Option Investor
Newsletter

Daily Newsletter, Wednesday, 10/6/2010

Table of Contents

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

Market Wrap

ADP Employment Report Disappoints

by James Brown

Click here to email James Brown

Market Stats

It looked like Tuesday's market rally might continue this morning until a disappointing ADP report on jobs suddenly soured the mood. The monthly report from private payroll company ADP Employer Services showed an unexpected decline of -39,000 jobs. That sparked some profit taking but overall the S&P 500 traded in a narrow seven-point range. The NASDAQ was not so lucky and some of the high-flying technology stocks were hit with solid losses. A few stocks giving up gains were: Amazon.com (AMZN -3.4%), F5 Networks (FFIV -12.5%), Priceline.com (PCLN -3.5%), Citrix Systems Inc. (CTXS -14%), Netflix (NFLX -3.7%), Baidu Inc. (BIDU) -4.1%), etc.

There was another rush into the perceived safety of bonds and the bond market rallied to another relative high. Yields move opposite of price and the yield on the 10-year U.S. treasury fell to 2.399%, its lowest level since January 2009. Meanwhile the 2-year, 3-year, 5-year, and 7-year U.S. bond yields all set new all-time record lows. The 2-year yield slipped to 0.38%. At the same time the U.S. dollar continued its plummet lower and settled with a new eight-month low thanks to the euro. The dollar settled at $1.3935 against the euro for a -0.7% decline. The dollar also set another 15-year low against the Japanese yen with a -0.4% drop to 82.92 yen.

Chart of the FXE euro ETF:

Chart of the UUP (U.S.dollar) ETF:

This dollar weakness and expectations for massive government quantitative easing is lifting commodities. It's a familiar story. The dollar sinks to another new relative low and metals hit new highs. Gold futures surged to $1,351 an ounce intraday. Gold settled with a +$7.40 gain at $1,347 following yesterday's +$25 rally. These are new all-time highs for gold and many are forecasting a rise toward $1,400 an ounce. So far gold futures are up +22% for the year. Silver is also seeing strength with another +1.9% gain and a 30-year high at $23.17 an ounce. Copper rallied +0.7% to close at $3.753 a pound. This is a new 27-month high for copper prices. Crude oil continues to rally on dollar weakness even though the oil inventory report this morning was bearish. The Energy Department released their weekly inventory numbers and our oil inventories rose +3.09 million barrels to 360.9 million. Economists were only expecting a +413,000 barrel increase. Inventories remain +13% higher than our five-year average. A week ago this report showed strong fuel consumption. Today's report said fuel consumption plunged -6.4% to 18.5 million barrels. That's the biggest weekly drop in consumption in over five years. Crude oil prices rose +0.5% to $83.23 a barrel.

Chart of the GLD gold ETF:

Chart of the SLV silver ETF:

Overseas the Asian markets reacted favorably to Wall Street's rally on Tuesday. The Hong Kong Hang Seng index gained +1% to settle at a new 2010 high on strong volume. The Chinese Shanghai index rallied +1.7%. Yesterday the Japanese market surged on the Bank of Japan's new quantitative easing program that included the possibility of government purchases of ETFs. The short covering in Japan continued today and the NIKKEI index rose +1.8% to close at a two-month high. However, gains were somewhat limited by strength in the yen as the dollar sank to a new 15-year low against Japan's currency (making Japanese exports more expensive here in the states).

European markets also showed widespread strength. News that Fitch had downgraded Ireland's debt from AA- to A+ was not enough to stymie the rally. The English FTSE index rose +0.8% while the German DAX and French CAC-40 both rose +0.88%. Analysts seem to be growing more positive that central banks will do whatever is necessary to prevent a double-dip recession. Yet the IMF has a more somber outlook for the U.S.

Based in Washington D.C. the IMF includes 187 member nations and the organization updated their worldwide growth forecasts ahead of their October meeting. The IMF now expects global growth of +4.8% in 2010 and +4.2% in 2011. That is a +0.2% improvement in their 2010 forecast from July. Unfortunately the outlook for the more developed Western nations is dimming. The IMF lowered their forecast on U.S. growth from +3.3% to +2.6% for 2010. Their 2011 estimate is +2.3% growth in the U.S. The 16-nation euro zone is expected to see +1.7% growth in 2010 and +1.5% growth in 2011. Meanwhile China is expected to grow +10.5% this year and +9.6% the next. The IMF expects Brazil to see +7.5% growth in 2010 but a drop to +4.1% in 2011.

The IMF also offered some gloomy forecasts for the real estate market. The institution warned that it could take up to eight years before the real estate market recovered and the market faces a strong risk of seeing a double-dip in prices. On a happier note the Mortgage Bankers Association said they saw a +9.3% increase in mortgage applications to buy a home. Applications for refinancing fell -2.5%. The interest rate on a 30-year fixed mortgage fell to another new all-time low of 4.25%.

Earnings results are starting to trickle in but the big report today was the ADP employment data, a precursor to the government's non-farm payroll data due out on Friday. Economists were expecting the ADP report to show +18,000 new jobs. Sadly, ADP said private businesses cut 39,000 jobs. This was the first decline since January 2010. Automatic Data Processing's report is based on data collected from 340,000 private businesses and should offer some insight into the government's private job creation number. In a separate report the firm Challenger, Gray and Christmas said larger employers planned on 37,151 layoffs in September. That's a +7% jump from the 10-year low set in August. After seeing the ADP numbers it creates a worry that without job improvement the consumer will cocoon themselves at home and pull back on spending, which accounts for nearly 70% of the U.S. economy.

We did see some M&A headlines this morning. JNJ and GE are making acquisitions. Johnson & Johnson (JNJ) announced they would by Dutch biotech firm Crucell NV for $2.41 billion. JNJ already owned a 17.9% stake in the company. Today's acquisition strengthens JNJ's footprint in the vaccine market. General Electric (GE) actually rallied on news it was buying oilfield-equipment manufacturer Dresser Inc. for $3 billion. Dresser Inc. has annual revenues in the neighborhood of $2 billion. In the last five years GE has doubled its energy-related business and the company says that today's deal will add to earnings next year. GE is also making deals in the financial arena with the company announcing it purchased $1.6 billion worth of retail credit card debt from Citigroup Inc. (C).

The Q3 earnings season is about to start and we're starting to see some early announcers and so far most of the headlines have been bad. Last night after the closing bell Equinix (EQIX), a data center operator, issued a warning that its Q3 revenues would fall in the $328-330 million range. Analysts were expecting $336.7 million for the quarter. The news garnered several downgrades and the stock gapped open and closed with a -33% loss. Another disappointment was agriculture name Monsanto (MON) with a three-cent earnings miss. Before the bell this morning MON reported earnings with a 9-cent loss on revenues of $1.95 billion. Wall Street was expecting a loss of 6 cents on revenues of $1.82 billion. MON's management issued downside guidance for 2011 and yet the stock actually managed to post a gain on the session (+0.2%). Of course shares of MON were down sharply in late September so the bad news may have already been baked in.

Wholesaler Costco (COST) also reported earnings this morning. Management delivered a profit of 97 cents a share on revenues of $24.13 billion. The profit was 2 cents better than expected but revenues missed Wall Street's estimates of $24.22 billion. Same-store sales were up +6%. Shares of COST gapped open lower near $63 but managed to rebound back into positive territory and close at a new two-year high over $65.00.

After the closing bell tonight Immucor Inc. (BLUD) reported earnings of 30 cents a share on revenues of $83.6 million. The profit was in-line with estimates and revenues were close to consensus estimates of $85 million. Unfortunately for shareholders the company has warned that 2011 earnings would fall in the $1.08-1.18 range compared to Wall Street's estimates of $1.28. During the regular session BLUD had rallied +0.6% to a new three-month high of $20.44 but after hours BLUD is down -17.5% near $16.85 a share.

Thursday morning Dow-component and the country's largest aluminum producer Alcoa (AA) will officially kick off the Q3 earnings season. The company has a tendency to miss the estimate and currently Wall Street expects a profit of 6-cents a share. Maybe this time, with the rise in commodities, AA can avoid an earnings miss. Thursday morning will also bring out the September same-store sales figures for dozens of major retailers across the country. We'll also get last week's initial jobless claims. Economists are expecting initial claims to come in at 455,000.

The big event this week is Friday's jobs report. Currently economists are estimating September job growth or job losses in the -8,000 to -0 (zero) compared to the -54,000 in August. After looking at the ADP numbers today you might think that we're setting up for a big miss in the jobs number. Yet the September jobs data failed to see any serious market sell-off. This time any big decline (which will hopefully see the final layoffs of the summer census workers), could be the silver lining that might guarantee more stimulus (and/or quantitative easing) by the Federal Reserve. Analysts are also expecting the unemployment rate to tick higher from 9.6% to 9.7%.

Let's take a look at the major indices. It would be easy to say the markets are overbought with the rally from its late August lows. However after almost two weeks of churning sideways there is a chance yesterday's short covering inspired rally could continue. I would much rather see a correction over the next couple of weeks because it would set up for a nice entry point into a fourth-quarter rally following the midterm elections. Unfortunately what we want and what we get are often to very different things. Mutual funds are facing their fiscal year end on October 31st and with the stock market at multi-month highs these funds may feel compelled to chase stocks higher. That's not a strategy I would recommend but it is something we could see. I'm still hoping we'll see a correction as traders react to Q3 earnings news.

The S&P 500's breakout over 1150 is bullish and now broken resistance should be short-term support. If 1150 fails then the S&P 500 should find additional support at 1130 and 1120. Overhead I'm looking for resistance near the mid May highs around 1173.

Chart of the S&P 500 index:

Some of the NASDAQ leaders were hammered today but the composite index only suffered a -0.79% decline. Currently resistance near the 2400 level is holding. A breakout here could spark a quick rally toward the 2450 area. If we see a correction then look for support near 2300 and its simple 200-dma.

Chart of the NASDAQ index:

The small cap Russell 2000 index continues to climb and hit new four-month highs on Tuesday. The small caps have slowly been chewing through resistance level after resistance level. This index is still overbought but if the mood stays bullish I would expect corrections to be shallow. Broken resistance near 670 could be support. I would look for some resistance near the 700 mark and the mid-May highs near 720.

Chart of the Russell 2000 index:

I always like to keep an eye on the SOX semiconductor index. Thus far I'm not seeing a lot of change. The SOX Is consolidating sideways under its 200-dma and still has a bearish trend of lower highs but a close over 355 might inspire the bulls. We also want to watch the transports and the Dow Jones Transportation index has broken out over resistance in the 4500-4550 zone. This index also looks overbought but traders have been buying the dips in the transport sector for the past couple of weeks. Continued strength in the transports is bullish for the wider market. The banks continue to be under performers but that could change. The BKX banking index looks ready to breakout past resistance near the 48 level. The BIX banking index is still lagging and both still have a bearish trend of lower highs. Readers may want to focus on the XLF financial ETF instead and wait for a close over the $15.10 mark to signal a new higher high and a breakout over resistance.

Chart of the XLF financials ETF:

I don't want to sound like a broken record here but not much has changed. The trend is still up and we're still looking to buy a dip. I am repeating myself but the best case scenario would be an earnings-inspired correction in the next two weeks that ends in the second half of October. We see the market bounce from significant support offering a lower-risk entry point to buy the dip and set our stop losses. Then ride the rebound higher through the elections and into November. That may not happen. As I said earlier with stocks pushing higher there could be pressure on fund managers to chase the market ahead of their fiscal yearend.

We also have to keep in mind that the economic data has been mixed and the jobs picture is not improving. While talk of a double-dip recession has faded there are still risks for this economy and plenty of investors and analysts are concerned. The infamous Dr. Doom, Mr. Roubini, is still grabbing headlines and claims we have a 40% chance of a double-dip recession. Naturally I assume he has a bearish bias to keep up his reputation but I thought he did have an interesting outlook. Mr. Roubini claims we don't have to have another meltdown, Lehman Brothers type of disaster to spark the next wave down. Instead we (the economy and the market) could die the death of a 1,000 cuts as the labor market fails to improve and real estate continues to fade and conditions in Europe (think Greece, Ireland, Spain) start to stall again.

Overall I remain optimistic for the next couple of months but we need to wait for an entry point and wait to see what corporate America has to say about the Q3 earnings season and their guidance as they look forward. Two weeks from now we may have to adjust our outlook on the market and the economy.

-James


New Option Plays

Investors Are Running For The Exits

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL PUT PLAYS

Isilon Systems, Inc - ISLN - close 23.88 change -2.00 stop NONE

Company Description:
Isilon Systems, Inc.(Isilon Systems) is engaged in providing scale-out Network Attached Storage (NAS) systems, combining the Company's OneFS operating system software and clustered architecture for file based data, including video, audio, digital images, computer models, portable document format (PDF) files, scanned images, reference information, test and simulation data and other file-based information. The Company sells its products directly through its field sales force and indirectly through a channel partner program that includes more than 210 resellers and distributors.

Target(s): 21.50, 20.50, 19.25
Key Support/Resistance Areas: 26.35, 25.00, 21.40, 20.40, 19.00
Time Frame: 1 to 2 weeks

Why We Like It:
ISLN, along with many other data networking stocks, has surged over the past 3 months on takeover speculation. Stocks in this sector are trading at ridiculously high multiples and are massively over inflated. Earnings are starting to be released and as investors begin to realize they bought on hope, they are running for the exits. The trade started to unwind today and I do not believe this is a one day event. Let's use a bounce to $24.10 or a breakdown to $22.95 to enter short positions. I have chosen a further out of the money option than normal to limit losses if we are wrong. Let's enter the position with no stop initially to account for volatility. If I were to place a stop $25.25 is a logical area. If the market finally has a meaningful correction ISLN could get hit hard.

Trigger: $24.10 or $22.95

Suggested Position: Buy November $20.00 PUT, current ask $0.75

Annotated chart:

Entry on October xx
Earnings: 10/21/2010 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on October 6, 2010


In Play Updates and Reviews

Important Data To Be Released Friday

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Good evening. Friday's employment report has the potential to be the catalyst for a continued move higher or the healthy correction we have all been waiting for. I think the latter will occur unless the number blows away expectations which certainly must be considered. There will be a lot position jockeying prior to the report. If you are not comfortable holding positions they must be closed tomorrow before the bell, otherwise you could wake up to big gap on Friday morning. Please email me with any questions/comments. Current Portfolio:


CALL Play Updates

Dresser-Rand Group - DRC - close 37.34 change -0.12 stop 36.15

Target(s): 39.00, 39.95, 41.40
Key Support/Resistance Areas: 42.00, 40.00, 39.15, 37.50, 36.30
Current Gain/Loss: -7%
Time Frame: 2 to 3 weeks
New Positions: Yes

Comments:
10/6: DRC surged higher at the open today but the bounce was sold into. The stock remains above its rising 50-day SMA, however, if the market corrects we have a tight stop to keep losses under control. My comments below remain valid.

10/5: DRC has been in a bullish uptrend since its lows in the fall of 2008. The stock is now finding support at its 50-day SMA and looks poised to test its highs from 2007. We have a good reference point to place a stop below yesterday's lows at $36.15. Currently, the primary target is $39.95 which should produce a profit of +90% on options positions.

Current Position: Long November $40.00 CALL, entry was at $0.70

Entry on October 6, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 570,000
Listed on October 5, 2010


Petroleo Brasileiro - PBR - close 35.09 change -1.62 stop 33.70

Target(s): 37.40, 38.65
Key Support/Resistance Areas: 39.00, 37.50, 36.60, 34.00
Current Gain/Loss: -36%
Time Frame: 1 to 2 weeks
New Positions: Only with tight stops

Comments:
10/6: PBR was the recipient of a downgrade this morning from Barclays to Equal Weight from Overweight. This sent PBR down -4.4% today and we have gone from a winning position to a losing position. Readers may want to consider exiting positions to preserve capital, especially considering the overbought conditions in the broader market as a pullback will likely put even more pressure on the stock. PBR has solid support at $34.00 but that is -$1 lower than current levels. Our stop is below this level at $33.70.

10/5: PBR experienced a wave of selling early today but recovered nicely. The stock continues drifting higher and I am expecting the first target to be reached, perhaps tomorrow or Thursday. I suggest taking profits or tightening stops to protect them at $37.40.

10/4: All things considered, PBR held up well today as the market sold off. The stock is hanging on to an intraday upward trend line that began last Monday, however, if a broader market correction gains momentum PBR will most likely head lower. I would view dips as buying opportunities. The comments below remain valid.

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

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


Visa, Inc. - V - close 74.23 change -0.75 stop 67.40

Target(s): 74.90, 76.90, 79.40
Key Support/Resistance Areas: 79.80, 77.50, 75.00, 70.50, 68.00
Time Frame: 3 to 5 weeks

Comments:
10/6 & 10/5: Nimble traders may want to consider entering long positions on a breakout over today's highs. I would prefer to enter long positions on a pullback to at least V's 100-day SMA (currently $73.04). Let's raise our trigger to enter long positions to $73.25 which will also fill today's gap higher.

10/4: V was taken out to the woodshed after FinReg and a Department of Justice anti-trust suit. The company, along with MasterCard, announced a non-monetary settlement has been made with the DOJ today which puts this issue behind them. There has been many analysts/brokerages defend the stock in recent weeks and I think V is on the verge of running higher into the company's earnings report on 10/27. Technically, the stock has made a higher high and closed above its 50-day and rising 20-day SMA. I would like to see V pullback a little more with the broader market and use $71.80 as our trigger to enter long positions. If triggered, our first two targets are estimated to produce +80% and +130% gains. This is a good addition to our model portfolio and will also provide more balance as we are currently firmly biased to the short side.

Suggested Position: Buy November $75.00 CALL, current ask $2.85, estimated ask at entry $1.90

Entry on October XX
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 6.8 million
Listed on October 4, 2010


Volatility Index - VIX - close 21.76 change -1.77 stop 20.70 *NEW*

Target(s): 24.00, 26.00, 27.25
Key Support/Resistance Areas: 21.00, 24.00, 28.00, 30.00
Current Gain/Loss: -55%
Time Frame: 2 to 3 weeks
New positions: Yes

Comments:
10/6: Our new position in VIX has not worked so we need to adjust as time decay is really affecting premiums. I've added a lower target which should get our position closer to break-even and have also lowered the stop 15 cents to 20.70 which is just below the swing low on 9/14. I suggest readers use any surges in VIX to tighten stops or close positions.

10/5: A surprise shift in monetary policy suggesting significant quantitative easing by the Bank of Japan caused volatility to collapse today. This provides more liquidity in the market and traders are feeling more and more comfortable buying stocks. If there is follow through tomorrow there is a good chance we will be stopped out of the position.

10/2 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.

Current Position: Long October $25.00 CALL, entry was at $1.80

Entry on October 4, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: N/A
Listed on October 2, 2010


PUT Play Updates

Alliant Techsystems - ATK - close 74.25 change -0.20 stop 76.25

Target(s): 72.25, 71.25, 70.50
Key Support/Resistance Areas: 76.00, 74.00, 72.00, 71.25, 70.00
Current Gain/Loss: -17%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

Comments:
10/6: I see no change from the comments below. ATK traded in tight range today. We are looking for a move down towards the stock's 50-day SMA.

10/5: ATK reversed yesterday's losses and then some as the stock surged +3.13%. Yesterday's gain is now a loss and readers should use caution.

10/4: ATK's slide continued today as the stock broke through its 20-day SMA. There is support near $71.00 so I have added $71.25 as a target. Protecting profits is key here as we already have a nice profit in the trade.

10/2: 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).

Current Position: Long November $70.00 PUT, entry was at $1.45

Entry on October 4, 2010
Earnings: 11/11/2010 (unconfirmed)
Average Daily Volume: 310,000
Listed on October 2, 2010


SPDR DJIA ETF - DIA - close 109.77 change +0.37 stop 110.55

Target(s): 107.25, 106.55, 105.40
Key Support/Resistance Areas: 112.00, 110.00, 107.30, 106.40, 105.00
Current Gain/Loss: -24%

Time Frame: 1 to 3 weeks
New Positions: Yes, with tight stops

Comments:
10/6 & 10/5: DIA has resistance at $110.00. Our stop is $110.55. I still like the short set-up with a tight stop. However, the massive amount of quantitative easing being announced in recent weeks from various countries (US, China, UK, and now Japan to name a few) will/is providing liquidity to the market and investors are beginning to feel more comfortable buying equities. DIA will correct but I am concerned of another push higher first, perhaps up to its YTD highs. I suggest using caution and honoring stops if we are taken out.

10/4: DIA took out last weeks lows and looks like it is headed lower. My primary target is $105.40 but taking profits or tightening stops on any further weakness should also be considered. The 20-day SMA is just below which may provide a bounce.

10/02: 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.

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

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


PNC Financial - PNC - close 53.78 change +0.30 stop 54.92

Target(s): 51.05, 49.50, 48.75
Key Support/Resistance Areas: 54.50, 53.50, 50.50, 49.50, 48.75, 47.00
Current Gain/Loss: -40%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

Comments:
10/: Nothing has changed in my comments below. PNC is at resistance and this is a logical spot for the stock to turn lower. New positions with tight stops at this level makes a lot of sense to me.

10/5: PNC has been consolidating below its 20-day SMA for the past 2 weeks but the stock closed above it today. There is resistance at current levels up to $54.00. I want to raise the stop to $54.92 to account for the declining 50-day SMA and a trend line.

10/4: PNC reversed off of its declining 20-day SMA today and looks to be headed lower if the broader market correction continues. The comments from the weekend remain valid.

10/02: 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.

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

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


CLOSED BULLISH PLAYS

iPath S&P 500 VIX ST Futures - VXX - close 16.24 change -0.19 stop 16.23

Target(s): 17.55, 18.45, 19.25
Key Support/Resistance Areas: 17.50, 19.75, 20.60
Final Gain/Loss: -28%
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.

10/6: We were taken of VXX by a few pennies in early trading so we are flat the position for a loss. The good news is our loss was kept under control. On Monday positions in volatility looked promising but yesterday's announcement by the BOJ put a wrinkle in the plan. Personally, I still like buying VXX at these depressed levels and selling on spikes. You just need to have your sell order placed and be prepared to closed positions.

10/5: A surprise shift in monetary policy suggesting significant quantitative easing by the Bank of Japan caused volatility to collapse today. This provides more liquidity in the market and traders are feeling more and more comfortable buying stocks. If there is follow through tomorrow we will likely be stopped out of the position.

10/4: VXX is moving in our direction as the market sold off today. I suggest picking your exit and sticking with it. My primary targets are $18.45 and $19.25. If a market correction gains momentum VXX may surge higher than these targets, but tightening stops and protecting profits at these levels is suggested. Our comments below remain valid.

10/02: 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.

Closed Position: Long November $18.00 CALL at $0.90, 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


CLOSED BEARISH PLAYS

Carbo Ceramics - CRR - close 80.04 change +0.60 stop 80.25

Target(s): 75.75, 74.25, 72.25
Key Support/Resistance Areas: 84.00, 82.00, 80.00, 78.00, 76.00, 74.00
Final Gain/Loss: -35.4%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
10/6: CRR surged higher at the open today and our stop was hit. Monday's break down lower was a huge head fake as the stock has gained nearly +5% since the dip. We kept a tight leash on the trade to control the loss.

10/5: CRR has resistance just overhead but if the broader market follows through higher in the coming days our stop will likely get hit. Readers should use caution.

10/4: CRR hit our trigger to buy puts at the open this morning. The stock is approaching support with an upward trend line and its 100-day SMA converging. As such, I want to add a target of $75.75. Taking profits or tightening stops to protect them is suggested at the first target.

10/02: 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.

Closed Position: Long November $75.00 PUT at $2.00, entry was at $3.10

Annotated Chart:

Entry on October 4, 2010
Earnings: 10/28/2010 (unconfirmed)
Average Daily Volume: 226,000
Listed on October 2, 2010