq. Volume is not weak but it's not as robust.

This is the third time of hourly highs in the 1128-1130 area. If SPX makes a decisive upside penetration of 1129-1131, it could be headed to the 1170 area next. It's not what I think will happen but in this market, would it surprise me? No.

Near support is at 1090; next technical support the 1050 area, extending to 1040.

SENTIMENT:

Bullish sentiment does not indicate any kind of buying frenzy going on in this recent strong price surge; which, in its usual 'perverse' way, should be reassuring to those looking for even higher prices. The market is not getting 'overheated' by a buying 'frenzy'. In terms of my CPRATIO line seen above, 'overheated' on the bullish side is when daily call volume for individual stocks starts popping up above 1.9 times that of total daily put volume for individual stocks. Daily ratios above 2.0, 2.3, 2.5, etc. is indicative of the bulls in a feeding frenzy. (That's also when I tip toe away and let the titans fight it out.) Such spikes in my indicator aren't happening yet, which 'supports' still higher prices in the S&P, but best still in the Nasdaq.

S&P 100 (OEX) INDEX; DAILY CHART

A bullish chart for a further swing to perhaps 520, but not much more at least in the near-term. This assumes however, that the S&P 100 (OEX) gets through what could be formidable resistance at the cluster of prior intraday and closing highs around 512. longer-term the index could get back up the 440 area resistance, the big 'breakdown' point during the market collapse in early-May.

Immediate support 498, then 475.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) is lagging the hotter tech sector indexes, which is typical of the phase that we're in. When there were more doubts about economic growth ahead, the Dow was doing very well indeed, especially with cyclical and consumer defensive type stocks doing well. The really outstanding (i.e., strong momentum) stocks in the Dow 30 are still in the defensive and 'basic' necessities type companies like Kraft, MacDonald's; also CAT, DD, and now T and VZ having rocket blasting charts.

INDU seemed to run into selling above 10600 but Fridays don't always tell the complete story. The definite challenging resistance is in the 10700-10720 area; with next resistance around 10800. A move to 10800 area and above in the coming week would put INDU 4% above its 21-day average, equal to the percentage dip below the average at the last (late-Aug) bottom. There's a tendency for volatility swings like these equaling out.

Near support is at 10500; then at 10330-10305.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I've kept Bollinger bands on my Nasdaq Composite (COMP) Index chart. There's a reason to say that 'theoretically' the Bollinger bands contain 95% of trading in a stock or index. John Bollinger devised his indicator by doing a whale of a lot or research with individual stocks. When prices touch the upper band as they're recently doing, there is an increasing probability for, at a minimum, a 'time' correction, where prices go sideways. More likely is a pullback.

I'm also well aware of the 5 percent of the times of occasional monster moves, where prices rocket higher (or lower), pulling the Boli band along so to speak. I don't see what would set off such a buying stampede currently. Encouraging technically for the bulls lately is traders not going overboard on bullish bets. When my call/put ratio starts getting above 2, with occasional spikes to well above 2, I'll take my exit from what the herd is doing. It's just my maverick instinct. What tends to keep me from shorting a still-strong trend is my respect for trend momentum. It's tougher picking a top just right, less so with bottoms.

Immediate resistance 2340, then 2374, extending to 2400. Support is 2250-2246, then 2200.

SENTIMENT:

Bullish sentiment does not indicate any kind of buying frenzy going on in this recent strong price surge. Which, in its usual 'perverse' way, should be reassuring to those looking for even higher prices. The market is not getting 'overheated' as they say. In terms of my CPRATIO line seen above, 'overheated' on the bullish side is when daily call volume for individual stocks is running more than 1.9 times that of total daily put volume for individual stocks. Daily ratios above 2.0, 2.3, 2.5, etc. is indicative of the bulls in a feeding frenzy. (That's also when I tip toe away and let the titans fight it out.) Such spikes in my indicator aren't happening yet, which 'supports' still higher prices in the S&P, but best still in the Nasdaq.

NASDAQ 100 (NDX) DAILY CHART:

This past week's run up, started very strongly with the Nasdaq 100 (NDX) leaping above 1900, on a gap up Monday. After that the index was in an accelerating advance. Very bullish action NDX is the first of the major indexes to reverse its intermediate-term up trend to up; the long-term trend never reversed to down.

This is the first pattern of higher rally highs, and a breakout of a 4-month price range. Oh, how we miss the doldrums and craziness of summer. NOT.

Looks like easy further gains, right? There is the matter that prices have a greater likelihood statistically of going down from here than going up, at least substantially more. Such after-burner type rallies do occur but only about 30% of the time. Emm, 70/30, how are those odds for a correction.

Key support is at 1900 with next pivotal support at 1850. Key resistance from Friday's 1955 close on up 1983.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

What a power move for the Nas 100 tracking stock this past week. Current levels are 5% over the index's 21-day moving average, which is startling for what's come before. If QQQQ gets to 48.6 that's the biggest upside I project before there's a correction. On the other hand, a strong further move above 48.6, would set up not only 49, but 50 as potential further upside targets.

An up surging On Balance Volume (OBV)line suggests higher prices ahead, consistent with the look of the NDX chart, currently on fire. Certainly volume analysis, for a change, is 'confirming' the current strong advance. The tech rally of late has been fueled by solid buying.

Near support: 46.7

Next support: 45.5

Near resistance: 48.6

Next resistance: 49.0; then 49.5

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) looks like it is consolidating for a next move to retest prior highs at 665-672. If RUT breaks out above its 665-670 resistance zone, extending also to the 677 prior high, next stop or a key test would be on a move to the 700-720 area.

Near support is 640, then 620. Resistances I've gone over already. If a break below 640 support, good odds exist for a dip to 620.



GOOD TRADING SUCCESS!


New Option Plays

Short Candidate

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. Friday provided no resolution to the sideways channel we have been trading in for the past week. My biggest concern with a breakout higher right now is that it will turn into a head fake because buyers are getting exhausted. The market is in dire need of a healthy correction and I remain in the camp that dips will be bought. If there is breakout to the upside this week prior to a pullback I think it is a good idea to consider closing long positions. The model portfolio has positions to take advantage of a correction and I have provided another short trade tonight that should work great with broader market weakness. We won't open positions until support is broken. In the end, the smart thing to do is to tread lightly and use small position size until we have a better handle on the broader market direction. Please email me with any questions/comments. Enjoy the rest of your weekend.


NEW DIRECTIONAL PUT PLAYS

Archer Daniels Midland - ADM - close 32.38 change -0.83 stop 33.76

Company Description:
Archer Daniels Midland Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. The Company is a processor of oilseeds, corn, wheat, cocoa, and other agricultural commodities and is a manufacturer of vegetable oil and protein meal, corn sweeteners, flour, biodiesel, ethanol, and other food and feed ingredients. The Company also has a grain elevator and transportation network to procure, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, and barley, as well as processed agricultural commodities.

Target(s): 31.25, 30.85, 30.20
Key Support/Resistance Areas: 33.50, 31.00, 29.80
Time Frame: 1 to 2 weeks

Why We Like It:
Cautious comments from analysts about rising agricultural commodity prices is likely to affect ADM's business. The stock is overbought and is due for correction after an incredible run higher off of the July lows. ADM has also formed a bearish dark cloud cover technical pattern that suggests the decline is imminent. I suggest we open positions at current levels and play for a $1 to $2 move lower. The primary targets are $31.25 and $30.85 and if reached they should produce a +40% to +60% winner. Our stop is above the 52-week high set on Friday.

Suggested Position: Buy October $32.00 PUT, current ask $0.90

Annotated chart:

Entry on September xx
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 6 million
Listed on September 18, 2010


In Play Updates and Reviews

Minimal Movement

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

ConocoPhillips - COP - close 55.27 change -0.09 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: +0%
Time Frame: 1 to 3 weeks
New Positions: Yes, only on pullbacks

Comments:
9/18: Not much has changed in COP this week. We are looking to take profits on a breakout, otherwise we may need to exhibit some patience on a pullback with options that expire in November. My comments below remain valid.

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

Annotated chart:

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 65.21 change +0.27 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:
9/18: I continue to like IWM on a pullback but I won't chase it higher as it is a higher risk situation. My comments from below remain the same.

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.

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

Annotated chart:

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


NVIDIA Corp. - NVDA - close 10.55 change -0.01 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:
9/18: We are either going to breakout higher or get a pullback this week. If we breakout first I suggest taking profits or tightening stops to protect them as it could be short lived. Nothing has changed from my comments below. All of the above targets remain valid.

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

Annotated chart:

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 15.27 change -0.54 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, 15.00
Current Gain/Loss: -4%
Time Frame: 1 to 3 weeks
New Positions: Yes, only on pullbacks

Comments:
9/18: Our $15.90 target has been hit in each of the past two sessions and SWC lost it today, closing down -3%. Taking profits was the right thing to do. However, the bullish case remains in tact as these pullbacks have continued to get bought. There is support near current levels and the stock is maintaining an upward trend line. Conservative traders may want to consider exiting if mining stocks are weak early this week. Our stop is below the rising 20-day SMA which SWC has not touched since it began to turn higher.

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.

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


Transocean Ltd - RIG - close 60.16 change +0.30 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:
9/18: RIG is so close to breaking higher and is forming multiple ascending triangle patterns on different time frames. Our options expire in November and I suggest we give this some time to work.

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.

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

Annotated chart:

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


Vale SA - VALE - close 27.85 change -0.22 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: +4%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/18: There have been several opportunities to take profits in VALE but our targets were just missed (they were adjusted on 9/14)). The stock is maintaining an upward trend line and is consolidating above its moving averages. Any breakouts prior to weakness should be used as an opportunity to take profits.

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.

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

Freeport-McMoRan - FCX - close 81.72 change +0.01 stop 84.55

Target(s): 79.40, 78.00, 76.80
Key Support/Resistance Areas: 84.25, 76.50, 75.00
Current Gain/Loss: -28%
Time Frame: 1 week
New Positions: Yes

Comments:
9/18: FCX looks toppy and ready for pullback, but then again most things do right now. We are looking for a retracement of some of the recent gains which could come quick and hit our targets. Be ready to close positions if it occurs.

9/15: FCX looked vulnerable this morning but recovered with the remainder of the market. We are short the stock at $80.95 and are looking for a move down towards the August highs. My comments from the play release below have not changed.

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

Annotated chart:

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 74.32 change -0.48 stop 75.75

Target(s): 73.25, 72.60, 72.05
Key Support/Resistance Areas: 75.35, 73.60, 71.50, 70.50
Current Gain/Loss: -14%
Time Frame: 1 week
New Positions: Yes

Comments:
9/18: I'm looking for MCD to head lower this week and give us a chance to close this position for a profit. The stock needs break through the 20-day SMA which should occur with broader market weakness. I've adjusted the targets and the pullback could be quick so be ready to take profits or tighten stops to protect them.

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.

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

Annotated chart:

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 112.49 change +0.04 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:
9/18: I believe any breakouts in the broader market 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. $110.65 is the primary target at this point which give us a +35% to +40% gain.

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.

9/13: 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

Annotated chart:

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