Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/21/2010

Table of Contents

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

Market Wrap

Pace of Recovery Slowed

by Jim Brown

Click here to email Jim Brown
The Fed really played it safe with their statement in saying the pace of the recovery has slowed. That is like saying snails crawl slowly. No real news there.

Market Statistics

The Fed kept the "exceptionally low…for an extended period" comment in the statement and that makes ten consecutive meetings the FOMC has used that terminology to indicate no changes in the foreseeable future.

The statement presented a much more detailed view on inflation than in the past. Specifically they said underlying inflation measures remain below those consistent with price stability. "With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate." This means the FOMC views inflation as too low and is actually worried about deflation to the point they are pointing it out in the statement. This is a further confirmation that the FOMC will remain on hold for a long time.

The statement was bearish and suggested the Fed is about ready to significantly downgrade their outlook for the economy for 2011 when the quarterly forecast is released in November. They noted high unemployment, low income growth, decreased housing values, tight credit, weak residential construction and bank lending slowing as factors weighing on the economy. The only positive was a mention that business investment was increasing although at a slower rate than in prior months.

The FOMC said it "is prepared to provide additional accommodation if needed to support the economic recovery and return inflation, over time, to levels consistent with its mandate." This was a new sentence and suggests if growth continues to lag and inflation does not increase soon, the Fed could take additional steps. Most commentators believe this was a clear warning the Fed is poised to initiate additional steps at the next meeting on November 3rd. With the election only five weeks away the Fed did not want to give either party additional talking points by taking action today. With the next announcement the day after the elections analysts think the Fed was warning of a new Fed move in November. The expected moves will be additional quantitative easing and a reopening of the Fed lending facilities to boost bank lending.

The tone and content of the statement suggests the FOMC will not be raising rates until late in 2011. Before it can raise rates it will attempt to remove some of the other accommodative measures and shrink its balance sheet in order to remove cash from the system. A rate increase will be one of the last steps they will take when the economy begins to pickup speed.

Kansas City Fed President Robert Hoenig was still a dissenter. He was the lone vote against the statement as released. He believes the Fed funds rate should be increased sooner rather than later and in order to do that the FOMC must first remove the extended period language.

The market rallied on the news because investors believe further Fed action will help the economy and that will push the equity markets higher. The statement was seen as a pledge by the Fed they will do whatever necessary to prevent a double dip recession.

The dollar was crushed on the release of the statement because the implied warning about future quantitative easing is a direct threat to the value of the dollar. Quantitative easing is the equivalent of printing new money at warp speed. Gold rallied to a new high over $1290 on the announcement.

Dollar Index Chart

Gold Chart

In the economic reports the New Residential Construction for August surprised on the upside with 598,000 housing starts on an annualized basis. This was an increase of +11% over the July levels of 541,000 units. The consensus estimates were for a decline to 550,000 with some numbers as low as 530,000. This was a bullish surprise but there was a hidden gotcha.

The majority of the housing starts were for multi-family dwellings. There were 32,200 starts on multi-family units and only 4,300 starts for single-family homes. It is still a positive report but less so than if the component starts had been reversed. Any number under 600,000 represents a potential decline in future inventory levels. The low was 488,000 in January 2009.

Housing Starts

Reports due out on Wednesday include the Mortgage Applications Survey, Purchase Only Home Price Index and the Oil and Gas Inventories.

After the bell Adobe reported earnings of 54-cents that beat analyst estimates for 49-cents. Revenue rose +42% to $990.3 million thanks to strong demand for CS5. Adobe also said it added 174 employees in the quarter. Unfortunately Adobe forecast earnings for the current quarter between 48-54 cents and analysts were expecting 53-cents. Adobe said corporate budgets were still tight with cautious spending. The slightly lower predictions knocked -$6 off ADBE shares in after hours.

Adobe Chart

Chipmaker PMC Sierra (PMCS) also guided lower after the bell and it was not pretty. PMCS slashed its outlook for the current quarter without giving any reason why. New guidance was for revenue between $161-$163 million compared to prior guidance from $169-$177 million. The analyst estimates were for $173 million. The company said it expected spending to decline but gross margins would also be lower.

PMCS Chart

Infineon raised its fiscal 2010 revenue forecast for a fourth time due to higher than expected sales of smart phones. They are now projecting a +50% increase in revenue with a profit margin of 14%. This compares to a mid 40% prior estimate. Q4 revenues are expected to rise +15% over Q3. In August Infineon agreed to sell the wireless unit to Intel. Do you think maybe they are having second thoughts today? Intel already cut its forecast for Q3 citing weaker than expected sales of PCs so they need to branch out into other products. Morgan Stanley downgraded estimates for Intel today as well.

Research in Motion (RIMM) is expected to announce its competitor to the iPad at next week's developer's conference according to the WSJ. The "BlackPad" is scheduled for release in Q4 and will feature a seven-inch screen and Bluetooth and broadband connections. It will have an entirely new operating system built by QNX Software and dump the Blackberry 6 OS. RIMM bought QNX earlier this year and will eventually replace the OS on its Blackberry phones as well. The tablet is being made by Quanta Computer in Taiwan using Marvel chips. RIMM gained +4% on the news.

Amazon is rocking despite the 50-cent loss today. That loss came after it broke out to a new intraday high at $153.31. Amazon is hot because of the quarter is expected to be very strong based on their repeated upgrades to the sales of the Kindle. Amazon normally reports in the second or third week of earnings season making their earnings less than four weeks away. There is chatter in the market that Amazon might be getting ready to take a run at acquiring NetFlix. Amazon is growing its video on demand service with a strong partnership with Tivo. NetFlix has roughly 15 million subscribers so adding those subscribers to the ranks of Amazon buyers of all things including video would be a very strong motive for an Amazon purchase. NetFlix (NFLX) has an $8 billion market cap but it would probably command a significant premium. Amazon's market cap is $68 billion so there would be no problem with digesting NetFlix.

Amazon Chart

Netflix Chart

The BHP CEO may be hearing the footsteps of angry shareholders. CEO Marius Kloppers said BHP would rather drop its $39 billion bid for Potash than pay something that exceeds good value for BHP shareholders. He said he was unconcerned about the growing possibility of a competing bid from Sinochem and their partners. When asked if the bid moved much over the current $130 BHP bid would BHP drop out, he replied emphatically yes. Sinochem has hired Deutsche Bank and Citigroup to evaluate a possible breakup bid for Potash. BHP bid $130 and POT shares have been holding in the $150 range.

Potash Chart

Petrobras (PBR) is scheduled to price the biggest secondary offering ever on Thursday. The offering is expected to raise $79 billion and dwarf the $36.8 billion offering by NTT in 1987. The largest recent offering was the $22.1 billion IPO of the Agricultural Bank of China earlier this year. Petrobras is going to use the money to help fund the $224 billion 5-year development of their new offshore oil finds. Citigroup, Bank America, Morgan Stanley and Santander will make a fortune underwriting the massive offering. The transaction has been delayed for months due to government interference in the process even though it will boost the government's ownership of the company. The Brazilian government is selling Petrobras five billion barrels of oil for $8.51 per barrel payable in shares in the company. This is oil Petrobras is expected to produce in the future not oil they have today. It is essentially a prepayment of royalties for future oil.

The pending share sale has depressed the stock price of Petrobras for the last six months because of confusion over the terms, price and number of shares. This will raise the market cap of Petrobras to be equal to that of Chevron.

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Petrobras Chart

The White House announced today that another top aide was jumping ship. Top economic advisor, Lawrence Summers, is leaving the administration before year-end. In the last couple months budget director Peter Orzag and Council of Economic Advisers Christina Romer jumped ship and went elsewhere. This leaves Timothy Geithner as the only top tier adviser to the administration as of year-end.

The Dow stretched its gains to 13 of the last 15 days but the Nasdaq and S&P finished slightly lower. After Monday's big gains for these indexes to close anywhere close to flat was a bullish event.

The S&P rocketed above solid resistance at 1130 on Monday and found support at 1135 today. Investors got what they wanted from the Fed announcement but the immediate post Fed spike was sold off into the close as traders took profits. The news was already priced into the market on the rally of the last two weeks. The afternoon weakness was simply a sell the news event. This could easily carry over into Wednesday since the market normally declines the day after a FOMC meeting.

The market action from last week was a positive consolidation of the prior two-week rally. Monday's spike was a breakout of that consolidation and some serious short covering. Tuesday's minor decline was not enough to damage the trend and the bulls should still be in charge.

Fund managers who missed any part of the recent move are in serious trouble and will be forced to buy any dip in order to join those who were already long. Their time remaining before the year-end statements are produced and bonuses calculated is growing short. They may not want to buy this over extended rally but they have no choice but to chase performance.

With the S&P breakout over 1130 the next resistance is 1150 and the target is 1240. That is 100 points away and several analysts are claiming we will see it before the elections and 1300 before Thanksgiving. With the bulls in attack mode that is entirely possible. Yes, we could still see selling ahead but I think the dips will still be bought. The trend has changed from choppy to positive and the bears will have to live with it.

S&P-500 Chart

The Dow has already moved over critical resistance at 10,700 with Monday's strong gains. This breakout is now targeting 11,200 and we could easily see that over the next couple weeks if the bulls can maintain traction and the economic reports continue to be "less bad."

The break over 10,700 is the equivalent of an S&P move over 1150. Over the weekend I pointed out that the S&P was the stronger of the two indexes but the Dow has now taken the lead. We need the S&P to push through 1150 before too much time passes in order to reduce the opportunity for the bears to mount a major defense. They are in retreat today and I hope they stay unorganized.

Support on the Dow is now 10,700. I can't even believe I am saying that but it shows how sentiment has changed.

Dow Chart

The Nasdaq is very overbought but the tech generals are still leading the charge. Stocks like AAPL, BIDU, GOOG and AMZN have been on fire the last several days. We started to see some profit taking today but it was very light.

I was eating out on Monday and sat near four retired men. Their entire conversation was centered on why Google and Apple were the only stocks to buy today. This is either a prime example of why we are moving higher or a technical indicator of a top in progress. When stock tips become the lunch topic of what I would classify from their conversations as very novice traders then sentiment has definitely changed. If retail traders are always the last to buy the market then fund managers should be running for the exits. Fortunately I don't see that in the internals. While I would not buy Apple or Amazon today because of their overbought status, I do believe they have farther to go. I would simply be looking for a dip rather than chasing the winners.

Fund managers may be wishing for a dip in the Nasdaq but even a monster drop in Adobe tonight could not make it happen. Nasdaq futures are up at 8:PM. They may want a dip but they will have to hold their nose and buy if that dip does not appear.

Nasdaq support is a very close 2345 followed by 2290.

Nasdaq Chart

On the negative side of the discussion is the Russell 2000. The index failed yesterday and today at strong resistance at 670. This shows fund managers are chasing blue chips because of the relative safety and still don't have any confidence in the long-term direction of the market.

Russell Chart

In summary, the market needs a rest but despite today's minor decline we are not seeing anything in the internals that is pointing to a pending decline. The new 52-week highs were 404 today compared to 62 new lows. That compares to 528/77 on Monday but still strong. The volume is increasing with eight billion shares today.

I remain in buy the dip mode rather than chase the winners. Those dips may be short and shallow so investors will need to be nimble. I believe sentiment has changed despite the gloomy Fed statement. Investors are looking ahead to the period after the elections and buying now rather than expecting an October decline. They appear to be discounting the potential for a second recessionary dip and that is bullish for the markets.

Jim Brown


New Option Plays

Volatility Play

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

iPath S&P 500 VIX ST Futures - VXX - close 16.79 change +0.06 stop

Target(s): 18.45, 19.25, 20.40
Key Support/Resistance Areas: 17.50, 19.75, 20.60
Time Frame: 1 to 2 weeks

Company Description:
The S&P 500 VIX Short-Term Futures Index is designed to provide access to equity market volatility through CBOE Volatility Index (the "VIX Index") futures. Specifically, the S&P 500 VIX Short-Term Futures Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.

Why We Like it:
NOTE: I view this as an aggressive trade so small position size is recommended. Long VXX is a bearish play on equities, however, it is listed as long call play because we are long the underlying instrument.

The market remains overbought and is need of a healthy pullback to regain its energy. Traders are getting complacent as evidenced by VXX printing new 52-week lows multiple times in the past week. I suggest we play for a spike in volatility in the coming days and initiate long positions in VXX at current levels. Our first two targets are +10% and +14% higher from current levels which could happen in a matter of a day or two correction if it is strong enough. If reached, these targets should produce approximately +60% to +80% gains on options positions. I am releasing this play without an initial stop, but will implement one in the next day or two.

Suggested Position: Buy November $18.00 CALL, current ask $1.30

Annotated chart:

Entry on September XX
Earnings N/A (unconfirmed)
Average Daily Volume: 21 million
Listed on September 21, 2010


In Play Updates and Reviews

Two Call Plays Breakout

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

NVIDIA Corp. - NVDA - close 11.29 change +0.58 stop 11.08 *NEW*

Target(s): 10.75 (hit), 11.05 (hit), 11.45, 11.80
Key Support/Resistance Areas: 11.85, 11.45, 11.00, 10.25, 10.00 9.45
Current Gain/Loss: +93%
Time Frame: 1 to 2 weeks
New Positions: Yes, on a pullback

Comments:
9/21: NVDA broke out today on a weak tape gaining +5.4% on the day. Our options have gained +93% and it is time to fiercely protect capital. Let's move the stop all the way up to $11.08 which will guarantee a nice profit. I also suggest we exit positions at the close tomorrow if our stop or remaining targets are not reached. I've added a target of $11.45 which is near today's highs and the 7/14 highs. Traders may want to consider a 10 or 15 cent trailing stop to see how much more we can get out of the trade.

9/20: I am looking for NVDA to break out above the $10.80 level which should catapult the stock up towards its 100-day SMA (currently at $11.19 but declining). I want to lower the next target to $11.05 to account for the declining 100-day SMA and suggest readers take profits at this level or tighten stops to protect them.

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 15.35 change +0.32 stop 14.20

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: -12.5%
Time Frame: 1 to 3 weeks
New Positions: Yes, only on pullbacks

Comments:
9/21: SWC sold off hard this morning and had a nice recovery this afternoon. I suggest readers use caution and consider exiting positions, especially on strength. All of the above targets remain valid. My comments from below remain the same.

9/20: SWC recouped some of its losses from Friday, closing +2.10% on the day. The stock's rally seems to be getting a little long in the tooth and is probably going to experience a correction. Readers may want to consider closing positions or using a tighter stop in the $14.85 area. If SWC heads back up towards our targets prior to correcting be prepared to take profits or tighten stops to protect them.

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.

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 59.67 change -0.55 stop 53.40

Target(s): 62.95, 64.50, 66.50
Key Support/Resistance Areas: 55.50, 58.25, 63.90, 64.90
Current Gain/Loss: -30%
Time Frame: 2 to 4 weeks
New Positions: Yes

Comments:
9/21: RIG broke out to a new a high today but it was quickly sold into. I continue to like the volume patterns in this stock and today's volume on the pullback was on the one of the lightest days since RIG broke higher on 9/10. However, it appears the broader may get a pullback here so we may need to exhibit some patience. New positions can be considered at current levels or on a pullback to $58.35 where there is solid support.

9/18 & 9/20: RIG is very 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.

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


PUT Play Updates

Archer Daniels Midland - ADM - close 32.85 change -0.10 stop 33.76

Target(s): 31.25, 30.85, 30.20
Key Support/Resistance Areas: 33.50, 31.00, 29.80
Current Gain/Loss: -20%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
9/20 & 9/21: We are short ADM and playing for a pullback. New positions can be considered at current levels. The play release is below and my comments remain valid.

9/18: 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.

Current Position: Long October $32.00 PUT, entry was at $0.82

Entry on September 20, 2010
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 6 million
Listed on September 18, 2010


Freeport-McMoRan - FCX - close 82.99 change -0.36 stop 84.55

Target(s): 80.20, 79.40, 78.00
Key Support/Resistance Areas: 84.25, 76.50, 75.00
Current Gain/Loss: -50%
Time Frame: 1 week
New Positions: Yes, if playing for quick pullback

Comments:
9/21: What a day, FCX gave up all of yesterday's big advance and then some by the time noon rolled around. However, after the FOMC announcement the stock rallied hard into the close. All told, FCX traded in a 3% range today and closed down 36 cents. Traders holding long positions in FCX had a scare today and if selling picks up again we could see a sharp move lower. This is when we should consider exiting positions or tightening stops as our targets approach.

9/20: A Goldman Sachs upgrade on FCX to buy from neutral sent the stock +2% higher today. As a result, our position suffered greatly and now we need to look for an exit. This move higher in FCX can not continue but it appears any dips will most likely get bought. I've added an immediate target of $80.20, while $79.40 will fill a gap higher. FCX should make it down to these levels on a pullback and is where I suggest readers close positions or tighten stops to protect capital. This could all come at once on one big down day.

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


SPDR S&P 500 ETF - SPY - close 114.21 change -0.23 stop 116.25

Target(s): 112.10, 111.50, 110.65
Key Support/Resistance Areas: 115.00, 113.00, 110.60, 50-day, 20-day
Current Gain/Loss: -40%
Time Frame: 1 week
New Positions: Yes, if playing for a quick pullback

Comments:
9/21: The bulls have made an impressive run but it appears they are getting exhausted. If the selling starts, which will most likely come fast, I think traders will run for the exits to lock in profits. This is when we want to exit this position or tighten stops to protect capital. I tweaked the middle target above due to a calculation error.

9/20: My comments from below have not changed. SPY broke out today but I do believe it will get sold into which sets things up for a much need healthy pullback in the broader market. I suggest using this pullback as an opportunity to close positions or tighten stops, even if we have to take a loss. I've adjusted our targets. The first target is just above the 200-day SMA while the final target is a gap fill which is just above the rising 20 and 50-day SMA's.

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.

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

Xilinx, Inc - XLNX - close 26.02 change -0.15 stop 27.20

Target(s): 25.40, 25.00
Key Support/Resistance Areas: 26.75, 25.60, 25.20, 24.00
Current Gain/Loss: +4%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
9/21: We are short XLNX as of the open this morning. My comments below haven't changed.

9/20: Semiconductor stocks have experienced a slew of recent downgrades and they keep coming as RBC cut its rating on XLNX to Sector Perform from Outperform. The semi's have been the worst performing sector over the past month and a broader market pullback should send the stocks in the sector back to retest their recent lows. If it weren't for the strong market today XLNX would probably have closed near our targets, but the intraday recovery is providing a second chance to enter short positions. I suggest readers initiate short positions at current levels and play for quick pullback of $0.80 to $1.20. If our targets are reached the estimated gain on the position is +50% to +75%.

Current Position: Long October $26.00 PUT, entry was at $0.68

Entry on September 21, 2010
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 7 million
Listed on September 20, 2010


CLOSED BULLISH PLAYS

Vale SA - VALE - close 28.51 change +0.44 stop 25.80

Target(s): 28.38 (hit), 28.65 (hit), 28.90, 29.30
Key Support/Resistance Areas: 29.30, 28.45, 28.00, 27.25
Final Gain/Loss: +46%
Time Frame: 1 to 3 weeks
New Positions: Closed

Comments:
9/21: VALE hit our target of $28.65 so we have closed the position for a +46% gain. The real opportunity to close this position was on 9/14 when the stock barely missed our $28.75 target and we had a +75% gain. At that time we lowered the target 10 cents to take advantage of another spike higher which happened today. VALE could have some gas left in the tank for a move higher but I would be cautious of a broader market pullback which could crush October call premiums as they expire 3 weeks from Friday.

9/20: My comments from the weekend remain the same. Look for a breakout as an opportunity to take profits.

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.

9/14: 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.

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

Closed Position: Long October $29.00 CALL at $0.73, 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



CLOSED BEARISH PLAYS

McDonald's Corp. - MCD - close 75.51 change +0.40 stop 75.75

Target(s): 73.85, 73.25, 72.60
Key Support/Resistance Areas: 75.35, 73.60, 71.50, 70.50
Final Gain/Loss: -58%
Time Frame: 1 week
New Positions: Closed

Comments:
9/21: Unfortunately, MCD hit our stop to the penny so we are flat the position for a loss. The stock looked vulnerable last week but just won't give it up so we are protecting capital. Readers who still have positions may want to stick with it with a stop above today's highs as a broader market correction looks likely.

9/20: We've got a double top in play on MCD's hourly chart but price needs to turn lower tomorrow. I've added a target of 73.85, while 73.25 would be a gap fill. I suggest readers begin to look for an exit or tighten stops if MCD trades down to these levels.

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.

Closed Position: Long October $72.50 PUT at $0.35, 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