Option Investor
Newsletter

Daily Newsletter, Saturday, 10/23/2010

Table of Contents

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

Market Wrap

Holding Pattern

by Jim Brown

Click here to email Jim Brown

One third of the earnings cycle is behind us and the markets are dropping into a holding pattern with only a week to go before the FOMC meeting and the elections.

Market Statistics

Maybe I should have titled this commentary "The day volatility died" because the VIX closed at the low for the week. There has only been one day with a lower print since early May. The reason was simple. With the elections, the FOMC meeting and the year-end for mutual funds only a week away most traders have already placed their bets and they are going to watch the fireworks safely from the sidelines for the next week. The G20 meeting this weekend was also a damper on the market with currency discussions on the schedule. The dollar was flat and everyone was holding their breath over the potential for some big currency move. This convergence of events caused the Dow to trade in its narrowest range of the last six months with only a 50 point spread.

The economic calendar was light for Friday with Regional Employment and Mass Layoffs the only reports. The regional payroll report showed that 34 states lost jobs in September. On the positive side 23 states reported a lower unemployment rate. The rate can go down even when the state lost jobs if enough people ran out of employment benefits and fell off the rolls.

This is a lagging report but still notable because of the sharp decline in government employment due to the end of stimulus funding. Even with the declines the report showed a slight improvement in the overall labor picture.

The Mass Layoff report showed the number of layoff events declined for the third consecutive month. They fell from 1,546 in August to 1,486 in September. The number of workers affected fell from 150,192 in August to 133,379 in September. Manufacturing still accounted for more than 25% of the layoffs. The slowing of layoffs suggests the economy is growing but still at a very slow pace. Consumers are still using their income to pay down debt rather than pay for consumer goods. Until that changes the manufacturing sector will continue to lag.

Next week's economic calendar is active with multiple housing reports, Fed surveys and the GDP on Friday. The GDP will be the most important report for the week and our first look at Q3. Estimates have risen slightly over the last month but the whisper numbers are still in the 1.6% range. Grass grows faster than that but at least it remains positive growth.

Economic Calendar

The real news moving the market next week will still be the earnings. So far over one third of the S&P has reported and 79% beat the street estimates. Those that beat on revenue slipped to only 65%. On the surface this would appear to be a strong cycle but as we have seen from the many disasters the trading community is destroying any stock that did not have a blowout quarter. Just beating the street by a couple cents with revenue inline is good for a $3-$4 beating in your stock price.

S&P is showing reported earnings for the quarter with an increase of 26.21% over 2009Q3. Of the 158 S&P companies reported 79.1% beat, 7% reported inline and 13.9% missed estimates. Those that beat estimates posted average gains in earnings of 47.4%. Earnings misses averaged a -33.1% miss.

Earnings Calendar

The elephant hidden in that calendar is Microsoft on Thursday after the close. They are the biggest tech stock to report next week. Also important will be 3M, Texas Instruments, Merck and a ton of chip stocks. Networkers HLIT and FFIV will try to uphold the high bar set by Juniper.

We saw some good results last week that lifted individual stocks but there was also a lot of rough guidance. Very few companies were bragging about how good business would be this quarter. Most said as little as possible in hopes nobody noticed.

Winners included Amazon, Schlumberger, NetFlix, McDonalds, Ebay, T. Rowe Price and Citrix Systems. Chipotle (CMG) was the big winner for the week with a +15% ($26) rally on Friday after posting better than expected earnings. Shorts loaded up on Thursday with a $5 intraday drop and they were crushed on Friday. Earnings jumped +40% to $1.52 per share compared to analyst estimates of $1.31. Same store sales rose 11.4%.

CMG also said they had opened 67 new stores this year and were planning another 140+ stores in 2011. I have eaten at CMG several times this year and I don't see it as anything special but in the Denver area there is a Mexican restaurant on every corner. I am worried they are going to follow Boston Chicken and Krispy Kreme into disaster. Those chains thrived until they could not afford to open any additional new stores and the novelty wore off their brand. Boston Chicken disappeared as a public company in a bankruptcy and closed most of its stores and was renamed Boston Market. Krispy Kreme was a rocket ride to fame at $50 and then a roller coaster back down to trade at $1.01 last year. The company quit opening new stores and was forced to buy back those that were unprofitable once the novelty wore off.

The difference is CMG has a boatload of cash and almost no debt. If burrito sales slow down their earnings will drop but they will remain a going concern. I would not buy the stock over $200 but let them do a 4:1 split and I might dip a chip in their guacamole.

Chipotle Chart

Schlumberger (SLB) proved why it is a better investment than Halliburton when they reported earnings on Friday. Income more than doubled on an increase in drilling activity in North America. Earnings only beat by a penny but revenue was up strongly, nearly a billion dollars over Q2. They said oil and gas drilling onshore in the U.S. was growing rapidly but permits in the Gulf were still a problem. SLB said the seismic business was booming as those in the Gulf were using the down time to get a better picture of their prospects. They said business outside the U.S. was mixed with Asia, Russia, the North Sea, West Africa and South Africa was improving but North Africa and the Gulf of Guinea were soft.

Schlumberger Chart

Halliburton said the demand in North America had given them the ability to adjust pricing higher across all their product lines. There appears to be a serious shortage of hydraulic fracturing equipment and drillers are waiting in line for an appointment to fracture their wells. Comstock Resources has 26 wells in the Haynesville Shale that can't be completed because of the limited availability of pressure pumping services. Halliburton estimates that by the end of 2010 there will be as many as 3,000 wells in North America that have been drilled but not completed. There has been a feeding frenzy by drillers to produce wells to anchor leases. Most leases require drilling within a certain period or the driller forfeits the lease. These wells have been drilled but there are only a limited number of fracking crews to complete the wells.

This will continue to pressure the natural gas drilling community. If they can't complete the wells they can't start the cash flow from the gas. They have spent the money to drill the wells but are getting nothing back from their investment. They are continuing to spend money to drill more wells but the purse strings are tightening. As these wells are completed it will add to overall gas production and push prices even lower.

We will see earnings from Conoco Phillips, Chevron and Exxon Mobil next week.

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On the negative surprise side, furniture maker Leggett & Platt (LEG) posted earnings of 31 cents that missed estimates of 37-cents. The Leggett CEO said "Certain of our key markets, primarily related to residential furnishings, weakened noticeably in the third quarter. As a result sales in Q3 were lower than Q2 and that rarely occurs." They also lowered full year guidance to the lower end of the prior range. LEG shares lost -9% on the news.

The decline in the furniture business in Q3 was directly related to the end of the homebuyer tax credit and the end of the moving cycle for those who took advantage of the credit.

Now that summer is over and the buying season for homes has passed we are seeing some alarming news on pricing. The Clear Capital Home Data Index showed that home prices declined -5.9% over the last two months. The index has a high correlation to the Case-Shiller indexes so the same declines should be shown in Case Shiller over the next two months.

The senior statistician for Clear Capital said home prices are clearly experiencing a dramatic drop from the tax credit induced highs. This decline has wiped out the gains in prices seen from that uptick in sales. This is the same magnitude of drop we saw in March 2009. If this aggressive drop continues through the other indexes we could have a major hit to consumer sentiment over the next month. Hopefully it won't be enough to knock us back into a recession but it won't be pretty.

Bank of America and GMAC plan on restarting foreclosures on Monday. This will dump even more houses into the secondary market during the slow winter sales months. This will guarantee further price declines. There were 102,000 homes foreclosed in September and that was a new record.

Hewlett Packard (HPQ) released its Slate 500 tablet that has an 8.9-inch screen and runs the Windows 7 operating system. HP said the device was targeted at business customers. It can be purchased on the website today and shipments will begin in early November. On the HP website it calls the Slate 500 the "ideal PC for professionals who don't usually work at a traditional desk, yet need to stay productive in a secure, familiar Windows environment." That is obviously a jab at the iPad, which is more like an iPhone on steroids. The tablet comes with Wi-Fi but no cellular capability. It does have a camera front and back to enable video conferencing. The tablet is $799 and will have up to 64GB of storage space. You can expect announcements like this almost weekly for the rest of the year. The tablet war has officially begun.

The FDIC closed seven banks on Friday bringing the total for the year to 139. The largest was $1.6 billion Hillcrest Bank in Overland Park Kansas. The list of all the banks:

Hillcrest Bank, Overland KS
First Bank of Jackonsville FL
Progress Bank of Florida, Tampa
First National Bank of Barnesville GA
Gordon Bank of Gordon GA
First Suburban National, Maywood IL
First Arizona Savings, Scottsdale AZ

The FDIC could not find a buyer for First Arizona and they will shutter the bank and mail checks for the insured deposits on Monday. Florida, Georgia and Illinois have been particularly hard hit by closures this year. Florida has seen 27 banks closed with 16 each for Georgia and Illinois making 42% of all closures in just those three states. Only three banks were closed in 2007, 25 in 2008, 140 in 2009 and 2010 is expected to top 150 with 829 banks currently on the problem bank list.

The G20 meeting is this weekend and that prompted some profit taking in currencies and commodities over the last couple days. China hiked interest rates to avoid having to take the heat about a cheap yuan.

Timothy Geithner became the center of attention based on his comments on Thursday. Geithner said on Thursday that all the major currencies were roughly equal. That brought a storm of criticism but he was just getting started. He circulated a letter to the other finance ministers on Friday telling them to hike the value of their currencies in order to increase the value of their exports on the U.S. market.

The letter was seen as a direct attack on China and warned bluntly of the dangers of seeking "competitive advantage by either weakening their currency or preventing appreciation of undervalued currency." Let's see, just to make sure I understand. The U.S. is on a major quantitative easing program where they create artificial money with the stroke of a pen in order to lower interest rates and devalue the currency. Yet Geithner has the gall to warn other countries about doing the same thing? No wonder his letter created a firestorm of controversy at the meeting.

The Japanese Finance Minister called Geithner "unrealistic" and "difficult." He also warned "strong volatility in currency markets would be harmful to the stability of the global economy and financial system." The BRIC countries were united in their derision of the Geithner letter and said bluntly that the U.S. would not succeed in pressuring other countries to do what the U.S. was not doing itself.

Nothing was expected to result from the G20 meeting but the recent moves in currencies prompted traders to exercise caution and go flat over the weekend. When the meeting closed on Saturday there was "agreement" not to have a currency war. What did you think they would say? They have to be positive and show progress even if it is just a front. The also agreed to accept the Basel III accords when the full G20 meets in November. These rules will force banks to raise their common equity from 2% to 4.5% by 2015 and to 7% by 2019.

One of the closing statements had an interesting tone to it:

South Korean Finance Minister Yoon Jeung-Hyun said the two-day G20 meeting had laid to rest fears of a currency war between "struggling debtors such as the United States" and "exporting powers such as China." Is it my imagination or has the U.S. declined significantly in stature because of our rising debt?

Volatility died on Friday with the VIX closing a two-week low and very close to a five month low. Volume was very low at 5.8 billion shares. The Dow traded in a 50-point range and the S&P a five-point range. That was the smallest range in six months.

The problem is that everything moving the market is already priced into the market. The Fed's potential QE2 program has been telegraphed for the last four weeks with almost daily speeches by some Fed head that referenced the topic. The S&P has gained 50 points since the September 21st FOMC statement and every point over the backs of frustrated bears. As one analyst put it, "We are left begrudging the longs."

The market is convinced the Fed will act at ANY cost to insure economic growth. Analysts believe that $500 billion to $1 trillion of quantitative easing is now priced into the market. Apparently the Fed's goal is to create a wealth effect through higher stock prices. As the dollar devalues stocks go higher and investors will eventually start feeling prosperous again and begin to spend money. It may take many more months but the Fed appears committed to that goal. This is referred to as the Federal Reserve Put. If we know the Fed is not going to let the market go down it is the same as having a put protecting our longs.

I am becoming increasingly worried that the Fed may not be enough in agreement among themselves to follow through on the QE2 program. Several recent Fed speeches have warned that we should not take the Sept-21st statement literally. On the other hand Bernanke has reiterated the concept of further QE in every speech. If by chance the Fed does not follow through in their Nov-3rd statement or offers only a token amount of QE the market may react badly.

Secondly, the market has priced in a Republican sweep on November 2nd. The closer we get to the election the tighter the races are becoming. The election day is now close enough that voters are actually paying attention to the campaign ads and the democrats have a far larger budget than the republicans. By some estimates the DNC and its offshoots have some $250 million to spread around in the last week of the campaign while the republicans are closer to $100 million. With some of the hotly contested races attracting a blizzard of ads for the incumbents the odds of republicans winning some of those seats are shrinking.

How this factors into the market on November 3rd is unknown. The groundswell of republican support is shrinking but they are still expected to control the House. Will that be enough for businesses to breath easier on hopes further government taxes and regulation will be postponed for at least two years? We simply won't know until after the smoke clears but a republican sweep is currently priced into the market.

We know from the Job Openings Labor Turnover Survey (JOLTS) that the number of available jobs is growing. Employers are just not hiring yet. They have created the positions and accepted resumes but are holding off on the hiring decision. Some analysts have said they believe employers are waiting on the outcome of the election. If the outcome appears to be more taxes and regulation employers will retreat back into their protective shell. If the opposite result is seen employers could begin hiring immediately.

Did you know that the public employees union, the American Federation of State, County and Municipal Employees (AFSCME), a 1.6 million member public sector union, has become the biggest spender in the election? AFSCME has contributed $87.5 million to support democratic candidates in the upcoming election.

The market next week could be boring. It will be the last chance for funds to dress up portfolios before their Friday year-end. This is their last chance to take profits or sell losers. In theory they should have already made their year-end moves but you never know.

This entire rally has occurred while money was flowing out of stock mutual funds. That continued last week with money still moving from stocks into bonds and into emerging market funds. Retail investors have zero confidence in the rally and the market. If this trend ever changes and retail investors begin to come back to stocks it could be explosive. This would probably require an uptick in nonfarm payrolls to trigger the reversal of money flow.

Keene has been pulling his hair out trying to understand why the technicals no longer matter. He is only one of millions. Almost the entire analyst community is still in denial over the continued rally. It all boils down to the Fed wanting to create inflation and flooding the economy with cash. That overcomes technical patterns as wave after wave of cash finds a home in stocks. Bernanke wants to make it so painful to be in money markets and bond funds that people will eventually put the money to work. Don't fight the Fed.

This will also be the busiest week for Q3 earnings with Tuesday and Thursday the heaviest days. This should provide plenty of activity for the talking heads on stock TV to discuss. In reality we already know how the cycle will end but we still need to go through the motions.

The S&P climbed a whopping +7 points for the week. That is not exactly a scorching performance but it was another week of gains and another new high over that resistance at 1175. There is resistance at 1195 and again at 1210 and 1228.

I am worried that we will push through to something in the 1225 range over the next two weeks and then hit a sell the news event after the FOMC meeting on Nov-3rd. That would produce a very convincing double top anchored well back in the March 2009 lows. It may take a very strong QE program announcement to keep this from happening because all the news is already old news.

S&P-500 Chart - Daily

S&P-500 Chart - Weekly

The Dow has the same double top potential but in the case of the Dow the strong resistance at 11,200 has already been met. If we move higher to touch that again next week and can't break through then I would be even more worried of a sell the news event the following week that could begin a double top.

If we were to break through 11,200 and hold the gains it would be very bullish. Before I forget it, "don't fight the Fed" definitely applies here. The Fed's goal is to push the markets out to new highs so writing about the technicals and potentially bearish setups is probably a waste of keystrokes.

Dow Chart - Weekly

The Nasdaq chart is extremely ominous with the eight-week vertical spike approaching the Fib resistance at 2520. Like the other indexes this could easily result in a major double top. Even more so on the Nasdaq because many high profile tech stocks have made moves reminiscent of the tech bubble moves in 2000.

For instance Amazon has rallied $65 since July. That is a 50% move. NetFlix is up +$70 for a 70% move. There are others but you get the idea. There are enormous amounts of profit to be captured and you have to sell them to actually bank the profit. We could easily see a sell the news event after the mutual fund year-end on Oct-29th.

That does not mean we won't finish the year higher. If the Fed follows through on its hints we could see the markets a lot higher over the next few months but nothing goes up in a straight line even in raging bull markets.

Obviously a move over 2520 could negate my worries temporarily and would produce some serious short covering.

Nasdaq chart - weekly

The Russell posted no gain last week. There was a complete lack of direction although there were two decent rebounds from support at 690. I believe the Russell has emerged once again as a clear indicator of fund manager sentiment. On the Russell the rally stalled ten days ago at 710 and that has remained solid resistance. If we see a move over that level it would be a bullish signal and it could be explosive. The next major resistance is 740. Likewise a breakdown under 690 would be strongly negative.

Russell Chart -30 Min

Russell Chart - Weekly

The NYSE Composite Index covers more than 2000 NYSE stocks from the giants like XOM to the very small stocks just off the pink sheets. This is a broad market index and it is just a good day away from strong resistance at 7700. To complicate matters the 200-week moving average is converging with that 7700 level. This suggests moving over that resistance could be difficult. The probable scenario is a stall under 7700 until the market picks a direction after Nov-3rd.

NYSE Chart - Weekly

The Dow Transports have been remarkably strong with the price of oil over $80. However, the transports are also showing a possible double top formation if resistance at 4800 remains firm. Transports normally move ahead of the broader markets when investors believe there is a stronger economy ahead.

Dow Transports Chart - Daily

In summary I think the market will be in a holding pattern until November third. All the potentially good news is already priced in. We had the buy the rumor rally and now we are waiting on the sell the news event. I don't see how any news we might get from the elections or the Fed will be so much better that the markets explode higher. The Fed put allows money managers to buy stocks in confidence the market will not go lower but that put will eventually expire.

The Fed has been spiking the punch for two years and now they are telling us they are going to skip the punch and start passing out shots of vodka instead. Like teenagers at a keg party we don't know when to stop drinking and walk away. Why do you think casinos offer free drinks to gamblers? So the alcohol will cloud gamblers judgment and keep them investing in the tables until they are broke.

Eventually we are going to have a terrible hangover when the Fed runs out of booze and the party breaks up but a QE2 announcement on Nov-3rd will insure another year in party mode. If the announcement on the third delays QE2 for any reason, November could be ugly. I believe the Fed understands this and they will do whatever is necessary to create investor wealth and improve consumer sentiment. They have to do this or the U.S. could fall into a long-term depression like Japan's lost decade. For that reason I am still in buy the dip mode until proven wrong. Don't fight the Fed.

Jim Brown

Work spares us from three evils: boredom, vice, and need. - Voltaire


Index Wrap

Notable Decline in Bullish Sentiment

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

While the S&P and Dow seem to be struggling in technical resistance areas and the Nasdaq is going sideways with the Composite not yet at new 12-month highs, the recent week's decline in bullish sentiment is a bullish plus. My sentiment indicator here tends to 'offset' a bearish price/RSI divergence. In the battle of the indicators, I rely somewhat more on my sentiment model.

The foregoing is not to say that the market is not at risk for a downside correction. We've seen so far one day shakeouts only. The major indexes remain at risk for more than a single day fall erased by a next day's rally. Nevertheless, I would guess higher since option traders are less 'believing' of it and price action can't be construed yet as anything more than a consolidation of the prior uptrend. In any recognizable trend, an up trend here, give the benefit of the doubt to the direction of the dominant trend. In the scheme of things, chart/price action is king; indicators (based on price inputs) are secondary. And, you will note further on with my Index charts, that both Nasdaq indexes have so far maintained their very steep up trendlines. Not so with the allied Russell 2000 Index, so its action does raise an alert as to whether Nasdaq will just keep surging higher with little corrective action.

One final note as to the longer-term market picture is to pick up on an aspect or element of Dow Theory. The Dow Transportation Index (TRAN) just made a new Closing weekly high at 4754.9, relative to its 4/23/10 weekly Closing peak of 4751. If the Dow Industrial Average (INDU), in turn, has a weekly Close above 11204, it makes for a re-confirmed Dow Theory buy 'signal'; reconfirming so to speak the original Dow Theory buy signal (of 8/7/09). I'm not sure Dow talked about it in quite my terms, but he always looked for 'confirming' aspects with his two key indexes (e.g., confirming each other in NEW highs) as being the way the market should go if in a primary uptrend.

Support and resistance levels are little changed for the coming week as the goalposts weren't moved much in this past week's continued march sideways, now making for an 8-day streak of mostly sideways price action.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) daily chart continues in its patter of mostly sideways price action. Given the prior trend as fairly strongly up, I have to assume that what we're seeing is a consolidation before a push higher. In the 1180 area, there's substantial stock for sale as I pointed out last week. Once investors churn through the 1180-1182 level, SPX should progress on to 1200, then 1220 at some point after that.

On the other hand, the bear one, a close below 1160 that doesn't see the index bounce back the next day, would suggest a slow down in buying interest as potential buyers look for the possibility of lower prices. Seemingly 'maximum' downside risk, absent an extreme economic shock, is to 1120 currently.

Bullish sentiment declined this past week which keeps me in a bullish camp in that perverse way of contrarians. That factor plus the index being so close to the prior top, makes for a previous high that sort of 'begs' to be challenged. In a significant number of times when I've seen this pattern the return rallies at least set up a double top but often mark the start of a new up leg. We continue to have a strong long-term uptrend.

S&P 100 (OEX) INDEX; DAILY CHART

As with big brother SPX, the S&P big cap 100 (OEX) chart suggests that OEX is on track to still churn through potential overhead resistance in OEX's case at 532-537, on its way to a potential challenge of 12-month highs in the 550-554 area.

Key near support becomes again the 21-day moving average, a great benchmark of near-term price momentum. In a strong uptrend, prices will rarely do more than drop to this key average and then rebound. In some instances (in a continued strong uptrend) a 1-day selling event will drive the index to a close below the average, but which is followed by a next day recovery rally. If however, that second day brings renewed selling, throw away your bullish flag for a bit. I currently see downside risk to around 511, possibly to 500, if the bears were able to stage a full-blown attack.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) upper trendline of INDU's uptrend channel continues to show increased selling pressure as prices move just incrementally higher. When an upper channel trendline such as seen below represents an accurate forecast of increased levels of selling and the rate of ascent slows, prices start just creeping higher instead of prior trot or gallop.

After a continued 'slowmo' move higher, what often follows then is either 1.) a substantial upside breakout rally that WIDENS the prior trend channel boundaries; OR 2.), a pull back toward the upper third to midpoint of the channel. The Dow back at 10700 (and the channel midpoint) seems like a lot, but it's not that much of a stretch relative to INDU's last up leg.

Key near resistance is 11200, which then extends to the prior intraday Dow high at 11258; above 11250-11300, long-term charts don't suggest major technical resistance until around 11700-11750. I currently don't see this much upside potential when I analyze the 30 charts involved.

Pivotal near support at 11000 also represents a downside breakout point, as a decisive downside penetration of 11000 would suggest high risk of a deeper correction to follow. It also depends on the following day's market reaction. We saw a recent (10/19) close below 11000 (10978) followed by a Close the next day at 11108. One day countertrend extremes can be just that, lasting for one day.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart remains bullish. Some cause for bullish concern is a slowed down advance but probably natural as the index gets near its 12-month high at 2535. Nevertheless COMP has 'maintained' its rather steep up trendline as seen on my next chart. As always with these things, intraday dips that piece such a trendline don't carry nearly the weight of Closing levels being maintained above this line.

Overbought RSI readings continue but I am discounting this indicator relative to the bullish chart pattern. As far as technical indicators, the fairly steep fall in bullish sentiment numbers this past week is trumping any overbought considerations, although I also pay attention to it. 'Indicator' is not even the right word to use as my CPRATIO sentiment model isn't derived from index price action and is mostly a reverse barometer of traders' passions on particular days.

The key overhead resistance remains the same: the prior 12-month high at 2535. There was almost no gain on the week. Key near support is at 2425, then down at 2350.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart remains bullish. Although recent upside momentum has slowed, NDX has continued to climb at a rate keeping daily price ranges above the steep up trendline.

The close over 2100 was a bullish plus but in a context that NDX, like the broad Composite, made only slight gains this past week. The rate of price increase isn't likely to rise (it's already quite high), so a key watch is for downside penetrations of the up trendline as predictive for a correction.

I project next resistance in the 2140 area, with increasing resistance on rallies that carry to and above 2200; the prior 2239 high seen below dates to Nov. 2007.

Near support is 2050, then at 2000. A daily close below 2000 would suggest a strong correction was underway. Next day confirmation of that is also key.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

A bullish chart pattern on balance with a potential test this coming week involving the Nas 100 tracking stock's ability to stay at or above its present rate of increase, which visually is of course a trendline! We start the week with the up trendline intersecting at 51, suggesting what should be immediate support. Let the watch begin! A continued march higher won't get 'extreme' in terms of again touching the upper envelope line seen below until/unless QQQQ hits 53.4, with some hourly projections going to 53.7 as resistance.

Friday's advance was on noticeably low volume. Are the bulls flagging, losing courage? Shorter-term traders holding the stock tend to be quick to run, especially such a prior strong advance.

Near support: 50.0

Next support: 49.0, extending to 48.2

Near resistance: 52.4-53.7

Major resistance: 55.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT), unlike the Nasdaq, its mentor-sister index, is flagging in maintaining the same rate of price increase as it had going into this past week. This group of stocks just doesn't have the money pouring into them as for example, NDX. The Index above 700 keeps a bullish pattern going but better in that regard would be the potential to rally to the 720 area. Next resistance above my projected 720 is more concretely suggested by the prior high at 746.

If RUT starts falling below 690, I won't be surprised by further bouts of weakness, such as 680 and if selling continues, to 670. Support implied by the 200-day moving average is at 655.



GOOD TRADING SUCCESS!


New Option Plays

Oil & Gas

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. I've got one bullish set-up for you tonight along with two trading ideas below. Continue to stay nimble this week as the volatility is likely to continue. A healthy broader market correction is imminent and when it comes I would use the opportunity to consider launching new bullish positions with tighter stops. SPX 1,150 seems like the most logical target but 1,160 will have to be dealt with first by the bears. If 1,150 is broken then 1,130 should be very solid support. I would view breakouts higher as suspect. Please email me with any questions.

Long WEN (Wendy's/Arby's Group): This is a more speculative play trading just under $5 that has some potential. The company is a takeover candidate and Trian Partners (the top institutional holder at 17.86%) is usually the name mentioned as a potential buyer. Aside from a takeover target, WEN has broken out of resistance on heavy volume. Target a move to the $5.50 to $6.25 area.

Long SFD (Smithfield Foods) - Listed again from last week. The stock is on the verge of breaking higher and looks bullish. A stronger dollar should lead to lower commodity prices and will help stocks like SFD. Technically, the stock is consolidating above its 20-day and 50-day SMA in a bull flag. If the stock breaks out target a move up towards the $17.50 to $18.25 area, which is +6% to +10% higher than current levels.


NEW DIRECTIONAL CALL PLAYS

ATP Oil & Gas Corp - ATP - close 14.73 change -0.14 stop 13.75

Target(s): 17.00, 17.90, and possibly higher
Key Support/Resistance Areas: 18.00, 17.00, 16.25, 14.75, 14.10
Current Gain/Loss: Unopened
Time Frame: 1 to 3 weeks
New Positions: Yes, see entry point below

Company Description:
ATP Oil & Gas Corporation (ATP) is engaged in the acquisition, development and production of oil and natural gas properties in the Gulf of Mexico and the United Kingdom and Dutch Sectors of the North Sea (the North Sea). As of December 31, 2009, the Company owned leasehold and other interests in 62 offshore blocks and 104 wells, including 19 sub sea wells, in the Gulf of Mexico. ATP operates 93 (89%) of these wells, including 95% of the sub sea wells. It also has interests in 11 blocks and three Company-operated sub sea wells in the North Sea. (source: company press release or website)

Why We Like It:
ATPG broke out of resistance from August on heavy volume on 10/11 & 10/12. Over the past week and a half the stock has drifted lower on light volume (a bullish sign) right into the prior resistance from August, which should now act as support. At the same time the stock has formed a bullish descending wedge pattern that could produce a powerful move higher if it breaks out. Also notice the converging 20-day and 200-day SMA's providing further support, along with an upward trend line from its August lows. Finally, there is a gap to fill down near $14.30 which also sets up a good bullish entry point. I suggest we launch bullish positions using a breakout (at $15.11) or gap fill (at $14.30). We'll keep a tight initial stop at $13.75 and it will be adjusted after our entry is triggered.

Trigger: $15.11 or $14.30 Suggested Position: Buy December $24.00 CALL, current ask $1.10

Annotated chart:

Entry on October xx
Earnings Date 11/4/2010 (unconfirmed)
Average Daily Volume: 2.7 million
Listed on October 23, 2010


In Play Updates and Reviews

Churning In A Tight Range

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

First Solar Inc. - FSLR - close 145.55 change +0.48 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:
10/23: Not much has changed with FSLR. I expect FSLR to pullback to trend line support, its 50-day SMA, and prior resistance from July and April. (see grey oval). This is where I suggest launching bullish positions and then target a move back towards its recent highs. I've pushed out the suggested call position to the December $155's. FSLR reports earnings on Thursday after the bell. Holding positions over earnings is a higher risk play. Readers may want to consider selling a further out of the call to help better define risk. For example, buy the December $155 call and sell the December $160 or $165 call.

10/16: (James) 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 December $155 calls.

Annotated chart:

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 - GNK - close 16.27 change +0.27 stop 15.50

Target(s): 16.10 (hit), 16.80, 17.50, 18.05
Key Support/Resistance Areas: 18.25, 17.75, 16.90, 16.25, 15.75
Current Option Gain/Loss: -50.0%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/23: GNK is stuck between its 50-day SMA (below) and 20-day SMA (above). There is resistance at current levels but if GNK can break above today's highs we will have a good chance of reaching our next target. However, I am concerned about the overbought broader market conditions so I suggest readers use strength to consider exiting positions, or tightening stops. 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

Annotated chart:

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: 56.97 change: +0.70 stop: 49.75

Target(s): 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:
10/23: HUM looks extremely bullish here and it is probably because money is rotating into this defensive sector. If HUM pulls back to $53.80 I suggest launching new positions. However, HUM reports earnings next Monday (11/1) so holding positions over the report is a higher risk situation. Readers may want to consider selling a further out of the call to help better define risk, similar to the suggestion in the FSLR play above. The play release from last weekend is below.

10/16: (James) 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 $53.80

BUY the 2011 January $55 calls.

Annotated chart:

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 -0.32 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: +5%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/23: JEF printed a bearish engulfing candlestick on Friday and I doubt the stock will be able to swim against the current of a broader market correction, should a correction happen. The stock gapped higher on Thursday and then Friday it retraced the gain and closed the gap. The 50-day SMA and prior resistance is just below near $23.50. The stock and price action look good to me but we are likely going to need the market to continue its march higher. For now, I continue to view dips as buying opportunities.

10/21: JEF gapped higher at the open near our trigger to launch bullish positions so we are long December $24 calls. The stock surged higher but closed well off of its highs. I like the price action in JEF and expect further upside if the broader market cooperates. I would view dips as buying opportunities.

10/19: 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: Long December $24.00 CALL, entry was at $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


Sears Holdings Corp - SHLD - close 76.32 change +0.31 stop 71.50

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: -16%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/23: Not much has changed from my comments below. Readers may want to keep an eye on $78.90 as a potential exit target. This is near highs from Thursday and should produce a +15% gain. Consider tightening stops if we get up there. Friday was the highest closing price the stock has seen since 6/17 so momentum is on our side, but we are going to need help from the broader market and retail sector, which has been performing extremely well lately.

10/21: SHLD hit our trigger to enter long positions and surged $1.80 higher. Unfortunately, the breakout did not last and the stock plummeted to its lows of the day. Our options expire in December so time is on our side for now, however, I am concerned with the price action not only in SHLD, but also the broader market. There is a lot of indecision and it is being confirmed by the intraday volatility (up and down). There is high short interest in the stock so this may spark further gains if the broader market continues higher. I suggest being ready to take profits or tighten stops to protect them if SHLD moves higher. I've moved the stop up slightly.

Suggested Position: Long December $80.00 CALL, entry was at $3.40

Annotated chart:

Entry on October 21, 2010
Earnings Date 11/18/10 (unconfirmed)
Average Daily Volume = 831,000
Listed on October 16th, 2010


PUT Play Updates

Alliant Techsystems - ATK - close 76.09 change +0.07 stop 76.33 *NEW*

Target(s): 74.90, 72.80
Key Support/Resistance Areas: 76.00, 74.00, 72.00, 71.25, 70.00
Current Gain/Loss: -65%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

Comments:
10/23: There is really nothing more to report on ATK as the stock traded in a tight range near its highs from Thursday. We need an immediate turn lower this week. I've adjusted the targets and suggest readers use weakness as an opportunity to close positions or tighten stops to protect capital. Our stop is just overhead.

10/21: ATK has broken out and our set-up has failed. The stock surged +2.7% today which may have been due to a favorable earnings report from one of its peers. ATK came within 1 penny of hitting our stop today so we are on the verge of being taken out. Let's raise the stop by 8 cents to $76.33 just in case ATK flashes a higher price tomorrow. Otherwise we will step aside and take the loss. ATK will eventually trade to its 50-day SMA but it just may not do it now as we have been anticipating.

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.

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

Annotated chart:

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


Fastenal Co. - FAST - close: 52.90 change: +0.00 stop: 54.25

Target(s): 51.20, 50.10, 48.25, maybe lower
Key Support/Resistance Areas: 55.00, 52.00, 50.00, 48,00,
Current Gain/Loss: -50%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/23: FAST gapped higher on Friday and it was immediately sold into. The stock has yet to trade above its highs from the past two weeks and closed below its 20-day SMA which is starting roll over. If we get a more meaningful broader market correction FAST should quickly head towards our targets which is when we want to be exiting positions or tightening stops.

10/21: Fast has bounced up to its 20-day SMA from below and has yet to take out highs from the past two weeks. We are most likely going to need a more meaningful healthy broader market correction for the position to get back into positive territory.

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.

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

Annotated chart:

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


Hartford Fin. Serv. Group - HIG - close 23.95 change -0.25 stop 24.70

Target(s): 22.45, 22.05
Key Support/Resistance Areas: 24.60, 23.70, 22.85, 22.25, 21.85
Time Frame: 1 to 2 weeks

Comments:
10/23: HIG printed a bearish engulfing candlestick on Friday as the stock failed at it 200-day SMA again. Our trigger remains at $23.32 which is a break down below last week's and also a break of trend line support.

10/21: This morning UBS reiterated their buy rating for HIG and the stock gapped higher at the open and surged up to its 200-day SMA. And that is when the selling began which pressured prices back to their lows of the day. We are waiting to be triggered on a break down below the prior two days lows which will also be a break of trend line support. However, more nimble traders may want to try a short position at current levels with a tighter stop overhead.

10/20: 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 if HIG trades to $23.32, 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


PNC Financial - PNC - close 54.72 change +1.16 stop NONE *NEW*

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: -84%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/23: PNC just keeps going like the energizer bunny. We have gotten destroyed on this play and our option premium has almost evaporated. Keeping a stop in place now doesn't make a lot of sense to me. I would rather hold the position and ride it lower if the market corrects between now and expiration, which is three full trading weeks. Our opportunity to close positions was late last week when PNC was at the $51.00 level. Let's see what happens in the coming days and we'll continue to monitor the developments.

10/21: PNC's "adjusted" earnings beat estimates but their revenues missed. The CEO made cautious comments but it didn't matter, investors gobbled up the stock and PNC closed +1.5% on the day. It is a tough call with earnings and considering the reaction to many reports I thought holding the position was the right call. Obviously it was the wrong call. If the broader market continues its path higher we will likely get stopped out, possibly tomorrow. We're not out of the position yet though and PNC could easily turn lower here. Our stop is in place.

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

Annotated chart:

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