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Newsletter

Daily Newsletter, Saturday, 10/9/2010

Table of Contents

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

Market Wrap

Lost Decade

by Jim Brown

Click here to email Jim Brown

The Dow struggled but managed to close over 11,000 on Friday. The first time the Dow closed at this level was May 3rd 1999.

Market Statistics

More than a decade has passed since the Dow first traded at this level and millions of investors have given up on the market over the years. Fidelity just completed an investor survey and 55% of respondents said ANY gain in their positions this year would be viewed as positive. More than 23% said they would be thrilled just to breakeven. More than 20% have pulled out of the market and gone to cash. Over 57% said they lack confidence to make accurate decisions in the current market. Forty percent said they were looking for ways to lower risks.

Their biggest fears about the year ahead were economic problems (31%), unemployment (28%) and year-end tax increases (15%). Fidelity said volatility had doubled since 2008. The number of days with a better than 100 point range on the Dow had gone from an average of one per week in 2008 to two per week today. We have been talking for years about Japan's lost decade but the U.S. just experienced one as well.

Fortunately moving over 11,000 on the Dow will help bring investors back into the market. Investor flight is a critical problem today. There have been fund flows out of the equity mutual funds every week since the May 6th flash crash. Investor confidence is broken and seeing the markets move back over the 11,000 level should help restore that confidence. In the Fidelity survey investors who fled to cash said they wanted to see six months of market stability before moving back into equities. Their average account value had shrunk -21% in the last two years. For the 74 million baby boomers who will be retiring soon that was a major hit. They spent decades building up their accounts only to see a 21% drop just a couple years before retirement. That is traumatic for people counting the weeks until they walk out the employer's door for the last time.

One economist said the U.S. economy was in a negative feedback loop. Employers don't want to hire or expand because of the weak economy. Consumers are not spending because of employment fears. The weekly economic reports reinforce those fears on everyone and force a continuation of the loop.

Friday was a prime example of those problems. The NonFarm Payrolls showed a headline loss of -95,000 jobs when almost everyone was expecting a minor gain. This was the largest loss of jobs in three months. July and August were revised lower by a total of 15,000 jobs. The preliminary benchmark revision for the prior 12-month period was an additional loss of -366,000 jobs.

Seeing a job loss number in the headlines is depressing to consumer sentiment as well as investor sentiment and dims corporate expansion plans. Corporations, like individuals want to see several months of improvement before they take on new obligations. For a corporation to add a $50,000 per year salaried employee it costs them over $90,000 in salary, taxes and benefits. Once the government healthcare program kicks in that number will be over $100,000 per year. Corporations are thinking hard before they add employees in this environment.

The government was the biggest drag on employment last month with 159,000 job losses compared with a +64,000 gain in private payrolls. Private job creation declined slightly in Q3 to +274,000 from +353,000 in Q2. That trend is heading in the wrong direction. Federal payrolls declined -76,000 while state and local governments cut 83,000 jobs. I have mentioned many times about the serious budget shortfalls at the local government level. Property values are down, which leads to lower taxes. Payrolls are down leading to lower income taxes and unemployment taxes. Sales are down and sales tax revenue is shrinking. States can't just throw on a new tax or sell another $10 billion in treasuries to fund the deficit. They are forced to cut employees and services and that reinforces the negative feedback loop.

The unemployment rate was unchanged at 9.6% but the U6 unemployment rose to 17.1% and the highest since last December. The U6 number includes those without jobs and those who are working part time to pay the bills while searching for a job in their field. That means engineers, accountants and bankers are waiting tables or stocking shelves at Wal-Mart until a job appears. Instead of employment improving it is still getting worse. Those out of work for more than six months were 41.7% of the total. Those out of work for less than a month rose to 19.1% and again that trend is moving in the wrong direction.

Not shown in these employment numbers are the 250,000 workers in 37 states that lost their jobs on October 2nd. The jobs were part of the $5 billion in stimulus for the Temporary Assistance for Needy Families program. Tens of thousands of these workers lost their jobs when the program ended on October 1st. The exact count is unknown because each of the 37 states configured the programs differently but many states told the workers not to show up for work beginning on October 2nd. These layoffs were not included in the September payroll report because the program conveniently ended a couple days after the survey period for the last jobs report before the elections. The TANF was only one of the stimulus programs ending on October 2nd. Also ending was a $2 billion subsidized childcare program and a $2.1 billion boost for Head Start. Jobs will be lost from both of those programs as well.

The Job Openings and Labor Turnover report earlier this week showed there were more job openings but fewer actual hires. Employers are dragging their feet on filling those positions until they see what is going to happen to the economy and in the election. The outcome of the election will have a dramatic impact on the costs of doing business, adhering to new regulations and adding employees. I believe they are waiting to judge the post election business climate before committing to new employees.

Payroll Chart

The markets were trapped between two ideas after the payroll report on Friday. On one hand investors were worried that weaker than expected job creation meant the economy was barely crawling forward and there was still risk of continued economic weakness. On the other hand the weak jobs seemed to indicate the Fed would step up plans for a new round of quantitative easing. That would push the dollar lower and stocks higher. In their best "don't fight the Fed" style traders bought the dip and the market moved higher.

That was a real test of faith because early Friday morning St Louis Fed President James Bullard dampened expectations when he said "policymakers could wait until December if they felt the need for greater clarity on the economic outlook." Also, "this upcoming FOMC meeting is going to be a tough call, because the economy has slowed but it hasn't slowed so much that it's an obvious case to do something." However he also said, "It does not seem like inflation is going to hit our target unless we take further action."

Dallas Fed President Richard Fisher cautioned about assuming the Fed would enact QE2. "The markets have drawn too quick a conclusion that this is a likely event. If it is to occur it will only occur after thoughtful discussion." He also warned that is is not clear if the benefits of further quantitative easing outweigh the costs.

The markets have clearly priced in a move at the November 3rd FOMC meeting but Fed heads are going out of their way to caution against considering it a done deal. This growing wave of caution could weigh on the markets for the rest of the month. If they don't move in November it would most certainly depress the markets because the dollar would rebound sharply and depress commodities and stocks. They would have to say the economy had taken a strong upside recovery in order to prevent a negative market reaction to a lack of Fed action.

In other economic news Wholesale Trade in August rose by a stronger than expected +0.8% but lower than the prior months +1.3% rate. This is a lagging report and we already knew that August saw a deceleration in the economy. The report was ignored.

Next week has a thin economic calendar. Monday is a government holiday and the bond markets are closed but the stock market will be open. Tuesday is the most critical day of the week with the FOMC minutes of the meeting that suggested a new quantitative easing program may be headed our way. Those minutes will be critical.

Thursday and Friday have the Price Index reports that show how much inflation is in the current economy. Since inflation is close to zero in all but the commodity space these reports will have little value.

Economic Calendar

The focus next week will shift to Q3 earnings as Intel, JP Morgan, Google and GE headline the earnings calendar. Intel on Tuesday will be critical since the chip sector has been receiving almost daily downgrades due to lower than projected PC sales. If Intel lowers guidance again on Wednesday could be a bad day for the markets. Despite the highlighted stocks below there is really very little earnings activity next week. That will produce a more volatile reaction because of the fewer reports. The following week there are hundreds of stocks reporting.

Earnings Calendar

Casino stocks won on Friday after the Nevada Gaming commission reported that revenues in Nevada jumped +11.5% in August and casinos on the strip saw revenues spike +21% on increased betting on table games. High dollar gaming activity rose the most with bets on baccarat jumping +87%. The commission also reported the slide in slot machine traffic continued but the decline has slowed. The casino stocks exploded higher with MGM gaining +16%, BYD +10%, WYNN +5% and LVS +4%.

Fertilizer stocks also won big after the USDA cut their estimates on corn production for the second time this year. The USDA lowered the expected yield per acre to 156 bushels from 162.5 bushels. To put this in perspective Iowa farmers produced an average of 182 bushels per acre in 2009.

Corn prices limited up on the news along with wheat and soybeans. The decline in yields was attributed to the weather and to the lower use of fertilizer to save money during the recession. The news caused the fertilizer stocks to surge higher along with companies like CAT and Deere. Cattle prices dropped sharply because of the expected higher costs to fatten them up at feedlots ahead of slaughter. Potash shares gained +3%, Mosaic +7%, Intrepid +8%, CF Industries +11%, CNH Global +8%, Agrium +7%, Monsanto +4% and Deere +5%. Food stocks like General Mills and Kellogg declined but to a smaller extent. Tyson Foods was the biggest loser at -8% followed by Smithfield -7% and Sanderson Farms -5%.

Tyson Foods Chart

Commodity Index Chart

Despite the continued decline on the chart below the dollar may be trying to find support at 77.00 on the dollar index. Thursday saw the low of the week at 76.90 where it was quickly bought. The long-term outlook is still down but analysts believe it is far too oversold to continue lower without a rest. The payroll report hurt it but the contradictory comments by Bullard and Fisher helped to provide support.

When you compare the charts on the dollar, metals and commodities in general they are begging for a reversal of the recent trend. Nothing goes up or down in a straight line forever. The potential for a major short squeeze has been building for weeks because of the outlook for future policy action. Shorting the dollar and buying commodities give institutions some serious leverage but that leverage will work against them when the trade breaks and it is a very crowded trade. This could be a historic short-term move when it occurs.

Dollar Index Chart

Bank of America (BAC) announced a nationwide moratorium on foreclosures and the sale of foreclosed homes after Freddie Mac pressed them to do a documentation check. BAC had already checked the process in the 23 states that require court approval to foreclose a home. At the urging of Freddie Mac they announced a halt in all 50 states in order to check it one more time. Most major loan servicers employ robo signers or employees whose only job is to sign thousands of documents every day that are required to complete a foreclosure. Reportedly the volume is so high they cannot carefully review their contents before signing and moving the file to the next station.

BAC CEO Brian Moynihan said Friday the bank had not found any errors in the process but they halted sales in all 50 states to check one more time. BAC has 14 million mortgages or one of every five mortgages in the country. That equates to a $2.1 trillion portfolio. JP Morgan and Ally Financial have also agreed to examine their documentation process. There are currently more than 4.4 million homes in the foreclosure process nationwide. One third of all home sales in August were foreclosed or distressed home. By halting the foreclosure process and allowing buyers to opt out of the deal while the banks review documents will stall the housing sector once again. Every home sale is dependent on another sale, which is dependent on another, etc. People can't move until they close and some of these closings have already been postponed for 3-6 months by the foreclosure backlog. Some realtors will not even accept a short sale contract for some lenders.

In the tech sector another chip company warned Thursday night and their shares fell -10% in trading on Friday. Kulicke & Soffa (KLIC) warned that revenue for the current quarter would be "significantly below" Q3 due to softening industry conditions. The company designs semiconductor assembly equipment and is sometimes seen as the canary in the chip mine. A slowdown in KLIC business means a future slowdown in the chip sector in general. This makes Intel's earnings on Tuesday even more critical for the tech sector.

The big tech news last week was the leak of an impending deal for Verizon to begin selling the iPhone early in 2011. This has been rumored in the past but lacked substance. This report is suspected to be correct. Apple is struggling to fend off the onslaught of the Android and the biggest thing they can do to increase sales is offer it on Verizon.

Neilsen reported that Android accounted for 32% of smartphones sold in the U.S. in the last six months. The iPhone only accounted for 25% of sales. The Android operating system is expanding its reach very rapidly with 2-3 new phone models announced every week. A Verizon iPhone could tilt the percentages back into Apple's favor but only temporarily.

On Monday Microsoft will make an announcement about the new Windows Phone 7 operating system. They will announce three phones with one each from HTC, Samsung and LG and run on the AT&T network. Reportedly Microsoft will offer these at a price point that will be significantly below the iPhone and Android models. Early reviews have been positive and that is one more competitor chipping away at Apple's market. Apple is being forced to offer a CDMA phone on Verizon in order to remain competitive.

The Android phones are dropping in price because of the competition between models and this will impact Apple's margins as they lower prices to compete. Apple is expected to sell another 10-12 million iPhones per year by providing a Verizon model. How many $299 iPhones can Apple really sell if the Android and Windows phones are priced at $99? Getting hammered on price is going to hurt Apple margins but in reality most iPhone buyers are already Appleholics anyway. Apple will have to cut prices but probably won't give up their prestige pricing position entirely.

Apple Chart

Research in Motion (RIMM) reported Friday that UAE canceled a proposed ban of BlackBerry devices that was to go into effect on Monday. The ban was creating a serious civilian backlash against the UAE government and it is unclear whether RIMM came to some kind of technology sharing agreement with the UAE or the government gave in to the rising public pressure. Saudi Arabia also dropped its threat of a ban and India backed off its plan in order to study the problem for two months. RIMM may be losing market share to Apple and Android but it is far from out of business.

The Dow closed over 11,000 for the 37th time in history on Friday. It remains -22% below it's all time high set in October 2007. Is this move higher for real? As I stated earlier the market has already priced in a second quantitative easing program that could include the Fed buying equities yet two Fed heads are warning it is not a done deal. There will more than likely be some kind of further Fed stimulus but the market is making the broadest assumption and the least likely to come to pass.

Of course irrational exuberance is a recurring theme in the markets and it is certainly with us today. I keep hearing stocks are undervalued and they may be but this earnings cycle is not shaping up to be a barnburner. S&P earnings are expected to increase from 8% to 10% and revenues increase by 2%. Those are not blow out numbers by any stretch of the imagination. The market is trading on expectations and completely ignoring all the negativity from places like the chip sector where earnings warnings are becoming an art form.

You would think from the exuberance that every stock was making new highs. There are quite a few but it is far from unanimous. There are 35% of the S&P 500 stocks trading at or near a new 52-week high. There were 41 S&P stocks that made new highs on Friday. However, of the 30 Dow stocks there are only four that have returned to their highs since the Dow's top in Oct-2007. Those are MCD, IBM, WMT and KO.

The Dow last closed over 11,000 just three days before the flash crash on May 6th. There has been a lot of volatility since then but the last six weeks have been very bullish despite outflows from stock mutual every week since the crash. The flows have been so strong it suggests quite a few people missed the recent gains and this includes mutual fund managers as well. Those managers now appear to be grasping at straws to try and capture some of the current gains because cash on hand has fallen to barely over 2% according to ICI.

The Investment Company Institute also said U.S. equity funds saw outflows last week of $4.15 billion while bond funds saw inflows of $5.42 billion. Investors are still running from the equity market to the "safety" of bond funds despite the biggest bond bubble in decades.

This is a contrary indicator. Just like investors are moving to bonds at precisely the wrong time they will move back to equities once we surpass the May highs at 11,258. The herd is always wrong and that will power the equity markets higher eventually. Whether it will happen next week is a different story.

Funds have spent down their cash over the last several weeks in what we know as window dressing. Their fiscal year end is in three weeks so any changes in that position will have to be done quickly. Next week is option expiration week along with earnings from Intel in a depressed sector, JPM with banks also under pressure and Google, a company that can't seem to please traders with earnings. Unlike the S&P and Dow the Nasdaq is NOT breaking out. The stage is set for one more volatility act between now and the elections.

I said last week that although I don't believe in the rally we have to respect it above 1150. Whether it has the momentum to continue higher is debatable but I for one don't want to short it. As long as the dollar is declining we should see equities rising. That assumes Intel does not stink up the place on Tuesday.

The S&P closed at 1165 on Friday and what had been resistance all day. After Tuesday's short squeeze over 1150 it has been stuck in a narrow range between 1155-1165. There is a strong possibility it is running out of steam but some analysts have been saying that since the September 1st rebound from 1050. Even a broken clock is right twice a day and eventually they will be right as well. I remain skeptical of a continued rally but I am not going to fight it. We need to stay long over 1150.

S&P-500 Chart

The Dow may have closed at a new five month high but there was no conviction. Volume for each of the last three days was barely 7.0 billion shares. This is a reluctant rally but one that refuses to die. The negative jobs report should have derailed it but the promise of QE2 kept it on track. If the Dow can move farther over 11,000 and hold it the next target is 11,200 and the real starting line for year-end. Forget 11,000. If we could move over 11,200 there would be no more skeptics.

But, for next week I remain a skeptic. Initial support is 10,925 and a break below 10,900 could trigger a new dog pile by the shorts. Maybe what we need to create a new short squeeze that pushes us higher is a sharply negative day to tease the shorts to jump back in. Just remember we have three Dow components reporting earnings next week in Intel, JPM and GE. Intel is the most dangerous and the one traders will probably be watching most.

Dow Chart

Nasdaq 2400 has proven to be a solid wall that cannot be crossed. The Nasdaq closed at 2401 on Friday but that was short covering in the last hour of trading. That end of day short covering produced a move over 2400 to 2406 at the close but a sell program in the last four minutes ended it. We need a big gap open on Monday to push the Nasdaq higher and force the shorts to cover and provide support. Apple is back in rally mode but is getting no support from Amazon or Netflix. I am not sure Apple can move the index higher on its own with the Intel earnings only a day away.

If we do see a pullback on Monday there is decent support at 2370 so there is not likely to be a major decline.

Nasdaq Chart

The Nasdaq 100 ($NDX) is a better chart and appears to be coiling for a move higher. The resistance at 2025 has been solid but so has support at 2000. This is because of the liquidity of the large caps. Funds were stashing money there as they waited out the month. If the NDX could mount a drive over 2050 the race would be on to higher ground across all the indexes. That is resistance dating back to May of 2008.

Nasdaq 100 Chart

The Russell continues to suggest the rally has legs. The breakout over 670 is picking up speed and Friday's +1.4% gain was double or triple the gains on the other indexes. This suggests the fund managers are moving some money from large caps to small caps and setting up for year-end. If that is the case this is very bullish.

Continue to watch the Russell intraday for confirmation of any large cap gains. As long as the Russell percentage gain is larger than that of the blue chips the rally has farther to go.

Russell Chart

In summary I remain skeptical of the rally but I suggest going with the flow. The Russell is confirming an increase in longer-term bullish sentiment. As long as the Russell continues to move a larger daily percentage than the other indexes I would remain long. If it begins to falter I would quickly become worried.

Earnings by Intel, JPM and Google are going to be a problem along with the FOMC minutes on Tuesday. The dollar is seriously oversold on a temporary basis and a short-term rebound could pressure the equity markets. This is expiration week so volatility should increase. This is October so keep those seatbelts fastened.

Jim Brown

Don't sweat the petty things and don't pet the sweaty things. - George Carlin.


Index Wrap

Bull with the Bit in his Teeth

by Leigh Stevens

Click here to email Leigh Stevens
It of course has been some time since this market has had much of a (downside) correction and it can also be said to be 'overbought' by some conventional technical measures. However, like the saying about the horse, this bull has the bit in his teeth and is on the run. Willing buyers are in charge and this market appears poised to go still higher. An unusual thing here, occurring with occasional markets in a prolonged advance, is the lack of extremes in bullish sentiment. Of my indicators, my way of measuring bullish/bearish sentiment is suggesting that this market isn't done climbing as bulls are not yet throwing caution to the wind.

Moderate and not overly 'extreme' bullish sentiment is almost a 'given' for the occasional strong advance that the bulk of traders/investors don't quite 'trust'. Moreover, there isn't enough of a dip to give much of a cheaper buy in. Even though the rise since late-August may be technically extended (looking like a set up for the 'usual' correction), it now seems that a primary indicator to watch for topping action is the options call to put ratios. For more on my way of measuring bullish/bearish sentiment and its extremes, you can go to my Trader's Corner article on this subject by clicking HERE.

On the subject of this market being overbought, by some measures it isn't, such as in terms of the weekly MACD (the Moving Average Convergence Divergence) indicator. I featured the MACD as the topic in my most recent Trader's Corner (10/7/10) piece and which can be reviewed online HERE and is seen below with the MACD applied to the weekly Nasdaq Composite (COMP) chart.

At least in terms of the S&P, I last was forecasting either more of a sideways/lateral move OR a corrective pullback. We saw however only a brief sell off in the early part of this past week in a dip that only carried close to the SPX 21-day moving average. A pullback ONLY to the area of this key average, followed by another strong rally, suggests we're in a still strong bull move. This kind of market tends NOT to behave in a typical technical fashion. I wasn't anticipating another leg up so soon! This is the kind of market that, when there are (bearish) concerns due to one economic report or another, the market just 'climbs the wall of worry'.

The primary competing asset class for equities seems to be gold currently. Not real estate, not low-interest bonds, etc. When there are few if any alternative mainstream investments for our 401k's, etc, investment money moves into stocks.

A 'benchmark' breakout move I wrote about last week was when a pivotal line of SPX resistance got decisively pierced at 1152; this level represented a 2/3rds retracement of the April-July decline. An upside retracement of more than 66%, as I often say, suggests that a retracement of 100% (of that prior decline), is increasingly likely. This pattern suggests, at a minimum, that SPX will retest its prior highs in the 1220 area. For COMP, a similar retest of its prior peak would occur at 2535.

In terms of the Dow 30 (INDU), the weekly close above 11000 was important technically also as it puts INDU into what looks to be a substantial zone of supply or potential stock for sale. If INDU clears 11087-11115 next, it would suggest that the prior top at 11258 would be a next target.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart has gone from slightly mixed in my read of it last week to bullish as the index cleared its prior minor 'line' of resistance at 1150. The 1150 area also represented the level where SPX had retraced 66% of the prior major decline. Odds now favor an eventual retest of the prior high in the 1220 area. SPX does have to first clear the 1182 level, a prior key 'breakdown' point and a level of possible supply overhang or stock for sale.

I'm putting considerations of the faltering RSI, as this isn't a market that is going to be 'ruled' by technical considerations. It is a market being driven by a current fundamental assumption that corporate profits will continue to do ok in 2011; not much talk of a double dip of late!

I've noted resistance on the chart at the red down arrow at 1173, then at 1182, with major resistance in the area of the prior high around 1220. Near support is bumped up to 1140 this week, with next support noted in the 1110 area.

MARKET SENTIMENT:

Bullish sentiment, as seen above, has been declining on balance this past week, as the market has moved higher. This is almost a picture perfect case of the market likely to have an 'extended' up leg. An exception to other indicators (e.g., overbought models) that can't be relied on to suggest upcoming tops in exceptionally strong moves, is my call to put ratio for equities and here my indicator is suggesting no topping action yet.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX), which I was seeing last week as somewhat 'mixed' has cleared up that confusion by its decisive upside penetration of 520-522 resistance. This move put OEX above the important 2/3rds retracement 'milestone'. Rallies that take prices above the 66% retracement level of the prior decline, suggest some likelihood that an index or stock goes on to challenge its prior high; i.e., in the 553-555 area.

Judging by prior highs and the prior 'breakdown' point, overhead resistance is first at 532, extending to 537. Fairly major resistance has be assumed for the prior top.

I've noted near support again at the 21-day moving average, which keeps moving up of course in this trend. Next support is suggested in the low-500 area; I've pegged it 504, which would 'fill in' a prior upside price gap.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow is no longer mixed or 'stalled' as it pierced 11000 this past week, which predictably go a lot of media attention. Of course the media folks no very little about the market but they know an evening story.

Leading the rally were good to outstanding moves in AA, CAT, DD, DIS, DD, GE, IBM, JNJ, MCD, MMM, PG, WMT (our 'usual suspects' so to speak) and CHV and XOM (not our usual suspects). When you got 14-15 stocks, of 30, in strong moves and only 2-3 correcting (e.g., AXP, T), this is a formula for still higher INDU levels.

I'm speculating that the 11087 area, the top end of an uptrend channel, may bring in some resistance/selling pressure in INDU. However, the main focus over time is going to be what resistance occurs if/when the Dow gets back up to its prior highs at 11220-11258. The odds of INDU at least retesting its 12-month highs look good given the present strong advance.

Near support is highlighted at 10753, again at the 21-day average. I've pegged next support now in the 10600 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The chart is bullish in its pattern. The Nasdaq Composite (COMP) Index before this past week was stalled in the area representing a 66% retracement of its April-July decline. This area was exceeded with COMP's breakout to and (slightly) above 2400. When retracements go over the 2/3rds mark of such a major prior decline, the chances increase substantially for at least a retest of the prior high; i.e., for a 100% retracement back to the top.

Bullish sentiment has been declining on balance this past week, as the market has moved higher per my bottommost indicator. This is almost a picture perfect case of the market likely to have an 'extended' up leg. An exception to other indicators (e.g., overbought/oversold models such as the RSI) that can't always be relied on to suggest upcoming tops in exceptionally strong moves, is my CPRATIO (call/put ratio) for equities and here my 'sentiment' model is suggesting no topping action yet.

Technical resistance may be found beyond 2400, at 2434, with fairly major resistance at the 2535 12-month high.

Near support is noted (at the green up arrow) at the 21-day moving average at 2345 currently, with next support estimated at 2300.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has made a new Closing high and appears to be ready to achieve a decisive upside penetration of the top end of the index's recent narrow 1970-2030 trading range. All systems go in terms of the chart. The RSI has hit a recent extreme suggesting an 'overbought' situation, but such extremes around 70-75 will often occur 2-3 times in power moves.

Unlike the S&P and the Nas Composite, NDX has retraced nearly ALL of its entire prior decline. It is unlikely that the index is going to get this close to retesting its prior high, especially given the strong move it's in, without at least challenging its late-April top. Moreover, it also seems unlikely that a double top would set up either. We should however also take note of significant resistance implied by the 2056 high that occurred at the peak of the recovery rally into June 2008 (made after the 2239 high of Nov '07) and the 2059 NDX top of this past April.

I also noted last week a mildly bearish divergence implied by a declining RSI, and a key indicator of momentum, as prices went sideways. The reason I say 'minor' in regards to such a divergence, is that the price trend was sideways, not UP. A rally in the face of rising prices AND a falling RSI is more potent in suggesting a possible top. The occasional power moves on the upside often create situations where the usual technical type indicators don't often suggest upcoming reversals. The exception is seen in measures of trader sentiment and my indicator here is suggesting no topping action yet.

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:

The chart is bullish as the most recent Close took QQQQ, the Nasdaq 100 tracking stock, to a new closing high above, for the most part, the top end of its recent trading range. Friday's low also bounced from support implied by a steep uptrend line. The slope of this trendline suggests a rate of change that is at the top end of what we normally see in the indexes. This rate of (upside) velocity almost always has a limited life. However, I would be somewhat surprised to see much of a downside correction until/unless the stock first retests its prior high around 50.65.

I wrote last week about a bearish divergence that was seen by a falling On Balance Volume (OBV) line, as prices were going sideways. This minor divergence didn't prove to be predictive of a price correction. Volume is always a secondary indicator. As I tend to be 'suspicious' of rallies that have up trendlines that approach vertical, I made more of the aforementioned divergence pattern than was probably justified. This is a market where the uncertainties about future economic growth for now have been 'decided' in favor of slow but steady earnings growth.

Near support: 48.7

Next support: 47.0

Near resistance: 49.85

Next resistance: 50.5-50.65

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart has closed at the level representing a 66% retracement of its April-July decline. Assuming RUT clears this level, there's good potential for an eventual retest of prior highs in the 742-746 area. Retracements that go beyond 2/3rds of a prior decline, suggests a better than average chance to extend the advance to a 100% retracement back to the prior high. RUT is in a very strong uptrend as it typically is when the Nasdaq indices are also in very strong moves. RUT is unlikely to experience much of a down correction until Nasdaq does. Nasdaq will lead.

Near support is at 670-660, extending to 652, the current level of the 200-day RUT moving average.

Judging still by the 66% retracement level, RUT closed at immediate overhead resistance around 693. Next technical resistance is at 720, with further resistance seen for the area of the April highs, at 742-746.



GOOD TRADING SUCCESS!


New Option Plays

Long and Short Candidates

by Scott Hawes

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NEW DIRECTIONAL CALL PLAYS

Thompson Creek Metals - TC - close 11.28 change +0.53 stop 10.45

Target(s): 11.75, 12.40
Key Support/Resistance Areas: 12.60, 11.80, 11.00, 10.55
Time Frame: 1 to 3 weeks

Company Description:
Thompson Creek Metals Company Inc. (Thompson Creek) is a molybdenum mining company with vertically integrated mining, milling, processing and marketing operations in Canada and the United States. The Company's operations include the Thompson Creek producing open-pit molybdenum mine and concentrator (the Thompson Creek Mine) in Idaho, the Langeloth metallurgical facility (the Langeloth Facility) in Pennsylvania and a 75% joint venture interest in the Endako producing open-pit molybdenum mine, concentrator and roaster (the Endako Mine) in British Columbia. In addition, the Corporation has two underground molybdenum exploration projects comprised of an option to acquire up to 75% of the Mount Emmons molybdenum property (Mount Emmons Project), located in Colorado, and the Davidson molybdenum property (Davidson Project), located in British Columbia.

Why We Like it:
It seems there is no stopping the basic materials sector as the lackluster employment report is sure to be followed by additional stimulus. Molybdenum is high strength metal and is used to make aircraft parts, electrical contacts, industrial motors and filaments to name a few. Technically, TC broke through resistance near $11.00 and touched its 200-day SMA on Friday. I would like to see the stock retrace some of those gains and suggest we enter long positions with a trigger of $11.10 which is -18 cents lower than Friday's close. Our targets are about +6% and +11.5% higher than our trigger.

Suggested Position: Buy November $11.00 CALL, current ask $1.00, estimated ask at entry $0.90

Annotated chart:

Entry on October XX
Earnings 10/4/2010 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on October 9, 2010


NEW DIRECTIONAL PUT PLAYS

Whole Foods Market - WFMI - close 34.57 change -0.65 stop 37.10

Company Description:
Whole Foods Market, Inc. (Whole Foods Market) owns and operates a chain of natural and organic foods supermarkets. As of September 2009, it operated 284 stores: 273 stores in 38 states and the District of Columbia; six stores in Canada, and five stores in the United Kingdom.

Target(s): 32.80, 31.80, 31.05
Key Support/Resistance Areas: 36.00, 35.00, 34.00, 32.80, 31.00
Time Frame: 1 to 2 weeks

Why We Like It:
A weak consumer does not bode well for a high end supermarket like WFMI. There is some serious selling happening in stock over the past few days that feels like an institution. WFMI has support at $34.00 which is where the stock is hanging onto, but it is making lower highs in the process, i.e. a descending triangle. The stock is now below all of its moving averages which should keep bounces in check. I would like to see the bounce continue up towards its 200-day SMA which sets up a good shorting opportunity. However, a break below $34.00 should also be considered. Let's use a bounce to $35.65 or a breakdown to $33.85 as triggers to enter short positions. WFMI has a gap to fill all the way down near $31.00.

Trigger: $35.65 or $33.85

Suggested Position: Buy November $33.00 PUT, current ask $1.24

Annotated chart:

Entry on October xx
Earnings: 11/3/2010 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on October 9, 2010


In Play Updates and Reviews

The Tug-of-war Continues

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Dresser-Rand Group - DRC - close 38.01 change +0.89 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: +21%
Time Frame: 2 to 3 weeks
New Positions: Yes

Comments:
10/9: Oil services stocks did well on Friday and DRC surged +2.4% on the back of more likely stimulus from the Fed after the lackluster employment report. DRC looks good here as long as the broader market cooperates. If we continue drifting higher this week DRC should easily reach our first target. However, a correction could certainly derail long positions. We'll tighten stops as the trade moves forward but.

10/7: Not too much has changed with DRC. The stock is stuck in a range and tomorrow's employment report could be the catalyst for a breakout. If we go lower we have a tight stop to keep losses under control.

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

Annotated Chart:

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


Visa, Inc. - V - close 74.00 change +0.39 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
Current Gain/Loss: +16%
Time Frame: 3 to 5 weeks
New Positions: Yes

Comments:
10/9: V traded right down to our entry Friday morning and bounced. We are long November $75 calls at $1.92. I do not see V trading much lower than its rising 20-day SMA which is currently $71.55 and increasing about 30 cents per day. This puts the 20-day SMA in the $72.50 to $73.00 range later this week. Any pullback to this area will provide another good entry point. The stock also has support at $72.50 if there is bigger pullback earlier in the week. I like V to go higher as they have worked through the issues that caused the stock to sell-off over the past few months. Even a small move up to out 1st target should produce a +40% gain, while a move to our 2nd target should produce a +85% gain. I plan to tighten the stop in the coming days.

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.

Current Position: Long November $75.00 CALL, entry was at $1.92

Annotated Chart:

Entry on October 7, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 6.8 million
Listed on October 4, 2010


PUT Play Updates

Alliant Techsystems - ATK - close 73.75 change -0.61 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:
10/9: ATK formed a perfect bearish head and shoulders pattern on its hourly chart turned lower right where it should have. Now we follow through to the downside. The stock remains below its 200-day SMA and I am ultimately looking for a move towards its 50-day SMA and our second target of $71.25. I do think a sell-off is likely to get bought so be prepared to take profits or tighten stops to protect them.

10/7: ATK has formed a perfect bearish head and shoulders pattern on its hourly chart and remains below its 200-day SMA. If the market breaks lower tomorrow I would consider new short positions.

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.

10/2: 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

Annotated Chart:

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


Isilon Systems, Inc - ISLN - close 26.14 change +1.00 stop NONE

Target(s): 23.20, 21.50, 20.50
Key Support/Resistance Areas: 26.35, 25.00, 21.40, 20.40, 19.00
Current Gain/Loss: -40%
Time Frame: 1 to 2 weeks
New Positions: Neutral

Comments:
10/9: ISLN has not followed through lower as I anticipated. In fact, it snapped right back up to its highs before the sell-off on 10/5. I picked the wrong stock in the sector as others such as F5 Networks (FFIV), Red Hat (RHT), and VM Ware (VMW) remain near their lows. In any event, our puts are still hanging in there and I suggest we give this some time to see if the stock turns lower. I chose further out of the money puts to limit losses for these reasons. Now there is a possible double top play that could be met with selling this week. A move back down to the $23 area is still certainly in the cards and that should get us out of the position near breakeven. The 20-day SMA is another target readers should consider. I've adjusted the targets. Finally, trying a short position at this level could work out nicely for a quick trade. I would suggest trying the $22.5 puts and use a stop near $26.80.

10/7: ISLN retraced much more of Wednesday's loss than I expected. The stock is sitting right at the 61.8% retracement which is a normal turning point for a move back down. I think trying a short position at this level makes sense, especially if the market turns lower from here. We should know a the short term direction tomorrow.

10/6: 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.

Current Position: Long November $20.00 PUT, entry was at $0.70

Annotated Chart:

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


SPDR DJIA ETF - DIA - close 110.16 change +0.56 stop 110.55

Target(s): 107.50, 106.55, 105.40
Key Support/Resistance Areas: 112.00, 110.00, 107.30, 106.40, 105.00
Current Gain/Loss: -36%

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

Comments:
10/9: There are not many changes to my comments. We have a tight stop overhead if DIA breaks out. However, I would be leery of any gap higher on Monday which could be sold into. As such, this is how I suggest readers manage the trade. Temporarily remove the stop and wait for Monday's open. If there is a gap higher near our stop, place a new protective stop above the opening range. This provides us the chance to measure the true strength or weakness of DIA. Often times this will keep you in the trade and looking for a better exit. At these elevated levels it would not surprise me to see a gap higher and an immediate sell-off so we don't want to have a GTC stop in place that gets taken out if DIA is only going to head lower. This is just a scenario. If the markets are surging higher and convincingly break the opening range then we need to get out of the way.

10/7: DIA had an outside day (traded lower and higher than Wednesday's range) and looked vulnerable but buyers stepped in again. Tomorrow's reaction to the employment report will likely determine our fate on this position. We have tight stop overhead if there is a major breakout.

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.

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 53.08 change -0.02 stop 54.92

Target(s): 51.05, 50.35, 49.50, 48.75
Key Support/Resistance Areas: 54.50, 53.50, 50.50, 49.50, 48.75, 47.00
Current Gain/Loss: -36%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

Comments:
10/9: PNC has been drifting higher in a bear flag and now sits at the bottom of the channel. The stock turned lower this past week right at it 50-day SMA and descending trend line. If the broader market corrects I'm looking for PNC to break lower towards $49.50 to $50.35 level which is our 2nd and 3rd targets. I suggest we begin to exit positions or tighten stops if PNC heads lower early this week. >p> 10/7: PNC turned lower and printed a bearish engulfing candlestick. The stock continues to look bearish, however, a breakout in the broader market will likely prevent further declines for the time being. If the opposite happens we should be on our way to nice gains.

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


CLOSED BULLISH PLAYS


Volatility Index - VIX - close 20.71 change -0.85 stop 20.70

Target(s): 23.00, 24.00, 26.00
Key Support/Resistance Areas: 21.00, 24.00, 28.00, 30.00
Final Gain/Loss: -72.2%
Time Frame: 2 to 3 weeks
New positions: Closed

Comments:
10/8: There is not much to say except our volatility plays turned out horrible this week. We've taken a disappointing loss and will move onward to find better opportunities. For readers who may still have positions I suggest continuing to look for an exit.

10/7: We are getting crushed in this VIX play and readers should use caution. Continue to use spikes to exit positions or tighten stops as time is not on our side. If the market breaks higher tomorrow we will likely be stopped out of the position. If we break lower our targets will likely be reached. $23.00 is another added target to consider exiting or tightening stops.

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.

10/2 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.

Closed Position: Long October $25.00 CALL at $0.50, entry was at $1.80

Annotated Chart:

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