Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/19/2010

Table of Contents

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

Market Wrap

Happy Anniversary

by Jim Brown

Click here to email Jim Brown
October 19th is the 23rd anniversary of the 1987 market crash where the Dow lost -508 points for a -23% drop in a single day.

Market Statistics

Today's -165 drop can't compare with the 1987 drop of -23%. Today was only a blink compared to the 1987 heart attack. That does not make today's decline any less painful if you were long going into the open. Numerous earnings reports left investors with an anticipation hangover and the Dow with a -160 point drop at the open.

The Dow drop was fueled by a -$5 decline in IBM. In addition to IBM the drop in oil prices caused a significant decline in CVX and XOM, also Dow components. The Dow was not the only big loser at the open with the Nasdaq tanking on a big drop in Apple, Google, Priceline and Amazon. This is not the way traders were hoping the Q3 earnings cycle would play out.

There was only one economic report of note and that was the New Residential Construction for September. Starts came in stronger than expected with a +.3% gain to an annualized rate of 610,000 units. Starts are up +4% year over year. Unfortunately permits declined by -5.6% month-to-month and -10.9% year over year.

The most important report for the week will be the Fed Beige Book on Wednesday.

Economic Calendar

Economics were not the problem today although currencies were a major weight on the markets. China announced it was raising interest rates by 25 basis points. This was the first rate hike since 2007. China is poised to release its Q3 GDP numbers on Thursday and they are expected to be near 10%. China's growth has caused some serious inflation problems in China. Consumer prices rose +3.5% in August with food prices spiking +7.5%. Real estate prices rose +9.1% in September.

China's action shook financial markets around the world sending equities and commodities sharply lower. The announcement came after China's market closed so the real hit will come tonight when those markets open. The timing of the rate hike should have been no surprise with the G20 meeting this weekend. China's low currency has been a source of concern and the U.S. stopped just short of labeling them a currency manipulator last week. Hiking rates boost your currency value so China will be able to go into the meeting claiming they are working on the problem of a cheap yuan.

The hike in rates prompted a serious round of short covering in various currencies and the U.S. dollar was one currency that was extremely oversold. The short covering prompted a +1.7% rally in the dollar index. That is a massive move in currency terms. That would be equivalent to about a 1,000 point move in the Dow.

Dollar Index chart

The spike in the dollar crushed commodity prices as the stops were hit on the very crowded trade of "short dollar, long commodities." Crude prices fell -4.5% on the increase in the dollar and the worries that China's rate hike signaled a new round of tightening for the Chinese economy. We closed a very nice short in the OilSlick newsletter today that was entered in expectations for a rebound in the dollar.

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

Crude Oil Chart

Gold Chart

Copper Chart

A story that was under reported was a halt by China of exports of rare earth minerals to the USA. For the last month China halted shipments to Japan as the two countries fought over jurisdiction of some disputed ocean real estate. Today three industry officials said China had halted shipments to the USA. Our administration needs to be careful what fights they pick with China over currency and trade issues.

You may remember last week that our 30-year treasury auction went badly for lack of demand. That lack of demand was reportedly a lack of Chinese demand for our bonds. They are the largest buyers and a sudden halt to bidding could drive our yields/rates higher very quickly.

The mineral halt was announced on Sunday night to protest U.S. trade actions. American trade officials announced last Friday they would investigate China's violation of international trade rules by subsidizing clean energy industries. The inquiry claims China has been steadily reducing exports in rare earth quotas since 2005 and adding steep export taxes on rare earths. China announced in July it was cutting export quotas by 72% for 2010 and as much as another 30% in 2011. Officials claim this is an illegal effort to force companies to manufacture more of their high tech goods in China. China mines 95% of the world's rare earth minerals. These minerals have very broad commercial and military applications and are vital to the production of things like wind turbines, guided missiles, batteries, semiconductors, etc.

U.S. officials need to be very careful when they pick fights with the sleeping bear. If he wakes up in a bad mood it will be bad for everyone.

Earnings are really the key this week and several big names on Monday night caused havoc in Tuesday's market. Apple reported strong earnings but iPad sales disappointed and profit margins fell to 36.9% from 38.2%. BMO Capital estimated that iPhone margins fell to 45% from 55% in the quarter. Research firm iSupply said the components costs for an iPhone 4 rose to $187.51 from $170.80 for the previous model. Apple shares closed down -$8.51 or $2.7% on the disappointment.

Analysts said the growing competition for the iPhone would probably force some additional price discounting that would impact margins in future quarters. The same problem is true with the iPad, which is being aggressively priced in an effort to control the market ahead of a dozen or so competitors going on sale over the next few months.

Apple Chart

Dow component IBM reported earnings that beat the street and raised full year guidance but plunged more than $6 intraday after service contract signings fell by -7% to $11 billion in Q3. Sales were brisk on hardware and software but corporations were holding back on large contracts until the economic outlook improves.

IBM said one deal worth $1.8 billion with ABN Amro slipped until October 8th and would have pushed the services total to $12.7 billion and higher than expected. Investors were already running for cover and ignored the excuse.

IBM Chart

Bank of America reported earnings of $3.1 billion or 27-cents per share before the open and that was well ahead of analyst estimates of 16-cents. After a list of charges relating to the new federal regulations that limit fees and some other items BAC lost $7.3 billion. This came from a $10.4 billion write-down in the value of its bankcard unit. The bank said credit quality improved significantly in the quarter. This allowed them to set aside only $5.4 billion for credit losses and $2.7 billion less than the prior quarter. It was $6.3 billion below the reserves for the same quarter last year.

BAC shares did ok at the open but took a sizeable tumble to lead the market down after news broke that Blackrock, Pimco and the NY Federal Reserve was preparing to sue BAC to buy back $47 billion in mortgage securities. The news sent BAC to a new 52-week low and the Dow to a -230 point intraday loss late at 3:30 PM.

Bank of America (Countrywide) sold roughly $750 billion in mortgage-backed securities between 2004-2008. Of that total $3.9 billion have been involved in repurchase requests for various reasons. $500 million were declined and $1 billion have been approved for repurchase with $1 billion still outstanding. Those are manageable numbers. If the $47 billion action now underway is the first of a new wave of repurchase actions then BAC and other banks like JPM, WFC, etc could be in trouble. This was a major weight on the market.

A bank can be forced to repurchase the loans if the purchaser can prove they were misrepresented in the original sale. This is covered by the representations and warranties clauses in the contracts. For instance if the bank represented the average credit score was 725 and it was found out later to be 685 they could be forced to repurchase. If the homes were represented to be owner occupied and later investigations found that many were actually rented they could be forced to buy back the loans. With the number of RMBS loan defaults the purchasers of these mortgages are trying every conceivable way to force a buyback. They have hired auditing firms to investigate tens of thousands of loans/properties in hopes of finding a pattern of misrepresentation that will give them a reason to go to court.

The action in progress by Pimco, Blackrock and the NY Fed is alleging that Countrywide failed to service the loans properly. Bank America and Countrywide collectively service more than 14 million mortgages worth more than $2.1 trillion. About half are owned by Fannie and Freddie and 30% are owned by institutions. Bank America said it would resume foreclosures in 23 states this week and the rest of the states next week.

Bank of America owns 34% of Blackrock so it is suing itself in a sense.

Goldman Sachs reported earnings of $1.74 billion and easily beat analyst estimates. Debt underwriting rose +59% during the quarter but trading revenue fell -40% from earlier in the year. The $2.98 per share in earnings from $3.03 billion and $5.25 per share during the same period in 2009. The decline was due in part to large dividend/compensation reserves for shareholders and employees. Goldman set aside $3.83 billion and benefits during the quarter. That brings the set aside for year-end compensation to $13.12 billion for the first nine months.

Goldman's CFO said trading revenue was down because of lower volatility and traders were skittish since the flash crash and worried about economics.

Goldman Sachs Chart

Harley Davidson (HOG) reported earnings of 40-cents that missed the street estimates of 44-cents due to a 7.7% drop in sales. Harley CEO Keith Wandell said "the economy as yet to turn around in a convincing way and many consumers remain on the sidelines." Harley narrowed its forecast for 2010 shipments. Shares of HOG gave up -7% on the news.

Harley Davidson Chart

Juniper Networks reported earnings that matched street estimates but revenue was light. The stock declined -10% in after hours before positive comments on the conference call produced a rebound. Juniper spokesmen said the company was on track for a revenue growth rate of 20% or higher for the full year and predicted higher than expected revenue in Q4. The CEO said global economic growth recovery was still patchy and slow but was very encouraged by recent discussions with large service providers. After closing at $30.54 shares briefly touched $27 before the conference call news.

EMC posted strong earnings that rose +58% due mostly by a surge in cloud computing. EMC is the majority owner of VMWare and VMW reported earnings that doubled. The U.S., Asia and Latin America markets saw sales increases over 20% while Europe lagged with a 14% increase. Earnings of 30-cents matched analyst estimates but EMC did not decline as other reporters today. EMC posted a fractional gain but it was a gain in a bad market. EMC said they were hiring again and added 1,700 people in the quarter.

Yahoo reported earnings after the close and earnings doubled. Unfortunately it was due to the sale of HotJobs.com and not a significant improvement in advertising revenue. Without the HotJobs sale earnings were 16-cents and only a penny above analyst estimates. Revenue was $1.6 billion, an increase of only 2%. You may remember Google posted a 23% increase in revenue. It appears Yahoo may not be spiraling down the drain but it is definitely takeover bait. CEO Bartz has had two years to turn the company around with not much luck. Google and Bing have passed Yahoo by and captured the search market. Yahoo's search revenues fell -7% for the quarter. After some serious volatility YHOO closed flat in after hours.

Major earnings reports due out on Wednesday include Boeing, Ebay, Morgan Stanley and Wells Fargo.

Earnings Calendar

The volatility today was nowhere near that seen on Oct 19th 1987 but it was still ugly. The Dow declined -230 at its lows and the Nasdaq was off -59 points. The Dow closed back below 11,000 but just barely.

The negative earnings, currency challenges and the Bank America mortgage problem were too much for the dip buyers to overcome. I believe they are still there but reeling from the morning body blow.

Wednesday will be a key inflection point. If the dip buyers return then it is back to business as usual with QE2 in the headlights but we are rapidly approaching that November 3rd FOMC meeting and analysts are starting to express skepticism.

There could be too many "perhaps, could and might" words in the recent speeches. Maybe the Fed is getting cold feet about charging off on another stimulus venture despite what the market thinks.

You may remember 2-3 weeks ago when the subject first appeared. Market pundits were talking $500B to $5T in future QE purchases. That is an amazing amount of money to float the economy and the market raced higher in anticipation. Now we are hearing numbers like $100 billion in an initial buy sometime in January. That is a drop in the bucket and 90 days away. The market is beginning to second-guess itself and we could see some backing and filling while we wait for the actual FOMC announcement.

That means the onward and upward market may turn into more of a trading range over the next two weeks.

The earnings parade has done little to power us higher other than the Google earnings last week. That pushed the Nasdaq higher but the Dow lagged in negative territory. Without any really key Nasdaq earnings other than Ebay and Amazon left this week there is little to create excitement.

We also have the Fed Beige Book economic update on Wednesday. That has the power to heal or kill the market. If conditions have improved the markets will not be so dependent on QE2. If conditions declined we will be entirely dependent on news of QE2. That 2:PM report will be critical.

The S&P pulled back to support at 1160 and saw a decent rebound on short covering just before the close. Volume was strong today at 9.65 billion shares but heavily skewed to the downside as stop losses were hit in volume. Resistance is now 1185 and real support 1150. That gives us a wide range to wander until November 3rd.

S&P-500 Chart

The Dow tried to push over 11,100 for a week and failed to hold its gains. The expectations for strong earnings did not last and the weakness in the financial sector weighed it down.

On the positive side the uptrend resistance from June (blue dashed line) has turned into support. The trend is intact as long as that support holds. A break there targets 10,700 and that would be a serious decline on top of our 165-point loss today.

Seven Dow stocks lost more than a buck with IBM -4.80, CAT -1.69, CVX -1.69, BA -1.18 and XOM -1.16 the biggest decliners. I doubt IBM will continue its decline and crude prices should recover when the dollar loses traction. That will give the Dow some support but other than short covering I don't see any big market moving events pushing it higher. Earnings from Dow components BA, AXP, MCD, HON and VZ will not have the same dynamic pop for the Dow as BAC, JPM and IBM.

Dow Chart

A -44 point loss on the Nasdaq is a lot but we should look at the glass as half full and be thankful prior resistance at 2435 returned as support for the third time in the last five days. We should view that as initial support and 2400 as the next level to test.

With the major big cap techs all severely negative we should be glad that 2435 held. Unfortunately there are not a lot of high profile tech earnings left this week. We need the dip buyers to come in at the open and then hope for positive news from Ebay, SanDisk, Amazon and a couple others to keep the rally alive.

Personally the way the big caps have been pummeled on various aspects of their fairly decent earnings does not give me much hope that scenario will come true. I would like to believe the QE2 story will overcome various deficiencies in future earnings but this week has not been a prime example of that thesis. I believe a break back below 2400 could lead to a significant decline.

Nasdaq Chart

In summary I believe market sentiment took a serious blow this week. The shorts are probably recovering some of their confidence while the dip buyers are questioning the reasoning of buying the QE2 rumor. Today's decline was steep but it was not a major problem. This rally has overcome several major declines in its six weeks of gains.

The market was severely overbought and needed a good face slap to wake it up. It depends now on whether traders decide enough is enough and start taking profits or they suck it up and race back in to buy the dip. Time will tell. I am still a dip buyer today but a further material decline on Wednesday could quickly change my mind.

Jim Brown


New Option Plays

Investment Banker

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Jeffries Group, Inc - JEF - close 23.54 change +0.02 stop 22.75

Target(s): 25.10, 25.75
Key Support/Resistance Areas: 25.85, 25.25, 24.25, 23.50, 23.00
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

Company Description:
Jefferies Group, Inc. and its subsidiaries operate as global securities and investment banking firm serving companies and their investors. The Company provides investors fundamental research and trade execution in equity, equity-linked and fixed income securities, including investment grade corporate bonds, high yield and distressed securities, government and agency securities, asset-backed securities, municipal securities, bank loans, leveraged loans, and emerging markets debt, as well as derivatives and engage in securities financing and commodities derivative trading activities. It offer capital markets, merger and acquisition, restructuring and other financial advisory services. (source: company press release or website)

Why We Like It:
Investment Banks are beginning to trade well, especially those that have little risk exposure to mortgage backed securities like many of the money center banks. JEF should do well in this era of corporate advisory services and M&A activity. JEF could even be a takeover candidate themselves. I like JEF to trade higher as long as the stock breaks out above today's highs. Technically, The volume patterns look good and JEF has closed above short term resistance from the past couple of weeks at $23.50 for two consecutive days. I suggest we enter long positions if the stock trades to $23.91 which is above today's highs. Our stop will be $22.75 and our targets are near the September and August highs, which are +5% and +7.5% from our trigger.

Suggested Position: Buy December $24.00 CALL, current ask $1.10

Annotated chart:

Entry on October xx
Earnings Date 1/20/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on October 19, 2010


In Play Updates and Reviews

Volatility

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good evening. I am expecting quite a bit of volatility in the coming days/weeks on both the upside and downside. Often times volatility signals an important turning point (or at least reflection point) in the current trend. It is going to take a monumental effort by the bears to do significant damage to the rally over the past six weeks. I do think we could see more selling but I also believe the dips will get bought. Our new plays this week have been break-out candidates which keeps things more conservative, i.e. entering positions when the stock is moving in the right direction as opposed to picking a top or bottom, which has been extremely challenging over the past six months. Staying nimble is key and working both sides of the market can be lucrative. I would view weakness as opportunities to tighten stops or take profits on short positions, while also considering launching new long positions with tighter stops. Please email me with any questions.

Current Portfolio:


CALL Play Updates

Dresser-Rand Group - DRC - close 37.70 change +1.03 stop 36.15

Target(s): 38.15, 38.80, 39.95
Key Support/Resistance Areas: 42.00, 40.00, 39.15, 37.50, 36.30
Current Option Gain/Loss: -20%
Time Frame: 2 to 3 weeks
New Positions: No

Comments:
10/19: The oil services sector took a hit today as the group lost more than -3%. DRC fared a little better but our position has gone from a +25% gain to a -20% loss. The Peoples Bank of China unexpectedly rose interest rates which caused the US Dollar to surge higher, and the whole commodity sector took a lambasting. It is too early to tell whether today's sell-off in commodities is the start of a bigger decline or a knee jerk reaction. Technically, DRC is still above its 20 & 50-day SMA's and is maintaining an upward trend line that began on 8/25. Readers may want to consider tighter stops at $37.40 (5 below today's low) or $36.90. Personally, I would use $36.90 which is below the important aforementioned support levels. I've adjusted the targets and suggest readers continue to use strength to exit positions or tighten stops to protect capital.

10/18: DRC is consolidating just under our first target of $39.00 (we have come within 2 to 15 cents in 3 of the past 4 sessions). We have a +28% gain and I suggest using any strength in the stock as an opportunity to take profits or tighten stops to protect them. As such, I am not recommending new positions at this time due to the broader market overbought conditions. Readers may want to consider tighter stops at $37.40 or $36.90.

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

Entry on October 6, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 570,000
Listed on October 5, 2010


First Solar Inc. - FSLR - close: 143.92 change: -3.15 stop: 135.95

Target(s): 145.00, 147.50, 149.75
Key Support/Resistance Areas: 137.50, 140.00, 145.00, 147.50, 150.00
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

Comments:
10/19: Raymond James cut FSLR to Market Perform from Outperform in the pre-market this morning. The stock sold off about -2% and there could be more to come. However, FSLR continues to look bullish and has solid support at $140 which is near the primary upward trend line and will provide a solid entry point. As such, I would like to lower the trigger to $140.50 and target a move up towards $150.

10/18: FSLR went in the opposite direction of our trigger to enter long positions. Let's remain patient and keep our trigger at $142.50.

10/16: Shares of FSLR have been marching higher after producing a huge (bullish) double bottom pattern with the lows in February and June. Now the stock has created a more bullish pattern of rally, consolidate, rally, consolidate. After two weeks of correcting traders are now buying the dip in FLSR near support in the $137-140 zone.

Aggressive traders could launch positions right now following Friday's bounce from $140. However, I suspect we'll see a better entry point on a minor dip this week. I'm suggesting we use a trigger at $142.50 to buy calls. If triggered we'll use a wide stop loss at $135.95 since FSLR can be so volatile (as an alternative more conservative traders could put their stop closer to $140). If triggered our first target is $145.00. Our second target is $147.50. Our final target is $149.75. More aggressive traders could aim for the $160 area. FYI: Investors should note that FSLR is due to report earnings on October 28th. Earnings reports can significantly raise our risk.

Suggested Position:

Trigger to buy calls @ $140.50.

BUY the November $150 calls.

Entry on October xxth at $ xx.xx
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on October 16th, 2010


Genco Shipping & Trading, LTD - GNK - close 15.80 change -0.68 stop 15.50

Target(s): 16.10, 17.70, 18.05, 18.50
Key Support/Resistance Areas: 18.25, 17.75, 16.90, 15.75
Current Option Gain/Loss: -60.0%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/19: GNK fell apart today and we are close to being stopped out. GNK is involved in shipping commodities and the news out of China is affecting the entire space. It is too early to tell whether this is a one day event or a knee jerk reaction. Technically, the stock has closed below its moving averages and looks to be headed lower. If GNK can manage a bounce back up towards $16.10 I suggest closing positions or tightening stops to protect capital.

10/18: GNK gained 3 cents today and is consolidating in a fairly tight range near $16.50. Our comments below remain the same.

10/16 (James): There is no change from my Thursday comments on GNK. Traders bought the dip again for the second day in a row near GNK's 100-dma and short-term support near $16.20. If this stock can rally past the October highs it could see a significant short squeeze. I wouldn't be surprised to see a rally toward $20.00. The Baltic Dry Goods shipping index, a measure of shipping rates, has been improving recently, which should bolster GNK shares.

Current Position: Long November $17.00 CALL, entry was at $0.80

Note: Readers who want to give this more time to work may want to consider buying the JAN 2011 $17.50 CALLS

Entry on October 12, 2010
Earnings 11/1/2010 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on October 11, 2010


Humana Inc. - HUM - close: 54.12 change: -1.39 stop: 49.75

Target(s): 54.95, 57.50, 60.00
Key Support/Resistance Areas: 50.00, 51.00, 53.50, 55.00
Current Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see entry point below

Comments:
10/18 & 10/19: Nothing has changed from the released play over the weekend. We will use a dip as a buying opportunity and keep the trigger at $52.50.

10/16: Check out the HMO healthcare index. Investor sentiment for the healthcare sector has changed. Fears about the healthcare reform seem to have faded and now the sector is breaking out to new three-year highs. HUM is helping lead the way. Shares have been very strong this past week with a rally toward the top of its bullish channel. We want to hop on board but wait for a better entry point.

I am suggesting readers use a trigger to buy calls at $52.50. More cautious traders could look for a dip closer $51.00 but I don't think we'll see HUM pullback that low. If we are triggered at $52.50 I'm suggesting a stop loss at $49.75. Our first target is $54.90. Our second target is $57.25. Our third, longer-term target is $59.00. Time frame is six to eight weeks. Technical traders will note that the P&F chart is bullish with a $66 target. FYI: HUM is due to report earnings on November 1st. We normally want to avoid holding over earnings but I would make an exception for HUM.

Suggested Position:

Trigger to buy calls at $52.50

BUY the November $55 calls - or - BUY the 2011 January $55 calls.

Entry on October xxth at $ xx.xx
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010


Sears Holdings Corp - SHLD - close 74.43 change -0.69 stop 70.75

Target(s): 81.50, 85.00, 88.00
Key Support/Resistance Areas: 90.00, 85.00, 82.00, 76.00, 73.00
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

Comments:
10/19: SHLD held up very well today considering the deep broad market sell-off. I suggest we play this conservative and keep the set-up in place, however, a dip down towards $73.00 also offers a compelling set-up. This is near the 20-day SMA and upward trend line that started on 8/24. The problem is SHLD could blow right through this level if the broader market correction picks up steam. We may consider a lower trigger in the coming days but we have to see the price action first.

10/18: Shares of SHLD have been trending higher since their lows near $60.00 back in August. The stock broke out of a multi-week consolidation area that began on 9/27 and looks poised for a continued move higher. Add in the fact that SHLD has a high short interest ratio and it could mean a short squeeze is on the horizon. There is also a lot of open air above $77.00 which means a breakout higher could quickly gain momentum. I suggest readers initiate long positions with a trigger $77.10 which is well above the past few day's highs. This allows SHLD to prove that it can make a run higher and should be the catalyst for a move towards $82.00, or higher. Our initial stop will be $70.75 and it will be adjusted once we are in the position.

Trigger to enter long positions: $77.10 Suggested Position: Buy December $80.00 CALL, current ask $2.00

Entry on October xxth
Earnings Date 11/18/10 (unconfirmed)
Average Daily Volume = 831,000
Listed on October 16th, 2010


Thompson Creek Metals - TC - close 10.76 change -0.82 stop 10.45

Target(s): 11.10, 11.75 (hit), 12.40
Key Support/Resistance Areas: 12.60, 11.80, 11.00, 10.55
Current Gain/Loss: -35%
Time Frame: 1 to 3 weeks
New Positions: Yes, on pullbacks

Comments:
10/19: Ouch, the profit taking we feared came in full force today and our gain in TC was reversed into a loss. The Peoples Bank of China unexpectedly rose interest rates which caused the US Dollar to surge higher, and the whole commodity sector took a lambasting. It is too early to tell whether today's sell-off in commodities is the start of a bigger decline or a knee jerk reaction. Only time will tell but readers should use caution. TC found support at $10.64 today and also has support at $10.55. Our stop is just below these levels. I've added a lower target of $11.10 where readers should consider exiting positions or tightening stops on bounces.

10/18: TC drifted sideways in a fairly tight range on Monday. The stock closed near its highs and continues to look bullish, however, be aware of some possible profit taking in the coming days which I would use an opportunity to launch new positions. If TC breaks above last week's highs there is little resistance until the $12.50 area which is just above our final target. Tighter stops could be considered in the $10.80 area to limit downside risk.

10/16 (James): TC experienced some volatility on Friday morning but shares settled into a sideways churn heading into the weekend. A little pullback toward the $11.15-11.00 zone could offer a new bullish entry point to buy the dip. I'm optimistic that this stock could trade toward $12.75 before hitting any significant resistance. FYI: I can't find any data on an earnings date for this company. Cautious traders will want to avoid holding over earnings, which makes this somewhat more risky.

Current Position: Long November $11.00 CALL, entry was at $0.90

Entry on October 12
Earnings 10/4/2010 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on October 9, 2010


PUT Play Updates

Alliant Techsystems - ATK - close 73.02 change -1.21 stop 76.25

Target(s): 72.25, 71.80, 70.50
Key Support/Resistance Areas: 76.00, 74.00, 72.00, 71.25, 70.00
Current Gain/Loss: -17.5%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

Comments:
10/19: ATK lost -1.6% today and the position is looks vulnerable here. The stock broke a short term upward trend line, closed below the 20-day SMA, and closed at its lowest level since 10/4. The selling in this stock should continue in the coming days which readers should use as an opportunity to exit positions or tighten stops. I adjusted the targets slightly to account for the rising 50-day SMA.

10/18: The bearish set-up in ATK remains in tact but the stock has stubbornly refused to break lower. I've raised the second target to $71.70 which is my primary target and just above the 50-day SMA. I think we'll see some selling in this stock in the coming days which readers should use as an opportunity to exit positions or tighten stops. All of James comments below remain valid.

10/16 (James): Shares of ATK continue to churn sideways under resistance near $75.00 and its descending 200-dma. I don't see any changes from my Thursday comments. Readers may want to wait for a move under $73.25 before launching new positions. FYI: ATK is due to report earnings on November 4th, before the opening bell. Wall Street expects a profit of $2.81 a share.

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

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


Fastenal Co. - FAST - close: 51.67 change: -0.22 stop: 54.25

Target(s): 50.75, 50.10, 48.25, maybe lower
Key Support/Resistance Areas: 55.00, 52.00, 50.00, 48,00,
Current Gain/Loss: +0%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/19: FAST held up relatively well today, maybe because of the strong housing starts data released in the pre-market. However, new permits went in the wrong direction. The 50 & 100-day SMA are near the first target. This should give us a +35% gain. I suggest using this area to either take profits or tighten stops to protect them. If this level breaks keep an eye on $50.00 as the next support level.

10/18: We are now long puts in FAST per the weekend play release. If the broader market corrects our targets should be reached quickly. Be prepared to take profits or tighten stops to protect them. I like new positions at current levels.

10/16: Traders were disappointed with FAST's recent earnings report and guidance. Shares had soared from $45 to $55 in just a few weeks and the stock plunged on the earnings news (Oct. 12th). The bounce attempts this week were also sold sharply and FAST looks poised for a much deeper correction.

I am suggesting new bearish positions now at current levels. We'll use a stop loss at $54.25. Our first target is 50.75 near the simple 50-dma. Our second target is $48.25, but watch for potential support at the rising 200-dma. It is possible that FAST actually sinks lower since the larger pattern on the weekly chart is one of lower highs and lower lows.

Current Position: Long November $50.00 PUT, entry was at $1.00

Entry on October 18, 2010
Earnings Date 10/12/10
Average Daily Volume = 1.0 million
Listed on October 16, 2010


PNC Financial - PNC - close 53.04 change +0.03 stop 54.92

Target(s): 51.05 (hit), 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: -48%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/19: Something is holding PNC up and I can not figure out why, other than it may be due to upcoming earnings. The stock is set to report earnings on Thursday before the bell so if you are not comfortable holding positions you need to exit tomorrow before the bell. Holding positions is an aggressive strategy that may or may not work. Lightening up on positions is also another option. The news out of the banking sector today has me inclined to hold positions, however, I still advocate using weakness to exit positions and preserve capital. Our stop is overhead. 10/18: After reaching our first target on Thursday and coming close to our second target on Friday, PNC had a snap back rally today and gained more than +3% as banks were the strongest performing sector. PNC remains below its 50-day SMA and primary downtrend line so the bearish case remains in tact. Launching new positions at these levels makes a lot of sense for a quick trade lower, but the broader market needs to correct along side PNC for it to be successful. Readers with current positions should use weakness to close positions. $50.35 and $49.50 are my primary targets.

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

Entry on September 30, 2010
Earnings: 10/21/2010 (unconfirmed)
Average Daily Volume: 5 million
Listed on September 29, 2010