Option Investor
Newsletter

Daily Newsletter, Wednesday, 10/20/2010

Table of Contents

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

Market Wrap

Whipsaw Wednesday

by James Brown

Click here to email James Brown

Market Stats

Negative reaction to China's surprise rate hike on Tuesday died quickly as fears eased that Beijing would slow down their economy too fast. Stocks here and across the Atlantic saw a very widespread bounce. U.S. dollar weakness was fueling big moves in commodity names. Better than expected earnings results from Dow-components Boeing (BA) and United Technologies (UTX) helped drive the DJIA back above the 11,100 level. Very bullish earnings in the airline sector helped lift the XAL airline index to new three-year highs and gave the Dow Jones Transportation index a nice boost. Financial stocks were still laggards as investors worry over efforts to force big banks into buying back billions of bad loans. Meanwhile the Fed's Beige Book report only showed modest growth. Traders decided to interpret the data as confirmation that the Federal Reserve would proceed with their plans to launch another round of quantitative easing (better known as QE2 these days).

Asian markets were mixed. The Japanese NIKKEI was still reeling from China's surprise rate hike and the Japanese market sank -2.3% intraday with the NIKKEI closing down -1.7%. I'm sure the dollar weakness with a drop to under 81.0 yen intraday certainly played a roll in the stock market's weakness since a weaker dollar makes Japanese exports more expensive. In China the market was poised to drop but the Shanghai index rebounded from its early morning weakness to close in positive territory. Yesterday was China's first rate hike (+0.25%) in almost three years. Initially investors were worried that China would cause their economy to stumble. Fortunately the market recovered and the Shanghai index inched up +0.7% to close at 3,003. The Hong Kong Hang Seng index lost -0.8%.

European markets saw widespread gains as stocks rallied off their morning lows. Metals, miners, and commodity-related plays were big winners thanks to the dollar's reversal lower. The minutes from the recent Bank of England meeting affirmed expectations that the BoE was still leaning towards additional quantitative easing. Unfortunately, gains in England were tempered by some of the deepest budget cuts the country has ever seen. The U.K. plans to cut 500,000 government jobs and impose further taxes on the banks in an all-out effort to eliminate the country's 156 billion pound deficit. The English FTSE rose +0.44%. The German DAX gained +0.5%. The French CAC-40 rose +0.5%.

It seems that these days trading is all about the U.S. dollar with concerns over currency wars and devaluations as countries try to stay competitive in the export market with a plunging dollar. The stock market has seen a relatively strong correlation with the dollar's move as dollar weakness bolsters stock gains. Today the dollar hit a new 15-year low against the yen, closing near 81.0 yen and hitting 80.85 intraday. The dollar's reversal lower today ended a three-day bounce against the euro with the euro rising toward $1.3958. The $1.40 level has been resistance and there is definitely speculation that a breakout past $1.40 on the euro would launch a new leg higher.

Yesterday's dollar declines sparked sharp profit taking in the commodity space. Crude oil lost -4.3% yesterday while gold plunged -2.6%. Today's decline in the dollar lifted oil +2.9% to $82.55 a barrel with a little help from the EIA report that showed a smaller than expected build in oil inventories last week. Metals saw a strong bounce on dollar weakness with copper up +1.2% and gold futures up +0.8% to $1,346.50 an ounce. The dollar's decline was also having a big impact on agricultural futures with corn up +5%, cotton +3.6%, oats +2.9%, rice +3.4% and soybeans hitting new 16-month highs. A weaker dollar makes U.S. exports of grains more competitive. Plus a weaker dollar means you need more dollars to buy the same bushel of corn.

The major economic report today was the Federal Reserve's Beige Book report, named for the color of its cover. A big picture look at the nation showed growth was modest. Seven of the 12 Fed districts reported modest improvements in business activity. Three regions said activity was flat while two regions, Atlanta and Dallas, said growth was slowing down. The Fed pointed out that businesses are still reluctant to hire new workers. Naturally our high unemployment is keeping the housing market weak with only scattered reports of mild improvements for residential real estate. Speaking of homes, the Mortgage Bankers Association weekly look at mortgage applications saw their index drop for the first time in six weeks. The application index fell -11% for its biggest drop since June led by a -11% in refinance applications and -6.7% drop in new purchases.

Most of the headlines today that weren't focused on the Beige book or the dollar were all about earnings. This earnings season has been much better than expected and results continue to prop up the market, even if they do take a back seat to the dollar's moves. Today the airline sector was soaring on strong earnings from three large carriers. American Airlines (AMR) ended a string of seven quarterly losses and reported a profit of $0.39, which was seven cents better than expected. Revenues jumped almost +14% and matched estimates at $5.84 billion. Delta Airlines (DAL) delivered a profit of $1.10 a share, which bested estimates of 94 cents. DAL's revenues grew +18.2% to $8.95 billion, besting estimates. Management issued bullish comments for growth through the end of 2010. U.S. Air (LCC) announced a profit of $1.22 a share versus a loss of 60 cents a share last year. Analysts were only expecting $1.17. LCC's revenues grew nearly +17% to $3.18 billion. Together the three airlines said average ticket prices were rising and traffic was healthy thanks the return of the business traveler and strong demand for international flights. Big gains for these three companies (AMR +12.5%, DAL +10.8%, and LCC +7.4%) helped push the XAL airline index (+5.2%) to new three-year highs.

Chart of the XAL airline index:

In related news Boeing Co. (BA), one of the world's largest manufacturers of commercial airplanes, rose +3.3% on its earnings report. Profits for BA came in at $1.12 last quarter with revenues hitting $16.97 billion. Wall Street was only expecting $1.06 a share on revenues of $16.81 billion. BA said demand had improved and management raised their forecasts. Another Dow-component reporting earnings this morning was UTX. Earnings came in at $1.30 a share, which beat estimates by 2 cents. Revenues were a miss but UTX narrowed its 2010 full year forecast toward the top of its previous range. The stock initially gapped down this morning but managed to bounce back into positive territory with a +0.4% gain.

Financials remain in the spotlight as investors struggle over headline risk with the major mortgage lenders. The markets are worried that growing efforts to force the banks to buy back billions of mortgages will succeed. Bank of America (BAC) is the biggest target and two firms downgraded the stock today. Shares of BAC tagged new 52-week lows this morning before paring its losses. Outperforming its peers was Wells Fargo (WFC), which reported earnings this morning of $0.60 a share on revenues of $20.87 billion. The street was expecting a profit of 55 cents on revenues of $20.95 billion. While the revenue number was a miss the $3.34 billion in net income was a new all-time high for WFC. The stock rallied +4.2%. Another financial company making headlines was Morgan Stanley (MS), which reported earnings of just 5 cents per share. Wall Street was looking for 15 cents a share. MS' revenues dropped nearly 20%. Trading revenues plunged from a year ago and yet in spite of these numbers the stock closed virtually unchanged on the session. Larger rival Goldman Sachs (GS) delivered a very strong earnings report yesterday and the stock rallied +1.8% today to set a new five-month closing high just under $160 a share.

In other news Amlyn Pharmaceuticals (AMLN) and Apple Inc. (AAPL) were making a splash. Shares of AMLN were nearly cut in half with a -46% drop to $11 on news that the FDA had rejected AMLN's once a week diabetes drug, Bydureon. AMLN is trying to compete with a similar drug, Victoza, manufactured by Novo Nordisk. AMLN's shares were not the only ones hurt by the FDA announcement. Eli Lilly (LLY) and Alkermes (ALKS) both had a stake in Bydureon. ALKS fell -27% to $10.50 and LLY dropped -3.8% to $36.01. The FDA has requested more information on how this new drug affects patients heart rate and any new decision has been postponed until mid 2012.

Chart of the Amlyn Pharmaceuticals (AMLN):

Shares of AAPL are hovering near their all-time highs. The stock only managed a +0.33% gain as investors digested the "Mac Event" scheduled today. CEO Steve Jobs unveiled Apple's new operating system called "Lion" and introduced two new MacBook Air models that weigh less than three pounds and have a battery life of seven hours. The new Macs also include "FaceTime" video similar to the new iPhone 4 video chat.

After hours the earnings results continued to pour in. Topping the tape were Ebay Inc. (EBAY) and Netflix Inc. (NFLX). EBAY reported earnings of 40 cents a share, which was three cents better than expected. Revenues improved to $2.24 billion, better than the $2.18 billion estimate. PayPal continues to be EBAY's crown jewel with strong growth. Management has raised their Q4 guidance to 45-48 cents a share, above consensus estimates of 44 cents. Shares of EBAY are up nearly +7% in after hours. Shares of NFLX are also trading up about +7% after hours as traders react to its earnings report. The company has raised its full-year subscriber forecast from 17.7-18.5 million up to 19.0-19.7 million. There seemed to be some confusion over the earnings results. Wall Street was expecting 71 cents a share. CNBC couldn't decide if NFLX had earned 70 cents or 78 cents. Revenues clearly beat with Q3 revenues of $553 million compared to the $550 million estimate. NFLX said they were seeing strong growth in their streaming video service.

Taking a step back to look at the market, technically, not too much has changed. The trend is still up and traders quickly bought Tuesday's dip. Stocks remain very overbought and due for a correction but that may not happen until after the elections. However, yesterday's sharp decline and the bounce back today does suggest a potential crack in the bull's armor. The rebound on Wednesday paused under yesterday's close and stocks began to wane late in the afternoon. I urge you to take a closer look at the intraday charts. Like I said, the trend is up, but if stocks struggle to make it past the highs this week we might be seeing a change in character.

On a short-term basis the S&P 500 index has resistance near 1185. Yesterday proved that 1160 was short-term support but I would watch the 1150 level as stronger support. A breakout past 1185 would leave the index open for a quick rally toward round-number resistance at 1200.

Intraday Chart of the S&P 500 index:

Chart of the S&P 500 index:

The NASDAQ composite is holding up pretty well and has yet to breakdown under its rising 10-dma. On a short-term basis we can look for support near 2420 and 2400 and overhead resistance at 2480 and 2500.

Chart of the NASDAQ index:

Meanwhile the small cap Russell 2000 index continues to march along. The index has been moving higher in a tight channel. Yesterday's close looked like a breakdown but there was no follow through. It might take a close under the 690 level before we actually see any real profit taking in the small caps. Until then the bulls are aiming for the 720 level.

Chart of the Russell 2000 index:

Tomorrow's economic data will be led by the Philly Fed survey and leading indicators. Plus, we'll see the weekly initial jobless claims. Economists are expecting new claims to come in at 450,000 last week. Odds are good the real headlines will focus on earnings data. Topping the list of companies reporting tomorrow are McDonald's (MCD), Amazon.com (AMZN), Caterpillar (CAT), and American Express (AXP). Thus far the number of S&P 500 components that are beating earnings expectations is up to 84%.

Personally I find it very challenging to want to buy stocks at these levels with the potential for a correction looming so large but nothing seems to keep this market down for very long. Negative economic data and earnings misses over the past couple of weeks haven't been able to spark any serious profit taking and even a surprise rate hike by China was quickly waved off as healthy. The trend of dollar weakness and commodity strength remains intact. Obviously we would prefer to buy a nice -5% or -10% correction but it may not happen until after the midterm elections and the next FOMC meeting. You would think that after the big gains we've seen so far in September and October that expectations for the Federal Reserve to launch another round of QE are completely baked into this market. Yet the QE yeast continues to rise. If you don't mind me mixing my baking metaphors, I'm worried that when the Fed finally does meets in early November we might hear this whooshing sound as the stock market deflates like an undercooked soufflé.

-James


New Option Plays

Insurance

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL PUT PLAYS

Hartford Fin. Serv. Group - HIG - close 23.74 change +0.21 stop 24.70

Company Description:
The Hartford Financial Services Group, Inc. (The Hartford) is an insurance and financial services company. It provides investment products, individual life, group life and group disability insurance products, and property and casualty insurance products in the United States. The Hartford is organized into two operations: Life, and Property and Casualty.

Target(s): 22.40, 22.05
Key Support/Resistance Areas: 24.60, 23.70, 22.85, 22.25, 21.85
Time Frame: 1 to 2 weeks

Why We Like It:
We are adding a short candidate to the portfolio to balance our positions a bit. The rally in HIG off of the August lows has failed at the 200-day SMA and I believe there is more downside to come. The stock is finding support at its 20-day SMA and I suggest we initiate short positions at $23.32 which is below Tuesday's low. Our first target is almost $1 lower near the 50-day SMA and our second target is near the swing low on 9/23. Our initial stop is above the 200-day SMA at $24.70 but it will be adjusted as the trade develops. This has the potential to be a quick trade so have your orders ready or be prepared to protect profits if HIG breaks lower.

Suggested Position: Buy December $22.50 PUT, current ask $1.05

Annotated chart:

Entry on October xx
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 7 million
Listed on October 20, 2010


In Play Updates and Reviews

Stay Nimble

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Good evening. I think we are going to see this volatility continue. Tuesday's losses were reversed today and I would not be surprised if today's gains are reversed tomorrow. Staying nimble and working both sides of the market is the right strategy. We have several positions still waiting to be triggered which could happen at any time. Please email me with any questions.

Current Portfolio:


CALL Play Updates

Dresser-Rand Group - DRC - close 37.76 change +0.06 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: -25%
Time Frame: 2 to 3 weeks
New Positions: No

Comments:
10/20: DRC traded in tight range and is still above its 20 & 50-day SMA's, and is maintaining the upward trend line that began on 8/25. Readers may want to consider tighter stops at $37.40 (5 cents below Tuesday'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. ,p> 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 cents 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.

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: 143.39 change: -0.53 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:
10/20: My comments from 10/19 remain the same. We want to launch bullish positions on a pullback to trend line support and prior resistance from July, then target a move back towards its recent highs.

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 16.04 change +0.24 stop 15.50

Target(s): 16.10 (hit), 16.90, 17.70, 18.05
Key Support/Resistance Areas: 18.25, 17.75, 16.90, 16.22, 15.75
Current Option Gain/Loss: -56.0%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/20: GNK did manage a bounce up to $16.15 which is where the stock found resistance. The problem is we don't have a good reference point to tighten the stop. Let's see how much more we can get out of the position and keep looking for areas to move up the stop. $16.22 is resistance and then a gap fill near $16.40.

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.

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: 55.98 change: +1.86 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:
10/20: HUM is running away from us as the stock took back all of yesterday's losses and printed a new 52-week high today. Let's keep the trigger in place and use a dip to $52.50 as a buying opportunity. Nothing has changed from the released play on 10/16 listed below. Should we get triggered I suggest buying the January options to give this some time to work.

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 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


Jeffries Group, Inc - JEF - close 23.83 change +0.29 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

Comments:
10/21: JEF closed above its 50-day SMA for the first time in a month which should provide support on a pullback. We are likely going to get triggered to launch bullish positions tomorrow on a breakout. Readers may want to consider an entry on a dip to the 50-day (currently $23.50) as the stock keeps getting bought, but I would keep a tight leash on the trade.

10/20: 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.

Trigger: $23.91

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

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


Sears Holdings Corp - SHLD - close 75.61 change +1.18 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:
10/20: We are getting closer to our trigger which may happen tomorrow or Friday. My comments bellow remain valid.

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 11.06 change +0.30 stop 10.45

Target(s): 11.10 (hit), 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:
10/20: TC recovered nicely but the stock still has a lot of work to do to regain the losses from Tuesday. We are in the same boat as GNK in that we do not have a good reference to raise the stop. Let's see how much more we can get out of the position and keep looking for areas to move up the stop. All of the targets above remain valid.

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.

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 73.97 change +0.95 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: -40%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

Comments:
10/20: There are not many changes to the comments below. We are getting whipsawed in a fairly tight range and ATK refuses to break lower as we have anticipated, which is when we want to be closing positions or tightening stops. I see no reason why ATK won't trade down to its 50-day SMA.

10/19: ATK lost -1.6% today and the stock 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: 52.40 change: +0.73 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: -30%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/20: FAST rolled over after their earnings report and has made a series of lower lows and lower highs over the past 8 trading sessions. What has me concerned is this may be forming a bearish descending wedge pattern. The bottom line is we are most likely going to need a more severe broader market correction for this trade to turn into a profitable one. A move the 50-day SMA should give us +35% gain. All of my comments below remain the same.

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.

10/16: (James)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 52.74 change -0.30 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: -50%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/19 & 10/20: 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