Option Investor
Newsletter

Daily Newsletter, Saturday, 10/2/2010

Table of Contents

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

Market Wrap

Best in Seventy Years

by Jim Brown

Click here to email Jim Brown

Despite the lackluster week for the markets it was still the best performance for September in seventy years.

Market Statistics

Last month may have turned out to be a September to remember but will October be a month we will want to forget? The first day of the fourth quarter started out slow but eventually ended with a minor gain.

The morning futures moved higher when the Personal Income report for August came in at a seven month high. The headline number of +0.5% was nearly double the consensus and more than double the +0.2% rise in July. Spending rose +0.4% and at the same pace as July. On an annual basis the rate of spending has risen to +5.8% and that is a good sign in a weak economy.

There was a catch but you had to dig deeper than the headline number. Income growth rose because of the resumption of extended and emergency unemployment insurance in August. This added $20.6 billion in personal income. This offset a -$17.7 billion decline in July when payments were on hold.

Prices rose slightly by +0.2% to give the Fed a little breathing room in its worry over deflation. There is still no inflation but prices are no longer going down.

Economists are fond of pointing out the 10% unemployment (-16% U6 unemployment) as a worry about the strength of the rebound. If you reverse that you have 90% employed and they appear to be spending at an increasing rate. This was a bit of good news for the market.

Construction spending rose +0.4% in August and well over the consensus estimates for a decline of -0.4%. However, this was another example of a headline number not showing the entire picture. Private spending fell -0.9% to the lowest level in 12 years while public spending spiked +2.5% to push the headline number higher. Spending is still spending but we would rather have private entities building things rather than the government.

Consumer Sentiment ended September at 68.2 and that was a significant improvement over the mid month reading at 66.6. That suggests sentiment improved as the month progressed. The present conditions component actually moved higher to 79.6 from August's 78.3. The drag on the headline number came from the expectations component that ended the month at 60.9 and down -2 points from August.

Consumer Sentiment Chart

The big report for Friday was the national ISM or Purchasing Managers Index. The ISM declined to 54.4 in September from 56.3 in August. This is still in expansion territory but it was the fourth decline in five months and the lowest level since November. The internal components also suggest that activity will continue to decline. The new orders declined to 51.1 from 53.1 and very close to contraction territory under 50. This is the lowest level since June 2009. Backorders fell into contraction territory at 46.5 from 51.5. Inventory levels shot up to 55.6 from 51.4 suggesting there is no need to increase manufacturing to produce more inventory. Falling orders and rising inventory levels are a recipe for a slowdown in overall manufacturing.

ISM Chart

An interesting highlight of the ISM was the sharp rise in the prices paid component from 61.5 to 70.5. This is the highest level since May and suggests the rising cost of commodities is starting to show up at the producer level. This could be an early warning sign of future inflation.

The decline in the ISM weighed on the markets but it was tame compared to what next Friday's payroll report is likely to do if the numbers disappoint. Yes, it is that time of the month again when the NonFarm Payroll report for September confuses analysts and investors alike with speculation on hiring.

The current estimates from Moody's is for total employment to have risen by 5,000 jobs in September. They believe private employment has risen by 90,000 but government terminations will approach 85,000 jobs. Census employment declined by an estimated 77,917 in the September period.

The census has complicated job prediction for the last six months but we should be at the end of that cycle. It forced analysts to emphasize "private employment" rather than concentrate on the overall number. Unfortunately the retail investor sees the headline number with a loss of jobs and immediately draws a conclusion.

Most people believe the jobs numbers are a government game anyway. Most revisions increase the jobs lost making it appear the government produces favorable estimates and then corrects their "mistakes" a month or two later after the politicians have finished using the numbers and investors have forgotten about them.

In reality the numbers are simply the result of a scientific wild ass guess, which we all know as the SWAG method. They take historical trends from decades of number crunching and apply the formulas to the small amount of valid data they do have. After all, does anyone actually believe that with a labor force of 154 million that the government knows if 5,000 more people were hired than fired in September?

Obviously they don't and could actually be off by hundreds of thousands every month but the key is the trend more than the details. The trend shows that the economy lost government jobs starting in June but private hiring offset a significant number of those job losses. Despite the negative headline numbers there were job gains in the private sector.

If the headline number is positive for September despite the -85,000 government jobs then it will be a good sign the economy is growing. The October report should not have a significant impact from terminated census workers so we could be back to a +100,000 rate when that report is released in November. This week we just want to see a positive headline number. Anything else is a bonus.

The only other number of any significance next week is the ISM Nonmanufacturing Index on Tuesday. It is expected to be flat with August at 51.5 and just over contraction territory. Any improvement there would be well received by the market.

Economic Calendar

More important to the market next week is the beginning of the Q3 earnings cycle. Something that was not well reported in the media is the growth of earnings warnings. We have seen more than double the earnings warnings for the coming Q3 earnings than we saw for the Q2 cycle. This is not a good sign that earnings will be strong. For every company that warned there are several that were still hoping to squeak by and not make waves.

The quarter is now over and the wishing and hoping period has passed. They either made their quarter or they didn't and now they have to face reality. That reality may mean another flurry of warnings next week.

There are a few companies you would recognize reporting next week and the most visible will be MOS, YUM, MAR, MON, PEP and AA. Alcoa is the first Dow component to report and they will be on Thursday.

I think Marriot and Costco on Wednesday are more important because they will give us input on business and retail spending.

The tepid economic data and the potential for another round of quantitative easing continues to push the dollar lower against other world currencies. The dollar index has fallen -6.2% since September 1st and still has farther to go according to Bank of America.

This pushed gold to a new intraday high at $1,322 and traders expect a move over $1,325 next week and $1,350 by month end.

Dollar Index Chart

Gold Chart

The falling dollar is also powering crude prices to a new six-week high. Crude was also helped by political unrest in Ecuador, a major oil exporter to the U.S. and by quarter end window dressing by commodity funds. With the dollar quickly getting cheaper it takes more dollars to buy hard commodities like gold and oil. Add in some unrest in Nigeria and Ecuador and a couple tropical storms and it was another short squeeze for the bears. With product inventories at 20-year highs it was definitely not a demand driven rally.

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Crude Oil Chart

In stock news Microsoft sued Motorola for patent infringement over the Android phone. Microsoft claims the Android violates Microsoft patents for synchronizing email, calendars and contacts. Motorola vowed to defend itself aggressively. Microsoft said Motorola licensed this technology from 2003 to 2007 but did not renew the license even though it continued to use the technology. Both stocks finished the day flat.

Computer research firm NPD Group threw some cold water on the idea the iPad was hurting PC sales. According to a survey only 13% of iPad owners bought an iPad instead of a PC. However, 24% bought an iPad instead of an e-reader like the Kindle. According to the survey the iPad is more of a challenge to Amazon than Hewlett Packard or Dell. Amazon shares reflected the results of the survey.

Amazon Chart

This should come as no surprise since the iPad was targeting the Kindle market as well as the smart phone market. The survey also found that iPad owners were significantly more likely to own other Apple products. I don't think they actually needed a survey to figure that out. More than 48% of iPad owners also own a Mac desktop or an Apple notebook computer. That compares to only 11% of computer owners who owned a Mac a year ago. 53% of iPad owners have a Windows based PC. 38% of iPad owners also have an iPhone.

Apple shares gave up $10 for the week to close at $282.55.

Apple Chart

A Bernstein Research semiconductor analyst cut his estimates again for Intel and AMD saying the Q3 notebook environment was below their already reduced expectations. He said early signs for Q4 suggest demand will be below seasonal norms. He claimed notebook shipments from Taiwanese manufacturers show "a significant deceleration" from recent quarters and typical historical trends. He said Taiwan notebook makers are now guiding to flat to lower shipments with as much as a -7% decline. Historical norms for Q4 are +20% increases. He also noted the loss of shelf space at stores like Best Buy in favor of more space for tablets and smart phones. It is not shaping up for a good quarter for chip stocks.

What's up with Goldman? The bank appears to be on everybody's short list and brokers are downgrading it almost daily. Since September 22nd there have been downgrades from Deutsche Bank, Rochdale, William Blair, Bernstein and on Friday a pair of dueling downgrades from Wells Fargo and Credit Suisse. It should be a clear case of all the bad news priced in after the string of downgrades but the banking sector is struggling under the uncertainty of the new banking regulations. If the dog pile on Goldman continues I would probably be a buyer in the $140 range.

Goldman Chart

Banking Sector Chart

Doug Kass used the current weakness in the banking sector as one of the reasons October could be ugly. Calling it a toxic combination of low volume, declining breadth and weak financials he thinks the markets are setting up for a pullback. He claims these are classic bearish signals. He believes the September rally was built on a false hope further Fed easing would stimulate the market. Kass is normally seen as a bear so it is not surprising he is expecting the September rally to fail.

On this occasion I am on his side. I believe the September rally was a combination of funds chasing performance, shorts covering and just plain old momentum trading. However, we did have positive words out of the Fed and a very slight improvement in economics. It was just enough to stimulate the markets and begin the cycle we have seen so many times before.

The majority of traders were lining up on the bearish side going into September and once the short squeezes started they were caught off guard. They entered the denial phase and continued to short each new high and continued to get crushed. Once that momentum ball starts rolling it is hard to stop but last week we may have seen the pull of gravity returning.

Quarter end window dressing was credited with keeping the indexes pinned at their September highs until month end but every attempt to push through those highs was immediately snuffed. The spike on the S&P to 1157 at Thursday's open managed a hang time of about 15 minutes before the bears piled on to push the S&P to the low of the day at 1136 about an hour later. Resistance at 1150 is very strong and moving into a normally volatile October only strengthens the resolve of the bears.

We saw some decent volume last week with about 7.5 billion shares on average. However, Thursday's opening spike pumped that volume to 8.7 billion shares and two-thirds of it was down volume. That tells me there were plenty of bears waiting at 1150.

For next week I expect the markets to be flat to down. The quarter end retirement fund flows will help support prices the first few days but with the payroll report on Friday there will be some serious hesitancy about adding to long positions.

The window dressing is over and now the funds have to make those hard decisions about what to keep for their fiscal year end on October 31st and what to sell. Those decisions will start executing soon and I doubt we are going much higher without first seeing some profit taking. Option expiration is early this month, only ten trading days away. That means any positions including options will have to be closed quickly and that increases the likelihood of higher volatility over the next week.

The S&P first tested resistance at 1150 on August 21st and has failed on every attempt. This will be our line in the sand for October. A close over 1150 signifies a win by the bulls and shorts on the run. Critical support is 1120 and below that level the bulls turn into bears.

S&P-500 Chart

On the Dow we have resistance at 10,875 and initial support at 10,750. Critical support is 10,550. The Dow has been moving sideways in about a 75-point range since 10:AM the prior Friday and unable to put together back-to-back gains. The Dow lost -30 points for the week and it would have been a lot worse except for Friday's 41 point gain.

The Dow is going to be hostage to earnings with Alcoa reporting on Thursday. Big caps could be weak until we get some idea how the earnings are going to play out. They have been savings accounts for funds looking for liquidity for the last month and eventually funds will want that cash back to put into small caps for the year-end rally.

Dow Chart

The Nasdaq 100 (NDX) led the rally in September. The index lost 27 points last week as the momentum in Apple, Amazon and Priceline slowed. The NDX lost traction when fund managers quit throwing money into those big cap tech stocks. After a four-week rally we could easily see a decent decline in October. Semiconductor analysts continue to dump on the sector and the tone of the research reports is growing increasingly negative. Eventually traders are going to start taking them seriously. Support on the NDX is 1985 with nothing even close for backup. If 1985 breaks it could be a long drop.

The Nasdaq Composite actually hit 2400 at the open on Thursday but was knocked down faster than a dog with his paws on the dinner table. Friday's spike to 2389 was just as quickly rebuffed for a lower high. The composite index is holding at the highs a little better than the NDX simply because it has more stocks and is not quite so reactive to the declines in a few big caps. Still the daily whipping of the semiconductor and PC stocks is eventually going to force some profit taking. Initial support is 2350 followed by 2325.

Nasdaq 100 Chart

Nasdaq Composite Chart

There was a slight change in the Russell last week. It had lagged the other indexes in moving to a new multi-month high but finally succeeded. The Russell actually posted the best gains for any broad index last week with a +1.2% gain when most of the others were posting losses.

I struggled to understand why the Russell suddenly outperformed when the big cap indexes were stalling. I believe it was "because" the big caps were stalling that some money found its way into the small caps. I would not have bought Amazon or Apple last week on a bet and I believe some fund managers probably felt the same way going into quarter end. It does not take a lot of money to move a small cap stock so the amount of actual cash spent may have been minor. The real key here is going to be the Russell direction in October. The first two weeks would normally be negative followed by a rebound in the last two weeks. I will be watching the Russell closely to see if we can get an early read on sentiment as the month progresses.

Russell Chart

Last weekend I said I expected limited gains for the week and a decline in October. That is my same expectation for this week. I believe end of quarter retirement cash could keep the market afloat until Friday's payroll report but the following week could be ugly. I would love to see a decent bout of profit taking as funds shuffle their portfolios and I would view that decline as a buying opportunity.

Jim Brown

There is no greater pleasure than seeing your loved ones prosper.


Index Wrap

Stalled

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

In terms of the S&P and the Nasdaq, the recent stall and sideways move occurred at the technically important 66% retracement resistance. The Dow and the in favor big cap Nasdaq 100 (NDX) are exceptions, in that both indexes have closed in on their April tops, especially NDX.

The question now is whether there will be more of a pullback instead of merely a sideways 'time' correction. In either case, more sideways or a further dip, it makes sense to come out of index calls. Of course, this wouldn't keep you in if there's more upside in the near-term. It's not easy to predict where the trend goes from here, but the probability of a strong breakout move looks to be less than either more of a lateral trend or a pullback.

There are some bearish technical divergences in that prices are going sideways on 'less' relative strength; i.e., the 13-day RSI is drifting lower while prices go sideways.

A bearish divergence I haven't seen in some time with the Nasdaq 100 QQQQ tracking stock has been occurring with the On Balance Volume (OBV) indicator, which has been declining (since 9/21). Prices may be going sideways, but OBV has been falling as you'll see with its chart at bottom. Volume is a secondary indicator relative to price action, but it is important. A falling OBV here may suggest that some traders, and they may be some of the more savvy ones, are exiting the stock, taking advantage of exiting while prices are holding steady.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is mixed in its pattern. It's bullish in that SPX has cleared its prior highs. A cautionary note is suggested by the fact that the recent rally is stalled at the 66% retracement level. A 2/3rds retracement of a prior decline is a moment of truth so to speak. Rallies of this amount tend to either stall and prices pull back, or the index or stock goes on to challenge the prior high around 1220; i.e., the 100% retracement level. It's a very key retracement. SPX could of course correct with a further dip and then go on later to challenge its highs, but with options positions I have to be more concerned with the next couple of weeks rather than the next month or two.

I mentioned in my initial 'bottom line' comments that the RSI indicator is declining as prices go sideways. This isn't a technically 'strong' position for the bulls.

Bullish sentiment hasn't been extreme this past week, but there were some 'extreme', cautionary readings, before that. I'd rate this indicator mostly as neutral.

I've noted resistance on my daily SPX chart at 1148, then at 1173, extending to what may be a major 'supply' overhang beginning around 1182. Near support is still seen at 1120, with next key technical support around 1100-1105.

S&P 100 (OEX) INDEX; DAILY CHART

This in not always the case but I see the chart of the S&P 100 (OEX) chart in the same mixed manner as its big brother S&P 500.

The S&P 100 (OEX) is also mixed in its pattern. It's bullish in that OEX has cleared its June and August highs. A cautionary note is suggested by the fact that the recent rally is stalled at the 66% retracement level. A 2/3rds retracement of a prior decline tends to be a 'moment of truth'. Rallies of this amount tend to either stall and prices pull back, or the index or stock goes on to challenge the prior high at 553; i.e., the 100% retracement level. It's a very key retracement point. OEX could correct with a further dip and then go on later to challenge its highs, but with options positions I have to be more concerned with the next couple of weeks rather than the next 4-6 weeks.

As noted in my initial 'bottom line' comments, the RSI indicator is declining, as prices go sideways and not a technically 'strong' position for the bulls.

Immediate overhead resistance is at 522, the 66% retracement level, then at 532, extending to 537. Near support is unchanged from last week in my view, as the 508 area, with next support at 500.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Not surprisingly, the Dow (INDU) stalled this past week as previously strong component stocks AA, CAT, DD, HD, KFT, KO, PFE and UTX started slipping or stalled. Holding INDU up was some upside in BA, CHV, IBM. Sell offs were seen in HPQ, MRK, and TRV. Telecom stocks T and VZ continued sideways. A mixed bag in the 30 stocks, reflecting a somewhat mixed chart recently.

I didn't make a point of it on the chart, but the Dow hasn't yet been able to penetrate 10920, the (up) swing high of mid-May. I did note resistance in the 11000 area, extending to 11070, at the approximate upper end of INDU's uptrend channel.

Near support highlighted at 10625, at the 21-day average, extending to 10600. Next support and a pivotal one, is in the 10400 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

As with the S&P 500 and 100, the Nasdaq Composite (COMP) Index is stalled in the area representing ITS 66% retracement level. COMP has been a bit over the exact level, but hasn't achieved a decisive upside breakout above this implied/assumed resistance. While the chart is overall mixed at its stalled, temporarily or not, at the key (66%) retracement level, the chart is bullish in that the index decisively cleared its prior highs of June and early-August.

As with the other major indexes, COMP is going sideways, which the RSI indicator also doing the same. The S&P picture is more of a declining RSI.

Bullish sentiment hasn't been extreme this past week as you can see on that portion of the chart below, but there were some 'extreme', cautionary readings, before that. As with the S&P, I'd rate my sentiment indicator as mostly neutral.

Technical resistance is at 2400, extending to 2425. A substantial supply 'overhang' or simply supply is seen at 2470 and this is a further key resistance. A first support is noted (at the green up arrow) in the 2300 area, with next support estimated at 2250.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) is bullish as it is more or less holding the pivotal 2000 level. Unlike the S&P and the Nas Composite, NDX has retraced nearly its entire prior decline. The index is close enough to suggest it could at least retest its prior highs in the 2056-2059 area, although currently NDX is stalled and going sideways.

The RSI, a key indicator of momentum is declining which diverges from the lateral move of the past week; a pattern which suggests that a pullback may be in the offing. A pullback could carry back to 1950 support implied by its 21-day moving average. Conversely, NDX is close enough certainly to retest its 2056 and 2059 weekly highs seen in June of 2008 and April of this year. I would be surprised to see NDX clear these prior tops without some kind of further correction, either more of a sideways time correction, or a dip. Either type of correction would tend to 'throw off' its recent overbought condition.

I've noted 2042 as potential next resistance, at a rising trendline connecting and intersecting the area of numerous prior highs and of course at the 4/26 intraday high at 2059, the prior 2010 top.

Near support is highlighted at 1950 and the current NDX 21-day moving average, with next support noted at 1900.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

There's nothing much more to say about the Nasdaq 100 (QQQQ) tracking stock chart except to note its pivotal prior highs coming in around 50.5. The 50.5 area would be the key test of the prior top. Whether the Q's can get there without a pullback is the big question. On a more recent note, resistance has surfaced in the 47.75 area.

Repeating what I already noted in my initial bottom line comments: A bearish divergence I haven't seen in some time, has been occurring with the On Balance Volume (OBV) indicator, which has been falling for awhile (since 9/21). Prices may be going sideways, but OBV is falling off. Volume is a secondary indicator relative to price action, but it is important. A falling OBV here may suggest that some traders, and they may be some of the more savvy ones, are exiting the stock, taking advantage of exiting while prices are holding steady.

Near support: 48.0

Next support: 47.0

Near resistance: 47.75.

Next resistance: 50.5 - 50.65

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart is somewhat mixed technically although the index has cleared it prior June-July highs which is bullish. What makes the technical picture still somewhat 'mixed' is that RUT has yet to clear the key 685-693 resistance zone, representing the 62 and 66% retracements of its April to early-July decline. Decisive penetration of these retracements is what would suggest that RUT's 12-month highs in the 742-745 area could get retested.

Immediate support is at 670, than in the 650 area, at the 200-day RUT moving average; next support extends to 637.

Near resistance is at 685, extending to 693; next resistance is seen in the 720 area.



GOOD TRADING SUCCESS!


New Option Plays

Expecting Volatility

by James Brown

Click here to email James Brown

Editor's Note:
I'm filling in for Scott tonight. My market outlook for the fourth quarter is bullish but I suspect this overbought market will roll over in the next several days. Look for traders to buy the dip in the second half of October. - James

More Trading Ideas:
There were several stocks that caught my eye this weekend.

CERN - this could be a bullish candidate but I would look for a pull back toward $81.00.
DE - DE has formed a bearish three-candlestick reversal pattern on its weekly chart. Look for a failed rally near $70.00 as a bearish entry point. DE should have support near $65.
FSLR - FSLR has rallied toward resistance near $150. Aggressive traders might consider bearish positions. I'm thinking this might be a bullish trade on a bounce from $130 again.
PCLN - After a rally from $175 to $360 shares of PCLN appear to be running out of gas. It's a very aggressive, high-risk trade but readers could speculate on a correction with some out of the money puts.
WLL - This oil stock looks bullish as it consolidates under $98.00. I'm watching for a breakout over $98.00 or another bounce near $94.00 as possible entry points.


NEW DIRECTIONAL CALL PLAYS

Volatility Index - VIX - close: 22.50 change: -1.20 stop: 20.85

Target(s): 26.00, 29.50
Key Support/Resistance Areas: 21.00, 24.00, 28.00, 30.00
Current Gain/Loss: +0.0%
Time Frame: 2 to 3 weeks
New Positions: Yes

Company Description:
The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.

Why We Like It:
I really like Scott's play on the VXX. The market is very overbought with the huge rally off its August lows. Now upward momentum has stalled and we're about to move into earnings season after a very weak third quarter. Volatility is almost guaranteed. I think options on the VIX might offer an even better trade than the VXX. I'm suggesting bullish positions now. We'll plan on taking profits at $26.00 and at $29.50. I do consider this somewhat aggressive so consider keeping your positions small. Traders will also want to keep in mind that VIX options don't expire on the same schedule as normal equity options but it shouldn't matter since our time frame is only two to three weeks.

Suggested Position:
Buy the October $25.00 calls (VIX1020J25) current ask $1.80
(these expire on Oct. 20th)

Annotated Chart:

Entry on October 4th at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = n/a
Listed on October 2nd, 2010


NEW DIRECTIONAL PUT PLAYS

Alliant Techsystems - ATK - close: 73.73 change: -1.67 stop: 76.25

Target(s): 72.00, 70.50
Key Support/Resistance Areas: 76.00, 74.00, 72.00, 70.00
Current Gain/Loss: +0.0%
Time Frame: 1 to 2 weeks
New Positions: Yes

Company Description:
ATK is a premier aerospace and defense company with operations in 24 states, Puerto Rico and internationally, and revenues of approximately $4.8 billion (source: company press release or website)

Why We Like It:
The rally in this defense stock just failed at significant resistance near $76.00 and its simple 200-dma. Combine that with an overbought market that has seen its upward momentum stall and it looks like a good spot to speculate on some puts. Now the intermediate trend for ATK is still higher so we're only looking for a correction toward support. I'm suggesting bearish positions now. More cautious traders may want to wait for a little confirmation of Friday's bearish reversal pattern before initiating positions. I am targeting the 50-dma (currently $70.31).

Suggested Position:
Buy the November $70 puts (ATK1020W70) current ask $1.50

Weekly Annotated Chart:

Daily Annotated Chart:

Entry on October 4th at $ xx.xx
Earnings Date 11/11/10
Average Daily Volume = 310 thousand
Listed on October 2nd, 2010


Carbo Ceramics Inc. - CRR - close: 78.35 change: -2.65 stop: 80.25

Target(s): 74.25, 72.25
Key Support/Resistance Areas: 84.00, 82.00, 80.00, 78.00, 76.00, 74.00, etc.
Current Gain/Loss: +0.0%
Time Frame: 2 or 3 weeks
New Positions: Yes, see trigger

Company Description:
CARBO is the world's largest supplier of ceramic proppant for fracturing oil and gas wells; the provider of the world's most popular fracture simulation software; and a provider of fracture design and consulting services. The Company also provides a broad range of technologies for spill prevention, containment and countermeasures, along with geotechnical monitoring. (source: company press release or website)

Why We Like It:
10/02 (James): Oil service stocks have been surging on the strength in crude oil (oil has been moving on weakness in the dollar). Shares of CRR appeared to breakout from a consolidation pattern on September 28th but the rally reversed. Now shares are testing short-term support at $78.00 and the bottom of its previous trading range. The current failure also looks like a bearish double top pattern.

I am suggesting a trigger to open bearish positions at $77.75. If triggered we'll use a stop loss at $80.25. Our first target is $74.25. Our second target is $72.25.

Suggested Position:
Trigger @ 77.75

Buy the November $75 puts (CRR1020W75) current ask $3.10

Annotated Chart:

Entry on October 4th at $ xx.xx
Earnings Date 10/28/10 (confirmed)
Average Daily Volume = 226 thousand
Listed on October 2nd, 2010


In Play Updates and Reviews

Closing A Couple Early

by James Brown

Click here to email James Brown

Editor's Note:

I'm filling in for Scott tonight. We are closing our open positions and closing STEC and ADM a little early. Meanwhile, I believe the VXX and DIA plays have a lot of potential on a market pull back.

Current Portfolio:


CALL Play Updates

Petroleo Brasileiro - PBR - close 36.46 change +0.19 stop 33.70

Target(s): 37.40, 38.65
Key Support/Resistance Areas: 39.00, 37.50, 36.60, 34.00
Current Option Gain/Loss: +9.6%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/02 (James): PBR is holding up relatively well. While everyone was impressed with the size of the company's recent secondary offering many analysts were worried it would depress the stock going forward. So far those worries seem to be unfounded. I agree with Scott that the broader market is overdue for a correction and PBR will likely trade lower if the market does pull back. More conservative traders may want to consider a tighter stop loss (maybe closer to $35.00). PBR looks poised to move higher but given my expectation for a market dip I would keep bullish positions very small. The Nov. $37 call closed with a bid at $1.37 on Friday.

9/30: PBR gapped higher, sold off, and surged higher into the close as the broader market headed lower. The stock has now broken and closed above its primary downtrend line from its December highs and is above all of its moving averages. Today's rally off of the stock's lows is encouraging but I am concerned of a broader market correction. The remainder of my comments below remain the same.

9/29: PBR is hanging tough but I am concerned of a broader market pullback, which readers may want to consider as a buying opportunity. I believe our stop is in the right place but we may have to exhibit some patience if there is a pullback. Tighter stops could be considered in the $34.35 to $34.65 area.

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.

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

Annotated Chart:

Entry on September 25, 2010
Earnings 11/11/2010 (unconfirmed)
Average Daily Volume: 13 million
Listed on September 23, 2010


iPath S&P 500 VIX ST Futures - VXX - close 17.04 change -0.25 stop 16.23

Target(s): 17.55, 18.45, 19.25
Key Support/Resistance Areas: 17.50, 19.75, 20.60
Current Gain/Loss: -8%
Time Frame: 1 to 2 weeks
New positions: Yes

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.

10/02 (James): After September's huge gains in the stock market and a week of moving sideways, odds are pretty good the market will see a correction soon. That means the VXX has a lot of potential here. It is an aggressive trade but personally I would adjust the targets higher and plan to take profits near $18.75 and $19.90. FYI: The Nov. $18 call closed with a bid of $1.15.

9/30: As the market spiked higher this morning volatility never really budged which was a signal the spike could fail, and it did. The question now is whether or not there will be follow through lower in the coming days. I believe there will be but I also think trading could be choppy which may fake traders out of positions. If we are patient our targets should be reached as the market is need of healthy correction. I suggest readers use further spikes in VXX as opportunities to take profits or tighten stops to protect them. My primary targets are $18.45 and $19.25. Our stop is in place.

9/28: Volatility carried into this morning but reversed lower as the bulls stepped in pushing stocks back toward their highs. I want to add a target of $17.55 which should be considered as a place to take profits or tighten stops to protect them. We have a tight stop which will most likely get hit if the broader market continues higher in the coming days.

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

SPDR DJIA ETF - DIA - close 108.32 change +0.41 stop 110.55

Target(s): 106.55, 105.40
Key Support/Resistance Areas: 112.00, 110.00, 107.30, 106.40, 105.00
Current Gain/Loss: +5.7%

Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/02 (James): Upward momentum in the market has clearly stalled. Stocks have been trading sideways for a week. Thursday's action looks like a bearish reversal but Friday did not confirm the signal. Instead Friday produced an inside day. While I remain bearish here more cautious traders may want to look for a move under Thursday's low (107.47) before initiating positions. Personally, I would target a correction toward $105.25 but keep an eye on the rising 50-dma, which could be support (currently $104.81). FYI: The November $105 put closed with a bid of $1.85.

9/28: Stocks have been flowing into large caps and I believe they are due for a decline after the quarter ends which is Thursday. I also think the broader markets may see a false breakout tomorrow which will head fake late comers to the party into long positions. I suggest readers enter long positions if DIA trades to $108.85 (updated), which is near the highs DIA printed after the flash crash before the DJIA plunged more than -1,000 points. If triggered, our profit targets on options positions are +50% to +75%.

Current Position: Long November $105.00 PUT, entry was at $1.75.

Annotated Chart:

Entry on September 30, 2010
Earnings: N/A (unconfirmed)
Average Daily Volume: 6.5 million
Listed on September 25, 2010


PNC Financial - PNC - close 52.84 change +0.93 stop 54.62

Target(s): 49.50, 48.75, 47.25
Key Support/Resistance Areas: 54.50, 53.50, 50.50, 49.50, 48.75, 47.00
Current Gain/Loss: -18%
Time Frame: 1 to 2 weeks
new Positions: Yes

Comments:
10/02 (James): Financial stocks have been a drag on the market of late and the path of least resistance seems to be down. Yet Friday's action in PNC was uncomfortably bullish. Shares posted a +1.79% gain and closed above the simple 10-dma. I'm not saying we should panic yet but the relative strength is a warning sign. Look for short-term overhead resistance near $54.00. I would prefer to see a failed rally under $54.00 or a new close under $51.50 before launching new positions.

9/30: We are long November $48 PUTS as of today's open. We are looking for a $2 to $3 move lower in the stock. Our stop is above resistance in the $53 to $54 level. My comments below have not changed.

9/29: Financials continue to trade terrible and PNC looks ready for quick spike lower as the broader market pulls back. The stock has formed a bear flag over the past 5 days and is trading below its 20-day SMA. I suggest readers initiate short positions at current levels. The primary target is $48.75 which is a $3 move lower. If reached, the profit target on our option position is approximately +65%. I suggest keeping a loose initial stop on the position to account for volatility as the quarter winds down.

Current Position: Long November $48.00 PUT, entry was at $1.26

Annotated Chart:

Entry on September 30, 2010
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 5 million
Listed on September 29, 2010


Charles Schwab - SCHW - close 14.13 change +0.23 stop 14.42

Target(s): 13.45, 13.10, 12.85
Key Support/Resistance Areas: 14.10, 13.35, 13.05, 12.65
Current Gain: -50%
Time Frame: 1 to 3 weeks
New Positions: Maybe

Comments:
10/02 (James): I am somewhat surprised by the strength in shares of SCHW the last few days. I use the term strength somewhat loosely but you can see a trend of higher lows. Thus far the stock has been unable to breakout past technical resistance at its 50-dma. The third quarter has seen terribly low trading volumes and investors have been pulling money out of stock funds for weeks. It should not be a good quarter for the likes of SCHW so odds favor this oversold bounce in the stock rolling over. Personally, I would consider giving SCHW a little bit more room and placing the stop loss above $14.50 (maybe $14.51 or $14.55). I would prefer to see a drop or a close under $13.80 before launching new positions.

9/29: SCHW backed off of its 50-day SMA and closed down -1.70% on the day. The stock now needs break down through its 20-day SMA which should catapult the stock towards our first target. If the broader market corrects it should easily happen. There were also more than 5,000 March 2011 puts purchased at the $13 strike today so it appears someone with deep pockets thinks the stock is due for a decline. We just need it to happen sooner rather than later.

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 BULLISH PLAYS

STEC, Inc. - STEC - close 12.31 change -0.14 stop 12.05

Target(s): 14.15, 14.65
Key Support/Resistance Areas: 14.80, 14.15, 13.45, 12.15
Current Gain/Loss: -45%
Time Frame: 1 to 2 weeks
New Positions: no

Comments:
10/02 (James): STEC continues to look weak. I am suggesting we go ahead and cut our losses now so we can look for new positions elsewhere. Readers may want to keep STEC on their watch list for a new test or bounce from support near $11.00.

Closed Early: We were Long November $14.00 calls, entry: $0.96
Exit: $0.52 (-45.8%)

Annotated Chart:

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


CLOSED BEARISH PLAYS

Archer Daniels Midland - ADM - close 31.92 change -0.00 stop 33.20

Target(s): 32.20 (hit), 31.50, 31.00
Key Support/Resistance Areas: 33.50, 31.00, 29.80
Current Gain/Loss: depends on your exit, see below
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/02 (James): ADM tagged our second target at $31.50 on Friday. Shares dipped to $31.36 but managed to rebound back to unchanged by the closing bell. If you did not take profits midday on the decline I am suggesting we go ahead and close positions now. The sharp rebound intraday is worrisome and while I'm not convinced the correction in ADM is over we don't want to hold puts on it at the moment. More aggressive traders may want to ignore this suggestion and aim for the $31.00 level or the rising 50-dma.

The October $32 put was trading near $1.00 when it hit our second target at $31.50 (option @ $1.00 (+21.9%)). However, it closed with a bid at $0.78 (-4.8%).

Closed 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