Option Investor
Newsletter

Daily Newsletter, Wednesday, 10/27/2010

Table of Contents

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

Market Wrap

QE2 Too Small?

by James Brown

Click here to email James Brown

Market Stats

The stock market stumbled out of the gate this morning as investors reacted to a bounce in the U.S. dollar, commodity weakness, and concerns over the Fed's expected quantitative easing next week. The economic data today was mixed with the durable goods orders suggesting the manufacturing sector in our economy is starting to lose momentum. New home sales were better than expected. At the end of the day a string of better than expected earnings results from the technology sector helped buoy the markets and lift the NASDAQ and the semiconductor index (SOX) into positive territory.

Everyone expects the Federal Reserve to launch a new round of quantitative easing (QE2 for short) at the FOMC meeting next week. These expectations are so big they have been powering the stock market rally for several weeks now and pushing the U.S. dollar lower. Bank of America is forecasting the Fed to announce a $1 trillion QE program. The minds at Goldman Sachs believe the Fed will embark on a $2 trillion program but most estimates seem to fall in the $500 billion to $1 trillion range. Thus investors were a little uncomfortable this morning when the Wall Street Journal released their opinion that the Federal Reserve will be much more timid in their QE2 plans. Instead of announcing some huge "shock and awe" number (in the trillions) the WSJ is suggesting the Fed will only announce a $250 billion program as the first step. This way the Fed can slowly roll out $250 billion chunks if they feel the need to and at the same time they can end the program when the economy improves.

Honestly today's opinion by the WSJ and market reaction to it could be a good thing. I have been concerned that expectations are so big for the Fed's QE2 announcement that the market would likely correct sharply in a typical sell-the-news sort of move no matter what the Fed says. Now the WSJ has helped adjust investors expectations (a little) that the QE2 news next week may not be the panacea we've been expecting. Of course the real impact of more QE was always open for debate. The WSJ report today had an impact on the dollar, commodities, and the bond market.

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

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

Chart of the GLD gold ETF:

The dollar saw a decent bounce as traders reacted to the WSJ report. If the QE2 program isn't big enough then the dollar has probably been oversold. The dollar bounce sparked additional profit taking in commodities and commodity-related stocks. Gold futures lost $16.00 to close near $1,322 an ounce. Silver prices retreated -1.79% to $23.40 an ounce. Copper prices slipped from 27-month highs with a -2.4% pull back. Crude oil also felt the dollar's gain as oil prices dropped -0.74% to close under $82.00 a barrel. The weekly EIA oil inventory numbers also contributed to oil weakness. Economists were expecting a one-million barrel gain in inventories and the EIA said oil supplies jumped five million barrels.

Reaction to QE expectations and the dollar's strength was also evident in the U.S. bond market. Bond yields move higher as bond values decline and the 10-year treasury bond fell for the sixth day in a row - the longest decline in two years. Yields on the 30-year treasury note closed above 4% for the first time in several weeks. The 10-year yield hit 2.71%, which is a big move from the 52-week low of 2.33% just over two weeks ago. Comments from the very influential Bill Gross of PIMCO definitely made headlines today. Mr. Gross manages PIMCO's Total Return Fund, the largest mutual fund in the world with assets of more than $255 billion. In his comments released this morning Gross suggested that the Fed's QE2 will probably end the 30-year bull market in bonds. If the Federal Reserve is going to print trillions of dollars to pay for this QE then it will definitely create inflation. Gross actually called the Fed's QE2 program "somewhat of a Ponzi scheme". Investors are growing more worried about inflation and the recent 5-year TIPS auction of inflation-protected securities, actually sold with a negative yield this week.

Chart of the Yield on the 10-year U.S. Bond:

Markets overseas were generally lower today. The drop in commodity prices fueled profit taking across Asia. The Chinese Shanghai index lost -1.4% and the Hong Kong Hang Seng fell -1.85%. The Japanese NIKKEI managed to close in positive territory thanks to the dollar's bounce against the yen. Gains in Japan were limited by weakness in the banking sector.

The major European markets were down across the board. Stocks rallied from their morning lows but the lunchtime gains faded into losses and Wednesday delivered the biggest drop they've seen in weeks. Market weakness was accelerated by the disappointing durable goods data in the U.S. and the WSJ report on QE2. Earnings disappointments from large European companies like SAP and Heineken didn't help. The Greek market lost -1.9% after the country's Finance Minister said their review of the 2009 budget showed Greece's deficit was actually higher than 15% of their GDP. At the end of the day the German DAX slipped -0.69%. The French CAC-40 fell -0.9% and the English FTSE lost -1.07%.

There were two economic reports out this morning, the Durable Goods orders and the new home sales data. The Commerce Department said durable goods orders rose +3.3% but that was fueled by big gains in civilian aircraft demand. Economists were only expecting a +2% rise. Yet excluding +15.7% jump in transportation the durable goods orders actually fell -0.6%, which follows a +4.8% rise in August. This is another sign that the manufacturing sector in the U.S. is slowing down. Looking at the details in the report the shipments of durable goods dropped -0.4% after a -1.4% decline in August. Inventories continue to climb and September saw inventories grow +0.5% for the ninth monthly gain in a row. The very volatile transportation sector jumped +15.7% in September following a -8.8% decline in August. Drilling down even further most of that move was fueled by a +105% increase for civilian aircraft last month. Overall it was a disappointing report since the manufacturing sector had been a bright spot in the economy the last several months.

Economists were expecting September new home sales to grow +4.1% from 288,000 in August to 300,000 in September. The Commerce Department announced that sales actually hit an annual pace of 307,000 last month (+6.6%). While it is improvement we're still very low and close to the all-time low of 282,000 set back in May. Demand for homes has crashed following the expiration of the new buyer tax credit. Back in April new home sales were at the 414,000 pace. Sales prices did improve +1.5% from August and up +3.3% from a year ago with the average new home at $223,800. Unfortunately the uptick in bond yields will put pressure on mortgage rates, which have been sitting near all-time lows. Rising rates won't help the housing market heal. Honestly, I'm not sure why anyone even bothers with this report since the margin of error is plus or minus almost 17%.

We are still in the middle of Q3 earnings season and corporate rules played a big part in today's market. Technology names continue to perform very well and buoyed the NASDAQ throughout the session. There were several companies reporting after the closing bell last night that saw big moves today and then a number of big reports this morning. I'll try and touch on them briefly. Aflac Inc (AFL) was up +2.1% to a new six month high after beating earnings by seven cents last night. Education stock DeVry Inc. (DV) soared +7% following its earnings beat last night. Jones Lang LaSalle (JLL) crashed -11% when the company missed estimates by 11 cents but beat on revenues. Broadcom (BRCM) soared +11.6% to new multi-year highs after reporting earnings last night that beat the street by five cents. BRCM management guided Q4 higher. Compellent Technologies (CML) rallied to a new three year high (+32% today) after reporting earnings yesterday that beat estimates by 11 cents.

Keeping the tech streak alive was F5 Networks (FFIV), which skyrocketed +14.6% to a new all-time high. FFIV reported earnings 7 cents better than expected and guided Q1 higher. FFIV management also announced a $200 million stock buyback program. JDA Software Group (JDAS) sprinted to its 200-dma before paring its gains to close up +12.9% following its better than expected earnings last night. NetGear Inc. (NTGR) rallied +12% to new two years highs after beating the street on profits and revenues and guiding higher. RF Microdevices (RFMD) closed at a new three-year high with a +15% gain following yesterday's earnings report where the company beat estimates on both earnings and revenues.

This morning investors were digesting earnings from Sprint, ConocoPhillips, Procter & Gamble, Northrop Grumman, and Whirlpool. Energy giant Conoco (COP) reported a profit of $1.50 a share, besting estimates of $1.46 but the stock dropped -1.2% likely due to oil's weakness today. Procter & Gamble (PG) eked out a very minor gain following its earnings of $1.02, which beat the street by two cents. PG's revenues were a minor miss at $20.12 billion but the company offered relatively bullish guidance for 2011. Defense contractor Northrop Grumman (NOC) closed virtually unchanged on the session near its 200-dma after reporting earnings of $1.64 a share. This beat Wall Street's estimates by 18 cents with NOC's revenues rising to $8.71 billion versus estimates of $8.56 billon. Sprint (S) saw its stock plunge nearly -10% after missing estimates by two cents with a net loss of -$0.30 a share. Whirlpool (WHR) spiked lower this morning but pared its losses to just -4% in spite of crushing the earnings number. Wall Street was looking for WHR to deliver 88 cents on $4.49 billion in revenues. WHR reported $1.02 in profits on $4.52 billion in revenues.

Looking at the market's major indices it appears that upward momentum is slowing fading. In truth I agree with Jim's assessment last night. There are only two trading days left in the month of October and yearend for many mutual funds. The market will likely drift sideways letting stocks close near their five-month highs, which will make your mutual fund statements look good and help ensure some yearend bonuses for fund managers.

On a very short-term basis the S&P 500's failed rally on Monday looks like a potential short-term top. Yet at the same time the S&P 500 saw a mini (bullish) double bottom today near 1172. The 1172-1173 zone was prior resistance. Take a step back and the S&P 500 still has a steady trend of higher lows and higher highs over the last several weeks. Yet if you step back even further the rally is slowing as it nears potential technical resistance at the 200-week moving average (see weekly chart below).

Short-term, if the 1172 level fails we can look for support near 1160. Overhead the S&P 500 probably has resistance near 1200 and then the 1220 level.

Daily Chart of the S&P 500 index:

Intraday Chart of the S&P 500 index:

Weekly Chart of the S&P 500 index:

The tech-heavy NASDAQ continues to rally thanks to a very strong earnings season. The NASDAQ Composite index has managed to rally toward round-number, psychological resistance near 2500. I wouldn't be surprised to see a last gasp spike toward the 2010 highs near April's close of 2530. You already know the NASDAQ and the NASDAQ-100 index (NDX) are very overbought and way overdue for a correction. On a short-term basis we can look for the NASDAQ Composite to find resistance near 2525-2530 and support near 2450 and 2400.

Chart of the NASDAQ index:

The small cap Russell 2000 index ($RUT) has stalled under resistance near the 710 level. The eight-week trend is still higher but momentum has clearly paused. For the moment the $RUT still has a bullish trend of higher lows. Small caps tend to be more volatile than the big caps so when the market does correction I would expect a pull back toward prior resistance near 670.

Chart of the Russell 2000 index:

I also want to point out that the Dow Jones Transportation index has rallied to resistance at its 2010 highs near 4800. Meanwhile the SOX semiconductor index has continued to rally with a strong move today (+3%) thanks to better than expected earnings news in the sector. The SOX is now testing resistance near 370 and is close to breaking the bearish trend of lower highs.

Chart of the Dow Jones Transportation index:

Chart of the SOX semiconductor index:

In summary, the market's trend is still up but momentum has slowed significantly. Money managers have already placed their bets ahead of the midterm elections and the FOMC meeting next week. We only have two trading days left until the fiscal year ends for most fund managers. Plus we only have four trading days until the elections and five trading days until the conclusion of the next FOMC meeting. The announcement on QE2 is expected around 2:00 p.m. on Tuesday, November 5th. You can bet we'll see some market volatility that afternoon and the following day. Until we get to November 5th I would expect stocks to slowly drift sideways.

-James


New Option Plays

Short Candidate

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL PUT PLAYS

Mechel OAO - MTL - close 23.14 change -0.24 stop 24.47

Target(s): 22.30, 21.25, 20.25
Key Support/Resistance Areas: 24.25, 24.00, 23.60
Current Gain/Loss: Unopened
Time Frame: 1 to 3 weeks
New Positions: Yes, see trigger

Company Description:
Mechel OAO is an integrated steel, mining, ferroalloys and power company. The Company operates in four segments: mining, steel, ferroalloys and power. Its steel segment produces and sells semi-finished steel products, carbon and specialty long products, carbon and stainless flat products and value-added downstream metal products, including wire products, stampings and forgings. Its mining segment produces coking and steam coal, as well as iron ore and iron ore concentrate. The mining segment consists of coal and iron ore mines in Russia and the United States. Its ferroalloys segment produces and sells low-ferrous ferronickel, ferrochrome and ferrosilicon. Its power segment produces and sells electricity to internal and external customers. (source: company press release or website)

Why We Like It:
The steel sector has come under pressure as earnings and guidance have failed to impress investors. MTL finds itself in a bear flag and is consolidating under its 200-day SMA, while its 50-day and 20-day SMA's are just overhead. Conservative traders will want to see the stock break below $22.25 before launching bearish positions. However, considering the overbought broader market conditions initiating positions on a bounce sets up a very good risk reward trade. There is solid resistance in the $23.60 to $24.20 area so I suggest launching bearish positions at $23.55. Our stop will be above the 20-day SMA at $24.47 (which is rolling over and declining). If triggered our first two targets are -5% and -9% lower.

Trigger: $23.55

Suggested Position: BUY the December $23.00 PUT, current ask $1.50, estimated ask at entry $1.30

Annotated chart:

Entry on October XX
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 2.1 million
Listed on October 27, 2010


In Play Updates and Reviews

Still Trading In A Tight Range

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Archer Daniels Midland Co. - ADM - close 33.22 change -0.22 stop 30.70

Target(s): 34.15, 35.15, 35.95. and possibly higher
Key Support/Resistance Areas: 38.00, 34.15, 33.00, 32.00
Current Gain/Loss: +16%
Time Frame: 2 to 4 weeks
New Positions: Yes

Comments:
10/27: ADM hit our trigger to enter bullish positions at $33.05. We are long December $34.00 calls at 77 cents. The stock has solid support $33 down to $32 and I would view dips as buying opportunities. Since we were triggered on our lower entry I have added an immediate target of $34.15 and adjusted the more aggressive targets. If the stock breaks higher I suggest taking profits or tightening stops to protect them, especially considering the overbought broader market conditions. >p> 10/26: ADM traded down to $33.15 (within 10 cents of our trigger) this morning before bouncing. I expect the 20-day SMA to act as support which is currently rising and just under $33.00. We have a trigger of $33.05.

10/25: ADM has been consolidating around a key long term pivot area between $32 and $33 for the past 6 weeks. The stock has lots of support below and limited overhead resistance until $36.50. I suggest readers initiate long positions on a dip or a breakout. We'll use a trigger of $33.05 on a dip and $34.15 on a breakout. Our initial stop will be $30.70 and it will be adjusted once the position is opened.

Note: ADM reports earnings before the market opens on 11/2. The company has beaten earnings estimates in 3 of the past 4 quarters and I am expecting another surprise beat. Holding positions is a higher risk play so please consider using small position size.

Current Position: Long December $34.00 CALL, entry was at $0.77

Entry on October 27, 2010
Earnings Date 11/2/2010 before market (unconfirmed)
Average Daily Volume: 5 million
Listed on October 25, 2010


ATP Oil & Gas Corp - ATP - close 14.30 change -0.76 stop 13.75

Target(s): 16.10, 17.00, 17.90, and possibly higher
Key Support/Resistance Areas: 18.00, 17.00, 16.25, 14.75, 14.10
Current Gain/Loss: -34%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/27: ATPG sold off -5% today and I could not find any news that caused it. Although today's volume was a bit heavier than recent days, it is still much lower than recent days when the stock was breaking out. The stock closed below its 20-day and 200-day SMA but is still holding an upward trend line. There is support at current levels an trying a long position with a tight stop below makes sense to me.

10/26: ATPG is consolidating above its 20-day and 200-day SMA's. The recent pullback continues to be on lighter volume which is a bullish sign. I've lowered the first target by 10 cents to $16.10. I suggest taking profits or tightening stops to protect them if ATPG reaches our first target.

10/25: ATPG hit our higher trigger of $15.11 to launch bullish positions. The stock has support at $14.75 and $14.15. If we get a broader market correction I would look to these areas to consider opening new positions. My comments below remain the same.

Current Position: Long December $16.00 CALL, entry was at $1.00

Entry on October 25, 2010
Earnings Date 11/4/2010 (unconfirmed)
Average Daily Volume: 2.7 million
Listed on October 23, 2010


First Solar Inc. - FSLR - close 150.18 change +2.15 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:
10/26 & 10/27: FSLR reports earnings on Thursday after the bell. If the stock trades down to the rising 50-day SMA, upward trend line support, and prior resistance level I suggest we take advantage of the weakness. All of the areas are converging near $139 to $141. Let's raise the trigger to $141 and use a dip as a buying opportunity. I am reluctant to chase FSLR so if there is no dip we will most likely drop the play.

10/25: 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. 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 money call to help better define risk. For example, buy the December $155 call and sell the December $160 or $165 call.

Suggested Position:

Trigger to buy calls @ $141.00

BUY the December $155 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 - GNK - close 16.44 change +0.14 stop 15.50

Target(s): 16.10 (hit), 16.80, 17.35, 17.95
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:
10/27: GNK is forming a symmetrical triangle as prices are coiling. This is not good for option premium that expires 3 weeks from Friday. We need the stock to follow through higher and if it does I suggest readers use the opportunity to close positions or tighten stops to protect capital.

10/26: GNK gapped lower, surged in the morning, and then sold off late. The end result was that yesterday's gap higher was closed, however, today was the second consecutive topping tail candle printed. There is support near $16.20 to $16.25, the 50-day SMA at $16.00, and an upward trend line. As long as the stock stays above these areas it is bullish. I suggest readers use strength as an opportunity to close positions or tighten stops to protect capital.

10/25: GNK broke out higher today and appears to be trying to put in a higher low. I've adjusted the targets slightly and suggest readers use any further strength as an opportunity to close positions or tighten 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: 57.37 change: +0.16 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:
10/26 & 10/27: HUM is simply not pulling back. The company reports earnings on Monday before the bell. I suspect the earnings report will be good which may cause the stock to continue higher, however, if there is a sell off I suggest using the dip as a buying opportunity. Our trigger is $53.80.

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.

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 23.86 change +0.19 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: +0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/27: JEF is finding support at its 50 & 100-day SMA's which is the first time the stock has tested these since breaking higher last week. This is a logical spot for JEF to bounce to another high. Our first target is $25.10 but readers may also want to consider $24.65 as a possible exit point. This should produce a +30% gain.

10/26: After breaking out on 10/20 JEF has retraced all of the gains and is finding support near its 50-day SMA, which is also at a support level of $23.50. I view this dip as a buying opportunity with a tight stop below. The pullback over the past three days looks like a bull flag to me.

10/25: JEF bounced back today but is struggling at its 200-day SMA. $23.50 offers solid support. My comments from the weekend remain valid.

Suggested Position: Long December $24.00 CALL, entry was at $1.10

Entry on October 29, 2010
Earnings Date 1/20/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on October 19, 2010


Sears Holdings Corp - SHLD - close 73.78 change -2.52 stop 72.48 *NEW*

Target(s): 78.85, 81.50, 83.75
Key Support/Resistance Areas: 90.00, 85.00, 82.00, 75.30, 73.00
Current Gain/Loss: -38%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/27: SHLD sold off -3.3% today. The stock is finding support on its 20-day SMA and upward trend line that began in August. This is a logical spot for the stock to bounce and make another higher low and higher high. Launching long positions at this level with a tight stop below is a low risk trade and makes a lot of sense. I've adjusted the upside targets.

10/26: SHLD gapped lower this morning but the weakness was short lived as the stock was immediately bought, gaining +0.77% on the day. The stock remains in an upward channel and is hanging out at its recent highs. If the broader market holds up SHLD should easily trade towards our targets.

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

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


PUT Play Updates

Fastenal Co. - FAST - close: 51.31 change: -1.19 stop: 53.40 *NEW*

Target(s): 51.20 (hit), 50.25, 48.25, maybe lower
Key Support/Resistance Areas: 55.00, 52.00, 50.00, 48,00,
Current Gain/Loss: -10%
Time Frame: 3 to 4 weeks
New Positions: Yes, on bounces

Comments:
10/27: FAST lost -2.27% today and hit our first target where positions could have closed near breakeven. The stock continues to make lower highs and lower lows, but is finding support at its 50 & 100-day SMA's. We are going to need to see a more meaningful broader market correction for us to book a gain. I've adjusted the next target up to $50.25 and suggest readers take profits or tighten stops to protect them if it is reached. We should be able to book a decent on further weakness. I've lowered the stop to $53.40 which is above the primary downtrend line and 20-day SMA.

10/26: Fast is struggling at its 20-day SMA and downtrend line that began on 10/11. A trip to the 50-day SMA seems inevitable which will also tag our first target. Time decay is starting to concern me with November options so I suggest we use weakness to close positions and/or tighten stops to protect capital.

10/25: FAST gapped higher again today and it was met with immediate selling as the stock sold off the entire day. My comments below remain the same.

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.

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


Illinois Tool Works - ITW - close 46.25 change +0.10 stop 47.83

Target(s): 44.85, 44.15, 43.50
Key Support/Resistance Areas: 47.75, 46.10, 45.50, 44.60, 44.00, 43.00
Current Gain/Loss: -8.33%
Time Frame: 2 to 3 weeks
New Positions: Yes

Comments:
10/27: ITW gapped lower which triggered our entry at the open this morning. We are long December $45 puts at $1.20. The stock drifted higher along with the broader market. There is support at $45.50 and overhead resistance between $46 and $47. Bounces should get sold into and if the broader market corrects ITW should head towards our targets.

10/26: Shareholders were unimpressed with ITW's earnings report on 10/19. The company narrowed guidance to the lower end of its range and the stock appears to be changing trends. Considering the overbought broader market conditions and the weakness being exhibited in ITW, I suggest readers initiate short positions in the stock on any bounces, or a break down below the stock's 200-day SMA and support near $46.00. Let's use a trigger of $46.40 on a bounce or $45.92 on a break down. Our initial stop will be $47.83 but it will be adjusted after the position is opened. Depending on our trigger, we are targeting more than a -$1 move lower, which will produce a nice gain if the set-up unfolds as expected.

Trigger: $46.40 or $45.92 Current Position: Long December $45.00 PUT, entry was at $1.20

Entry on October xx
Earnings: More than two months (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 26, 2010


PNC Financial - PNC - close 53.75 change -0.25 stop NONE

Target(s): 53.00, 52.10, 51.05 (hit), 50.35
Key Support/Resistance Areas: 54.50, 53.50, 50.50, 49.50, 48.75, 47.00
Current Gain/Loss: -80%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/27: Not much has changed from my comments below. PNC closed near its lows of the day while the broader market closed near its highs. We are looking for dip to close positions and salvage as much premium as possible, however, this may have to wait until next week's elections and FOMC announcement on Wednesday.

10/26: PNC closed flat in the day. Our position is deep out of the money and we are waiting to see if the stock corrects with the broader market, which we will use as an opportunity to close positions. The stock is holding an upward trend line that began from last week's lows. If it breaks the next support levels are $53.00 and $52.10. I doubt our option value is going increase a significant amount, but recovering 20 to 30 cents is certainly in the cards.

10/25: I do not see many changes from my comments below. PNC lost -1.3% today and printed a bearish dark cloud cover candle pattern which indicates a decline is imminent. Let's see if we get a healthy broader market correction see how far we can ride this lower.

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