Option Investor
Newsletter

Daily Newsletter, Saturday, 9/25/2010

Table of Contents

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

Market Wrap

Bad Day for Bears

by Jim Brown

Click here to email Jim Brown

News events and gains in overseas markets produced a bad day for the bears with a monster short squeeze and the biggest gain in September.

Market Statistics

This could really be a September to remember with the Dow up +843 points from the August 31st close at 10014. That is an 8.4% rally for the Dow, +9.4% for the S&P and a whopping +12.6% rally for the Nasdaq. Since September 1st the uptrend has been rather dramatic and there are four days left in the month and quarter. If this trend holds this could be the best September since 1939 according to Reuters.

One of the reports boosting the market on Friday was another "less bad" report from the housing sector. Sales of new homes clocked in at 288,000 and near a record low but still better than the 276,000 rate from July. Analysts were expecting a further decline in sales and the uptick, despite it being minimal, was a positive surprise. The number of new homes on the market declined and the average price slipped another -1%. These are far from bullish numbers but another in a string of unexpected economic improvements.

You may remember on Thursday the existing home sales report also surprised to the upside with a moderate jump to a rate of 4.13 million homes compared to the 3.83 million pace in July. The increase in sales was broad based while months of available inventory fell from 12.5 to 11.6.

The Wall Street Journal also reported that new foreclosures initiated in August declined for the first monthly drop in over a year.

These are all positive signs but the rate of change is excruciatingly slow. Employment will have to improve before we will see an acceleration in home buying. Most homeowners are just happy to have survived the recession with a home and are not yet thinking about moving up.

Another less bad report was the Durable Goods report for August. The headline number was -1.3% and the biggest drop in over a year but the internal components showed signs of improvement. The headline number was down because of a -10% drop in transportation equipment. (Planes)

The positive component was the +1.6% jump in core capital goods shipments and inline with an +8% rate for Q3 spending. Core capital goods rebounded +4.1% in August after a -5.3% decline in July. Capital goods orders are up +18% over the same period in 2009 and +30% since the recession lows. The increase in core orders prompted some analysts to start talking about a +2% GDP again. Estimates had fallen to +1.2% to +1.6% over the last month.

Overall it was a positive week for economics and the FOMC statement reinforced the idea that the Fed is going to take further action if the economy does not accelerate soon. Next week is going to be even more important with a flood of regional manufacturing reports plus the next GDP revision.

We should know by next weekend if the economy recovered from the July soft patch and ticked up again in August or if that soft patch is turning into quicksand. The double dip conversations have lessened significantly but a resumption of bad news from the regional manufacturing reports could bring it back fast. This is going to be a pivotal week for economics. It will be a critical milepost as we head into Q3 earnings in just over a week. Alcoa kicks off the Q3 earnings parade only nine trading days from today.

Economic Calendar

In stock news Amazon garnered a new upgrade and hit a new all time high at $161. JP Morgan reiterated a buy rating on Amazon and raised the price target to $198 from $154. The analyst raised earnings estimates from $2.57 for 2010 to $3.64 in 2011 and a whopping $4.97 in 2012. The analyst said the thesis is simple. Amazon continues to gain market share in the e-commerce world and the e-commerce world is taking share from brick and mortar retailers. He said Amazon is rapidly expanding in non-US sites and sales and its international margin should continue to rise as the markets are developed. Also the "Fulfillment by Amazon" service is also a revenue growth driver. This is where other companies sell products and Amazon ships them from an Amazon fulfillment center.

Amazon announced some new features for its Kindle application for Android products. The app will allow you to search text of e-books and Wikipedia using voice commands only. Electronic Arts also announced some new games for the Kindle in case you are bored with reading or you are between books or appointments and just need a diversion.

Amazon Chart

Apple (AAPL) is on its way to being the largest market cap of any U.S. company when the stock reaches $345 according to Rich Peterson at S&P. The story about a Verizon iPhone won't die and the iPad is taking over the retail world. Apple shareholders should be very happy. Anyone who bought Apple in August when it reached support at $240 should also be happy.

Apple shares were boosted by news that the iPad would be sold in Target stores beginning in October with a starting price of $499. They will be the largest retailer to offer the product and just in time for holiday wish list inclusion.

Unfortunately for Apple bulls there are problems on the horizon. The various competing tablets are starting to appear in the market and there will be a veritable flood of new devices over the next six months. None will have the fully stocked app store but that does not seem to be slowing down Android purchasers.

The various Android tablets will be the biggest competition. The Android tablet has the same 1280x768 resolution as the iPad and the next OS version 3.0 is specifically targeted at tablet users. Analysts are already claiming the Android tablet will make up 26% of the market in 2011 compared to a 57% share of the iPad. Some analysts believe the Android will eventually outnumber iPads simply because of the vast number of models by various makers.

While this may sound negative for Apple just remember that Apple will continue to sell as many as they can produce for a very long time. Apple users are very loyal and every iPhone user is a potential iPad owner. Piper Jaffray expects Apple to sell 21 million iPads in 2011. At a roughly $600 average price that is roughly $12.6 billion in iPad sales alone. Steve Jobs could actually afford a raise.

Apple Chart

If you look at the charts for Apple and Amazon you have a good reason for the September rally in the Nasdaq. Add in NFLX, FFIV, FSLR, PCLN, CTXS and GOOG and the rest of the tech stocks could have taken the month off. All of those charts are poster children for severely overbought but analysts believe the tech rally will continue next week.

An example of irrational exuberance in tech stocks would be AMD. The chipmaker slashed its guidance on Friday and is now expecting revenue to decline by -1% to -4% from Q2 levels. AMD warned that slower notebook sales (thank you iPad) would push revenue to less than $1.65 billion. Analysts were expecting $1.72 billion. You may remember on July 15th AMD guided higher for Q3. Evidently management was overly optimistic.

The example of irrationality is AMD's +7% gain on Friday. They slashed estimates and gained +7%. Obviously the bad new bulls are in stampede mode. Helping push chip stocks up was a comment from Oracle's Larry Ellison that he was considering buying some chip companies. Who knew Ellison wanted to compete with Intel as well as Microsoft and Apple. What next from Oracle, maybe an oPhone or a tablet that runs databases? Oracle has acquired 65 companies in the last five years. Chip companies mentioned as targets were AMD, Nvidia and IBM's chip division. Since Oracle bought Sun Microsystems Ellison may be thinking more about beefing up its server business and adding new products.

AMD Chart

Gold rallied to close at $1296 after a brief tick over $1300 intraday. With the dollar imploding and the Fed almost guaranteed to launch QE2 in November there are some analysts predicting $1500 an ounce. It makes the hysteria over the old $1000 barrier seem almost calm.

The dollar index has fallen almost 5% since the end of August and there appears to be no letup in sight. Friday's close at 79.39 was a seven-month low. The drop is based on worries the U.S. economy is not improving and the Fed is likely to launch another trillion dollar quantitative easing program that will further devalue the dollar. This makes commodities like gold and oil more valuable because it takes more dollars to buy the same amount of product.

Dollar Index Chart

Gold Chart

There may not be any official inflation but if you look at the things that hurt if you drop them on your foot there is rampant inflation. Copper, lumber, wheat, corn, metals, etc are all soaring. Obviously this has something to do with the fall in the dollar and the droughts overseas but not 100%. Commodities are in rally mode because the rest of the world is in growth mode. Just because the U.S. is lagging does not mean the rest of the world is sitting on the sidelines waiting on us.

Commodity Chart

Petrobras (PBR) may have succeeded in its $70 billion share sale but the stock declined -2% Friday and will likely continue declining in the days ahead. That is simply too large a block of stock to not weigh on the share price. A day after the offering there are some analysts that believe it will mark a high point in the emerging market bubble. Money managers were literally throwing money at the offering despite the negative political ramifications.

Petrobras lost $70 billion in market cap over the last year as the government changed the rules, passed new oil laws and conjured up a scheme to increase their ownership of Petrobras from 32% to nearly 50%. One analyst called it the first stages of Venezuelation of the Brazilian energy sector. I like Petrobras as a company because they are in the top five offshore drilling and exploration companies. They have a monster asset in the new 50 billion barrel offshore find. Unfortunately the share offering was a bet that the find could be commercialized. They are not even sure they will be able to produce oil in quantity from the subsalt reserves. There are a lot of unknowns ahead for the company and a failure to show some progress in the months ahead will keep pressure on their stock.

Register for the OilSlick.com newsletter and receive free daily updates and commentary on the energy sector. Register here

BlackRock vice chairman Bob Doll was pounding the table on stocks Friday saying the S&P should gain another +6.6% this year to begin a decade of 8% annual returns as concerns of a return to recession prove unfounded. BlackRock oversees $3.4 trillion in assets. Doll said the risk of a double dip has declined to 10% but the stock market had priced in a return to recession. "The economic recovery is becoming self-sustaining. U.S. consumers have not retreated into a long period of deleveraging as some feared. They got tired of that real fast, came running out of their homes and straight into the mall."

He said corporate earnings are going to explode because companies got so scared they cut costs to the bone and this will produce record earnings when the economy gains traction. He said the biggest problem U.S. corporations have today is an adverse political climate. He projects a drop of 1% in GDP if the tax cuts are not extended. He sees 2010 as the beginning of a fantastic decade with 8% annual returns led by healthcare, technology and alternative energy stocks performing best. He expects emerging markets to exceed those returns.

While on that topic the Democrats announced on Friday they will not vote on extending the tax cuts before the election but "may" talk about it after the election. Analysts said this was clear evidence they were throwing in the towel and conceding the election to the Republicans. The tax cut vote was seen as the Democrats only chance to gain in the polls before November. Now the Republicans can hammer them as out of touch with voters and the financial pain the recession has caused.

There are many reasons for any rally. The one last week seemed to center on the unmistakable fact that the economy is either going to get better by November 3rd or the Fed is going to spike the punch again. Either way the economy and the market go higher. The only difference is the speed of the increase.

If the economic reports continue to come in less bad, corporations will begin to have more confidence about hiring. If the stock market continues to move higher, consumers will feel better and spend more over the holidays. If the Republicans maintain their lead over Democrats heading into the election then corporations will look forward to reduced uncertainty, fewer regulations and lower taxes. That will stimulate business expansion and increase hiring. All of these things are probably underway already because the signs of change are already evident. We just need another month or two for traction to appear.

The talking heads were all excited with the "major rally" on Friday. They should all take a semester off and take a class in market analysis. It was NOT a rally. It was simply another monster short squeeze prompted by a combination of news events.

The S&P gained +22 points in the first 45 minutes as shorts covered in panic. For the next five hours it gained only two additional points. In a rally the markets rise all day. In a short squeeze they rise at the open, move sideways all day and then see an "I give up" candle at the close as those shorts hoping for a reprieve are forced to cover before the close.

After the market decline on Wednesday and Thursday, with Thursday ending with a major sell program to close on the lows for the week, the shorts were loaded up again with expectations of an end to the September rally. Surprise, surprise, it was a classic bear trap and the bulls loaded up on bear skins for the winter.

The S&P could not punch through the solid resistance from January at 1150. It was a dead stop on Tuesday (1148.59) and a dead stop on Friday (1148.90). That is not to say it won't happen but it remains strong resistance.

I believe it will happen next week but not because of some economic scenario. I believe it will happen simply because it is quarter end and fund managers will be forced to join the party and add some winners to their portfolios so it appears in the quarterly statements that they participated in the September rally.

Managers are going to be holding their nose and buying big cap winners. The small caps have yet to break over lower resistance because fund managers still have no confidence in the economy or the market. I would bet that a vast majority are holding cash in reserve in hopes of an October surprise that gives them a buying opportunity to catch up on missed chances in August.

I would not be surprised to see the S&P breakout on Monday and then trade sideways through Thursday. Friday could be a black day for the markets unless we have some strongly positive news from the ISM. Friday is a new quarter and an opportunity to turn some of those winners back into cash.

Traders forget that October 31st is more than Halloween. It is the fiscal year-end for the vast majority of mutual funds. Any portfolio manipulations for year-end statements and taxable events have to be concluded in October. That means if a fund bought Apple in January at $190 they have better than a $100 profit today. They have to decide if future upside potential is worth keeping the stock OR should they take the profit now to offset their losers and reduce the taxable impact. Spread that risk across dozens or even hundreds of stocks that have risen more than 100% since the 2009 lows and fund managers in need of a bonus fix may be itching to unload. If they do it early in October they can use that cash to buy the normal October dip in preparation for 2011.

I think it is a forgone conclusion the market will be better in 2011. At the same time it is not a safe bet that October will mimic September. I am wary of an October surprise.

S&P-500 Chart

The Dow broke over strong resistance at 10,700 but then failed to show any follow through until Friday's short squeeze. The Dow gained +186 points in the first 45 min squeeze and added only +11 points for the rest of the day. This was definitely not a rally.

I suspect the Dow will test 10,900 on Monday and then move sideways through Thursday. I don't think we will see a mad dash to strong resistance at 11,200 but it depends on how many fund managers are holding cash they need to spend before Friday. Support is well back at 10,500.

Dow Chart

The Nasdaq continues to power the broader markets higher. Actually it is the Nasdaq 100 not necessarily the Nasdaq Composite. The NDX has blown past prior resistance at 1930 and broke over 2000 on Friday. If it can maintain the pace and blow pass 2050 it would be a major accomplishment. That resistance dates back to July 2007. With the strength of AMZN, APPL and GOOG it has a good chance but that 2050 level is going to be tough. It would be the perfect spot for next week's advance to fail and setup an October decline.

Nasdaq-100 Chart - Daily

Nasdaq-100 Chart - Weekly

The Nasdaq Composite stopped just barely over resistance at 2375 with another hurdle at 2430. However those are just milestones in the journey to real resistance at 2519 and the 78% Fib retracement level from the March 2009 lows. This was major resistance before and should be equally as hard to cross on the next attempt. Only the next attempt will likely be in November and on a strengthening economy.

Nasdaq Composite Chart

The Russell-2000 example is proof of what I have been preaching. Despite the short covering on Friday it was another dead stop on strong resistance at 670 and another failure to thrive. Fund managers are still avoiding small caps in favor of high liquidity names. There is ONLY one reason for this. They are planning on a quick exit in October. They will then take their profits and buy small caps on any October dip. Compare the charts above to the Russell chart and the evidence is clear.

Russell 2000 Chart

In summary, I expect limited gains next week and a decline in October. I view that decline as a buying opportunity but I believe it will be steep enough to give traders some shorting opportunities in the first few days. You know I have had a bullish bias for the last month AND I am still bullish long term. I just believe there will be some volatility in October and smart traders will capitalize on it.

Jim Brown


Index Wrap

Big Cap Tech On Fire

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The big cap Nasdaq 100 (NDX) stock index barely slowed down this past week and at Friday's 2024 close, is within striking distance of the June '08 and April 2010 highs at 2056/2059. Can the 2007 NDX top of 2239 (made after the major 2002 bottom) be a next area to be tested? We can't rule this out given the strong advance that's been underway since the 1040 bottom of early last year.

Since my trading style tends toward being cautious when market volatility gets extreme, along with bullish sentiment and overbought indicators, I wasn't fully on board with index call options. My feeling is that I can always be long the (QQQQ) stock when I want to participate but deleverage.

In my most recent Trader's Corner article written this past week (Thurs, 9/23) on the subject of a momentum indicator, stochastics, that I use less than the somewhat similar Relative Strength Index or RSI, I also did a 'mini' technical update and noted the following about the Nas Composite (COMP):

"The telling pattern I've found in the Bollinger Band indicator, is that after upper or lower volatility extremes are reached and when prices go SIDEWAYS after that (e.g., for 2-3 days or a greater number), trend reversals tend to occur. This pattern (sideways after intraday lows or highs reach the lower or upper Boli bands) is seen in all the numbered examples below (with the COMP chart) except #1. The sideways trend seen in example #6 was premature in suggesting a 'final' bottom. I am assuming that the recent BB extreme may mark a tradable top but not enough subsequent price action has occurred to say definitely; a top IS consistent with historical patterns."

The COMP chart I was referring to (as of Thursday's Close):

Since COMP had taken out its prior highs (at points 1 & 2 above), which (finally) reversed its intermediate-term trend from down to UP, it was somewhat speculative to look for a possible top rather than a consolidation before another push higher. I didn't short the moving tech freight train of course, as I respect strong momentum, but was somewhat surprised to see tech so back on fire on Friday. But then I don't trade so much on the latest 'news'.

The market tends to go from extreme to extreme. Now, as if by magic, the bulls see few problems ahead with earnings, especially in the tech sectors. The bulls may be right of course when looking out 6-8 months, but from a trading standpoint its high risk to buy inflated call premiums. Shorting bucks the trend, so that's high risk too. I saw a good risk to reward equation at NDX 1700-1750; bearishness then wasn't as extreme as recent bullish sentiment, but you didn't have a LOT of company in buying calls.

After this foray more into strategy questions, I'll next comment on what the charts are projecting and suggesting in my individual index commentaries.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is bullish in its pattern but is of course lagging the tech heavy Nasdaq. I doubt that SPX is going to break out above resistance implied by the upper envelope line, or to above 4% over its 21-day moving average.

There is substantial resistance in the 1173 to 1182 area in my estimation. If the index keeps going in its slow but steady climb this zone is the where there's substantial overhanging supply (of stock). Any signs of a reversal in this area will suggest exiting long calls and other bullish option strategies.

I'm not looking for a major decline when a correction does begin. It's possible of course that buying churns through supply and goes directly to re-testing major resistance at prior highs around 1217-1220. I think it more likely that the market backs off some before making a run at this pivotal prior top.

As I noted last week: If SPX makes a decisive upside penetration of 1129-1131, it could be headed to the 1170 area next." SPX has achieved this breakout above prior highs, turning its intermediate trend higher, and a further advance seems likely. I don't feel this would be another major up leg just yet, given the overbought condition suggested by the RSI and what may be the start of an 'extreme' in bullish sentiment.

I've noted resistance on my chart at 1154, then at 1173, extending to what may be a major 'supply' overhang beginning around 1182. Near support is at 1120, with next key technical support at 1100-1105.

SENTIMENT:

Bullish sentiment, as seen with my CPRATIO indicator above, spiked up again along with the strong advance of Friday. I get most alert for the possibility of a downside reversal when there are a number of such 'spikes', such that they pull up the 5-day average to at or near 1.9 or above. We're not quite there yet.

My take on this market is that there's a lot of just moderate or tepid bulls and the 'public' is so shell-shocked still and out of the market (except for watching their 401k statements from time to time), that we're not yet in a period when people are throwing money at stocks or equity calls. When market sentiment goes from tepid enthusiasm for stocks to red hot lusting for equities is when tops tend to form. Stay tuned on this!

S&P 100 (OEX) INDEX; DAILY CHART

I envisioned the S&P 100 (OEX) chart last week as good for a move to the 520 area and the index has gotten within a hair's breath of that. What next? Since OEX has cleared its prior highs of the past few months anyway, this suggests that the index should stay ABOVE prior highs at 510-512. The big question is whether both S&P indices can move above fairly major prior 'breakdown' points; in OEX's case, overhanging supply begins at 532 and extends to 537. If OEX clears this area, next could be a possible challenge to the prior (April) highs in the 550-555 area.

It's not often the case that a further up leg like this gets tacked on when the RSI for example is at an overbought extreme. Of course overbought/oversold are relative terms that pertain to the occasional major momentum moves. If you want to judge how much higher OEX can get, watch the Nasdaq, as the strength in the tech stocks is such a big influence in pulling the S&P stocks higher.

I've noted near resistance at 522, then at 532, extending to 537. Near support is around 508, then at 500.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) had a decent move on Friday propelled especially by strength in AA, CAT, DD, HD, IBM, KFT, KO, MRK, PFE and UTX. Except for IBM and UTX, these are mostly consumer/consumer cyclical stocks. But, if the prospects for the consumer are brightening, even a little, these companies should see more earnings growth ahead.

I don't see a LOT of upside for the Dow, but we can't rule out a move to the 11200 are over the next couple of weeks. It depends on whether there's a shake out before a push to retest those highs or not. And that's hard to predict. There is a lot of buying coming in of late. On the other hand in most market cycles, an overbought situation such as we're in, often precedes some type of correction, even if a sideways 'time' correction. Again, as with the S&P, it's almost more important to watch the tech heavy Nasdaq. As soon as its advance slows down, the Dow will be right behind it. You can also watch the 10 current strong movers I list above to gauge if the Dow Average is going to follow through with Friday's strong bullish action.

I've noted near resistance at 10920, then well above 10000 (which is more a media talking point of importance), at 11200.

Near support is seen at 10640-10600; then at 10450 just because it’s the pivotal (trading wise) 21-day average; when prices carry to the upper envelope line and show that kind of strength, pullbacks often won't carry below the average.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Now that the Nasdaq Composite (COMP) Index is on fire so to speak and is rather far 'extended' on the upside relative to past months, I kept the Bollinger band indicator on my COMP daily chart to see that visually. The Boli bands normally 'contain' 95% of trading in a stock or index. If you want an explanation of Bollinger Bands and how they're used, this is contained in my recent (9/23) Trader's Corner article. You can see this online by clicking HERE.

As I wrote last week: "I'm also well aware of the 5 percent of the times of occasional big moves, where prices rocket higher (or lower), pulling the upper Boli band along so to speak. I don't see what would set off such a buying stampede currently." Well, that came on Friday with some reports that business investment is picking up, etc. I may have also discounted the positive backdrop of the Fed saying earlier this past week that it's prepared to take other stimulative actions beyond what it has engineered with current rock bottom interest rates.

COMP is at an overbought extreme, as measured by the 13-day RSI, suggesting that bearish economic or market related news coming up could set off a bunch of profit taking selling, which sets off more selling, with traders/investors then backing off from buying dips. Keep this in mind as trading progresses in the coming week.

Next move for COMP could be to or above 2400, perhaps to the upper band, currently at 2412. Technical resistance then extends up to the 2466 area. On the downside, key near support is 2300. A close below 2300 that wasn't reversed (back to the upside) the next day would suggest that a correction was underway. COMP support below 2300 looks like 2246, then 2200.

SENTIMENT:

Bullish sentiment, as seen with my CPRATIO indicator above, spiked again with Friday's strong advance. I get most alert for the possibility of a downside reversal when there are a number of such 'spikes', such that they pull up the 5-day average to at or near 1.9 or above. We're not quite there yet.

My take on this market is that there's a lot of just moderate or tepid bulls and the 'public' is so shell-shocked still and out of stocks (except for watching their 401k statements from time to time), that we're not yet in a period when people are throwing money at the market and participating in options. When market sentiment goes from tepid enthusiasm for stocks to red hot for equities is when tops tend to form. Stay tuned on this!

NASDAQ 100 (NDX) DAILY CHART:

Once the Nasdaq 100 (NDX) rocketed above a very key resistance at 2000 this past week, there was a wave of short-covering. Momentum traders bought just because of this breakout and surge in buying. As I noted last week, NDX was the first of the major indexes to reverse its intermediate-term trend to UP (the long-term trend never had reversed to down). Now, the Index is within striking distance of prior highs in the 2059-2055 area. It seems unlikely that NDX is going to get this close to challenging these prior tops without re-testing this area.

I also expressed caution last week due to how 'overbought' the index was getting. That's still a legitimate concern, so guard profits on long calls by being alert to signs of a reversal pattern. 2038 also marks the current intersection of trendline resistance noted on the chart below. Next potential resistance above this trendline comes in around 2060. The high for the past several years, not the all time NDX high, came back in November '07, suggesting potential major resistance at 2200-2239.

Near support is at 1972, with key lower support in the 1900 area. 1850 looks like the beginning of major support.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The chart of the Nas 100 (QQQQ) tracking stock is bullish of course as it tracks the NDX. I figure resistance is from where QQQQ closed around 49.7, on up to 50.5-50.65. Recent highs, in fact the Friday Close, are now fully 6% over the index's 21-day moving average as I raised my upper envelope by another percent. Such an envelope line is not potential 'resistance' the same way that a prior major high is, but does visually keep me focused on just how far 'extended' prices are relative to an important benchmark moving average; i.e., the 21-day average.

The higher prices get above certain benchmarks like this, the greater the probability of at least an interim top. If prices just go sideways because of an overbought situation, that's an important consideration in how long to stay with QQQQ calls. If long the stock, this consideration is not as important, at least as long as you don't mind a possible ride back down to support in the 47 area.

Near support: 47.0

Next support: 46.5, then 45.3

Near resistance: 49.6, the recent Close

Next resistance: 50.5 - 50.65

RUSSELL 2000 (RUT) DAILY CHART:

For a change the Russell 2000 (RUT) chart is not as bullish as the Nasdaq, in that it is possibly stalled at its prior 672 high; resistance which extends to 677. RUT did bounce from support implied by its 200-day moving average, but that's not a great bullish 'accomplishment'.

RUT needs to clear its prior highs and for more than a day or two to suggest that it could have a next leg higher, such as to technical resistance around 720.

Near support is 649, extending to 640. Next support technical support then looks like 630, extending to around 620.



GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.


New Option Plays

Storage Play

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

STEC, Inc. - STEC - close 13.32 change +0.50 stop 33.70

Target(s): 14.15, 14.65
Key Support/Resistance Areas: 14.80, 14.15, 13.45, 12.15
Time Frame: 1 to 2 weeks

Company Description:
STEC, Inc. (STEC) is a global provider of enterprise-class Flash solid-state drives (SSDs) for enterprise-storage systems and servers that companies use to retain and access their critical data. The Company’s products are designed specifically for storage systems and servers that run applications requiring a high level of input/output operations per second (IOPS) performance, capacity, reliability and low latency. STEC designs and develops its SSD controllers, enhance them with its own firmware and combine them with third-party Flash memory. The Company sells its SSDs to global storage and server original equipment manufacturers (OEMs), which integrate them into storage systems and servers used by enterprises in a variety of industries, including financial services, government, transportation, defense and aerospace and transaction processing. The Company also offers both monolithic DRAM modules and DRAM modules based on its own stacking technology.

Why We Like it:
The storage sector has been beaten down and is due for a comeback if the broader market cooperates. STEC bounced hard off of its 20-day SMA on Thursday and is forming an ascending triangle on its daily chart. I suggest readers initiate long positions if STEC pulls back to $13.10 or breaks higher to $13.50, whichever occurs first. We are targeting a move up to the stock's congestion areas from April and June. If triggered at $13.10, our profit target on option positions is +50% to +75%.

Suggested Position: Buy November $14.00 CALL, current ask $1.05

Annotated chart:

Entry on September XX
Earnings 11/03/2010 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on September 25, 2010


In Play Updates and Reviews

Stopped Out of Index Play

by Scott Hawes

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Current Portfolio:


CALL Play Updates

Petroleo Brasileiro - PBR - close 34.92 change -0.67 stop 33.70

Target(s): 37.40, 38.65
Key Support/Resistance Areas: 39.00, 37.50, 36.60, 34.00
Current Gain/Loss: -12%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
9/25: PBR gapped lower on Friday which improved our entry price into the position. All reports indicate the secondary offering was a success and was priced near the market. We are looking for the short interest to unwind which should cause a quick pop in the stock. Our stop is in place if we are wrong.

9/23: PBR announced a secondary offering announced on 9/2 and it has reportedly grown into the largest ever offering in the capital markets at $80 billion. Short interest has grown in the stock ahead of the offering as traders think there will not be enough demand to buy the securities. However, reports continue to trickle in that indicate institutional demand is alive and well and the offering is more than 2x oversubscribed. This could create a short squeeze in the stock and I suggest we buy calls at current levels to take advantage of it. Conservative traders may want to wait for a breakout above today's high of $36.60 which will also break the primary downtrend line. Our stop will be below the recent swing low and the upward trend line that began on 8/25.

Suggested Position: Long November $37.00 CALL, entry was at $1.25

Annotated chart:

Entry on September XX
Earnings 11/11/2010 (unconfirmed)
Average Daily Volume: 13 million
Listed on September 23, 2010


Transocean Ltd - RIG - close 50.06 change +0.59 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:
9/23 & 9/25: Still not much movement in RIG and it is still consolidating on lighter volume. The main reason this position is negative right now is due to a bad entry at the open last Monday when the stock gapped higher. Now we need a breakout which is going to be tough if the broader market continues lower, but so far RIG has held its own. If things pick back up I expect RIG to do well and I view pullbacks as possible buying opportunities.

9/22: Nothing has changed and volume continues to be light as RIG is consolidating. Today the stock printed a bottoming tail hammer but I am still concerned of a broader market pullback. My comments below remain the same.

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.

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


iPath S&P 500 VIX ST Futures - VXX - close 16.63 change -0.99 stop 16.23

Target(s): 18.45, 19.25, 20.40
Key Support/Resistance Areas: 17.50, 19.75, 20.60
Current Gain/Loss: -8%
Time Frame: 1 to 2 weeks
New positions: Yes, preferably on pullbacks

Comments:
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 play because we are long the underlying instrument.

9/25: VXX collapsed nearly $1 as the market ripped higher on Friday. Our +24% gain is now a -8% loss. I suggest readers use caution with this position. If the market breaks out higher this week we need to get out the way. Then we can consider possibly entering at a lower price. Let's implement a stop at $16.23 and move on if we are taken out.

9/23: VXX is in an uptrend on its intraday charts and I'm expecting more to come. Readers may want to consider $18.10 as a possible exit target which could come as quick as tomorrow. This price should give you another +20% to our current gain of +24%. My primary targets are $18.45 (a gap fill) and $19.25 which I think we will see in the coming days. If the market sells off hard our final target of $20.40 could get hit fast. I'm sticking with no stop for now.

9/22: We are long VXX at the open today. I am looking for a spike higher in the coming days which means we need to experience some broader market weakness. My comments from the play release are below.

Current Position: Long November $18.00 CALL, entry was at $1.25

Annotated chart:

Entry on September 22, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 21 million
Listed on September 21, 2010


PUT Play Updates

Archer Daniels Midland - ADM - close 32.27 change -0.38 stop 32.95

Target(s): 32.20, 31.25, 30.85
Key Support/Resistance Areas: 33.50, 31.00, 29.80
Current Gain/Loss: -5%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
9/25: ADM lost more than -2% of Friday when the broader market gained +2%. I could not find any specific news that would have caused the sell-off in the stock. Nonetheless, it was good for our puts. ADM is finding support at its 20-day SMA and if the broader market breaks out next week ADM could quickly erase Friday's losses. However, if the broader market retraces some of Friday's gains ADM should quickly head to towards our more aggressive targets. I want to tighten the stop down to $32.95. This is an intraday resistance level and just above Thursday's and Wednesday's closing prices.

9/23: We got a little reprieve in ADM today as the stock lost -1.14%. We need the stock to break below today's low to get things moving in our direction, which will also break an intraday trend line. I suggest readers remain cautious on the position and my comments from below remain valid.

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

Annotated chart:

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


Charles Schwab - SCHW - close 13.97 change +0.50 stop 14.42

Target(s): 13.10, 12.85, 12.55
Key Support/Resistance Areas: 14.10, 13.35, 13.05, 12.65
Current Gain: -30%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/25: SCHW reversed right back up to its resistance level where the stock has struggled all month. It is a tough call to say where SCHW heads from here. I still think the stock heads lower but I could see the stock trading up to its 50-day SMA first. Our stop is 13 cents above the 50.

9/23: The gap down this morning triggered our entry into SCWH at 50 cents instead of 45 cents. In hindsight, my instructions should have been enter at 45 cents. Nonetheless, SCHW looks vulnerable but we have to get below $13.36 before the stock will head towards its lows. My comments from below remain valid.

9/22: We are going with a cheapie in the financial services sector tonight, which looks terrible across all industries, from banks, to lenders, to broker dealers. A study released today said that the 85% of Americans do not trust the financial markets and have therefore reconsidered their investment activities. Retail trading volumes are way down which will hurt firms like Chuck (SCHW). Technically, the stock has run right up into prior support (now resistance) from July and has turned lower. The stock has also been making lower highs and lower lows and I see no reason for this pattern to stop if the broader market cooperates. It would be nice to see some retracement of today's losses but a breakdown is also a good set-up. I suggest readers initiate short positions with one of two triggers. If SCHW trades up to $13.70 or down to $13.55. If triggered at $13.70 we are playing for an 85 cent pullback which is our 2nd target and a gap fill. If this target is reached the estimated gain on the position is +60%. If we are wrong we won't get hurt too bad as the option is cheap.

NOTE: November strikes were just recently released in SCHW so the open interest not as great as other months. The spreads are reasonable and I am not worried about liquidity as trading will begin to pick up.

Current Position: Long November $13.00 PUT, entry was at $0.50

Annotated chart:

Entry on September 23, 2010
Earnings: 10/14/2010 (unconfirmed)
Average Daily Volume: 11 million
Listed on September 22, 2010


CLOSED BEARISH PLAYS

SPDR S&P 500 ETF - SPY - close 114.82 change +2.32 stop 114.10 *NEW*

Target(s): 112.10, 111.50, 110.75
Key Support/Resistance Areas: 115.00, 113.00, 110.60, 50-day, 20-day
Final Gain/Loss: -50.6%
Time Frame: 1 week
New Positions: Closed

Comments:
9/25: So much for continued weakness as I indicated in Thursday's comments. Decent economic data on Friday in the pre-market caused the markets to gap higher and created a good old fashion short squeeze. The entire move of the day was essentially done in the first hour of trading. Our stop was hit in the first 10 minutes so we were able to get out early and keep the loss under control. The close on Friday provided no clues as to where the broader market heads from here but I would not want to be short if it breaks higher. So it's a conundrum in that holding long positions will become more and more stressful trying to squeeze out additional gains, while holding shorts could be detrimental to your account. Staying nimble is the name of the game in this type of market.

9/23: On Tuesday SPY printed a red candle high which has been confirmed with a red candle yesterday and another new low today. This is a fairly strong reversal pattern that doesn't happen often. It has happened 4 or 5 times over the past year and the smallest drop in the S&P was about -40 points from the red candle high closing price, with the largest being -170 points, i.e. the flash crash. A -40 point drop from Tuesday's close puts the S&P 500 at 1,100 which is near our final target of $110.75 (raised 10 cents to account for the rising 20-day SMA). As such, I'm looking for more downside but it could come fast. The 1,100 level has support which is logical spot for the dip to be bought so be prepared to either take profits or tighten stops to protect them as targets approach. We are nearing breakeven on the trade and our first target was almost hit today. My best guess is SPY will bounce after reaching this target tomorrow because it is near the 200-day SMA and a prior resistance level. But the bounce should be short lived and I'm looking for SPY to eventually trade down toward our final target. In case this analysis is wrong, let's move the stop down to $114.10.

Closed Position: Long October $109.00 PUT at $0.77, 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