Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/3/2010

Table of Contents

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

Market Wrap

$600 Billion In New Money

by Jim Brown

Click here to email Jim Brown
The Fed committed to create $600 billion in new money and use that money to buy government bonds and keep interest rates low for "an extended period."

Market Statistics

The Fed announcement today was no real surprise. The move had been telegraphed since Bernanke's Jackson Hole speech on August 27th. There had been some competing rumors in the market as to how much the Fed would actually commit to spending. The general estimate was between $500 billion and $1 trillion with some estimates as low as $100 billion and as high as $2 trillion.

The Fed came in right in the middle of the range with a commitment to create $600 billion in new electronic money and then spend it on U.S. government debt at the rate of $75 billion per month through June 2011. In addition to the investment of the newly created money they also committed to use money received from the payment on past investments to purchase the same 3-5 year maturities. This is expected to provide another $250-$300 billion in purchases. That raises the total on the new QE program to something in the range of $850-$900 billion over the next eight months.

This amount of quantitative easing in addition to their prior program is unheard of in U.S. history. In theory it will keep interest rates near zero for a very long time. The Treasury sold 2-year inflation protected notes last week with a negative yield. That means the interest rate was so low that the real yield was negative. With bonds the higher the price the lower the yield. The demand was so strong that the calculated yield was less than zero.

The Fed statement did contain an escape clause. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. If the Fed decides the economy is improving sufficiently they can scale back on the size of the purchases or eliminate them completely. They can also increase the purchases if they believe conditions are deteriorating.

The Fed sees the $600 billion in new money purchases as the equivalent to a 75-basis point in the Fed funds rate. Under normal conditions this would be extremely aggressive policy accommodation. Can you imagine the market reaction to a normal Fed rate cut of 75-points? Unfortunately these are not normal times and over the last 60 days the market has already priced in the move. Bernanke telegraphed the program starting on August 27th and then continued to provide additional hints over the last two months. The S&P is up +12% since that August speech.

As justification for the move the Fed said the pace of recovery had slowed and employment remained constrained. Housing wealth and tight credit continued to weigh on consumers. Business spending was still rising but at a slower pace than earlier in the year. The Fed reiterated that inflation remained low and had trended even lower in recent quarters. The PCE CORE inflation number last week was zero. You can't get much lower than that without slipping into a depression and this is what the Fed is fighting.

With interest rates already zero the Fed is taking direct aim at the stock market. Over 50% of consumers have investments in equities. By inflating the stock market this produces a wealth effect that boosts consumer confidence and stimulates spending. Since the election slammed the door on any new government stimulus the Fed is the only player left in the game that has the power to move the economy.

The Fed is in a unique position. To use a Texas Holdem term the Fed can go "all in" by betting all of its available cash in an effort to boost the economy. If they lose that hand they can simply create more money to replenish their bankroll and go all in again. They have the power to outlast any other player at the table because they can keep creating money until they eventually bankrupt everyone else.

In this case they can continue creating money and pushing rates so low that banks, businesses and investors will eventually have no choice but to make loans, spend money and buy stocks in an effort to get a return on their investment. You can't leave trillions in cash in the corporate mattress forever. During the recession non-financial corporations have accumulated $1.845 trillion in cash a near record. If that money was put to work the impact on the economy would be huge. This is what the Fed is trying to accomplish.

There is also about $1 trillion in corporate profits sitting in accounts overseas in hopes of a tax holiday or some kind of tax discount for bringing those profits back into the U.S. This has been done before when the government wanted to stimulate growth at home. Now that the election is over companies are hoping for a friendlier Congress that will pass a repatriation bill. Currently they would incur a 35% tax rate and the highest rate in the world.

The next step up in the escalating war on the recession is to charge banks for money they have on deposit at the Fed. Banks currently earn interest, .25%, on money deposited at the Fed. If the Fed suddenly turned the tables on the banks and began charging them say a quarter point in interest those banks would immediately be forced to put that money to work somewhere else.

The Fed also said it could reactivate the various loan facilities like the TALF if conditions warranted.

Even though the market did not post any sizeable gains today and this has been telegraphed for months in advance that does not mean the rally is over. Over the long term we know not to fight the Fed. They will eventually accomplish their goals and it is best if we don't bankrupt ourselves trying to second-guess the market direction. We could still have a sell the news event but we have to believe it will simply be another buying opportunity. Do you really want to beat against an entity that has an unlimited bank account?

There was a heavy economic calendar today in addition to the FOMC statement. I will skim through the highlights because the Fed was the big story.

The Factory Orders for September rose +2.1% and the biggest gain in the last eight months. This is a lagging report but it was still good news. However, when you remove orders for transportation equipment that number fell to +0.4%. The transportation component rose +15.8%. Nondurable goods shipments rose by +0.9% and durable goods was raised to +3.5%. Core capital goods rose +0.5% and the ninth consecutive monthly increase.

The October ISM Non-Manufacturing Index (Services) stretched its rebound to two months with a small gain to 54.3 from 53.2. It appears from the ISM Manufacturing and the ISM Services that the economy is rebounding from the temporary summer slump. If this kind of increases through year end we could be set for a significant ramp higher in 2011. These are still just green shoots and not a blossoming economy just yet. The business activity component shot up to 58.4 from 52.8 for the biggest gain in the report. That one component accounts for 25% of the index so we are making progress. We still need to see the index move over the 55.4 plateau we saw back in the spring in order to break the long-term downtrend.

ISM Services Chart

The Challenger Employment report was neutral for October. The number of announced job cuts remained low at slightly less than 38,000. The number of layoffs has remained under 40,000 for six of the last seven months. July saw a small spike to 41,700 and August was the low at 34,800.

The ADP report earlier this week predicted an increase of +43,000 jobs in Friday's NonFarm Payroll report. This was pretty much inline with estimates although there are some as high as +100,000 jobs. Moody's is predicting a gain of +70,000 jobs.

The NonFarm Payroll report on Friday is the last of the big economic events for the week. Since the Fed has already made its announcement on QE the jobs report should not make a big impact on the market as long as the numbers are inline. However, an unexpected loss of jobs or a much better than expected gain could still produce some extra volatility.

Vehicle Sales for October spiked another 500,000 units to an annualized rate of 12.3 million units. This was better than expected and was boosted by a pickup in fleet sales. That is a positive economic signal for me. If companies are increasing their purchases of fleet vehicles they must be positive about the economy. This was the highest sales rate since September 2008 and with the exception of the artificial cash for clunkers spike in August 2009. We still have a long way to go because average sales rates before the recession were in the 15-15 million unit range.

Economic Calendar

Stock news was almost nonexistent today with the election results and the FOMC meeting hogging all the airtime. There are still some earnings occurring and Qualcomm was one of those reporters. QCOM reported earnings of 68-cents and well above the estimates for 59-cents. Revenue rose +10% o $2.95 billion. The company raised its guidance for Q4 to an average of 72-cents where analysts were looking for 64-cents. QCOM shares spiked +$3 in after hours. Analysts believe QCOM would benefit from a Verizon iPhone in 2011.

Chesapeake (CHK) reported earnings of 70-cents compared to estimates of 64-cents. The beat came from a 23% increase in natural gas production. The big news was not the earnings but statement they will stop pumping gas until prices go up. All the gas producers are struggling under the current price of gas in the mid $3 range. Gas prices have gone down 31% this year.

Chesapeake said it would begin to ramp down production by mid-2011 if prices did not rise. CHK and other gas producers are shifting their drilling programs to search oil and natural gas liquids rather than shale gas. The cost to drill the horizontal wells are about equal but the relative price between gas and oil has broken down. Typically there was historically a 6:1 ratio of gas to oil on price but that is now roughly 24:1. It takes 6,000 cubic feet (mcf) of gas to produce the same amount of energy as a barrel of oil.

It does not make sense to continue drilling for shale gas at $3.50 per mcf. This is a lowing proposition for many drillers. Chesapeake said they expect to produce around 1 trillion cubic feet in 2011 but expects 80% of its production growth to come from liquids. Over time this will produce a decline in gas production and push prices higher. Producers need prices in the $6 range to make it worthwhile to continue drilling at the current cost. Those costs have shot up over the last 24 months and will continue to rise as the landowner war over damage from hydraulic fracturing makes its way through the courts.

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The earnings cycle is winding down but the earnings growth numbers are still rising. With 404 of the S&P-500 companies reported the average earnings growth was 33.3%. Over 313 companies beat estimates and 82 missed estimates. The average surprise was 46.5% and the average miss was -21%.

GM priced its IPO between $26-$29 and they expect to raise about $12.2 billion. The government will still own 43.3% of GM after the deal. GM still has about a $50 billion operating loss carry forward and the government funded that loss. The UAW will sell 25% of its shares in the IPO to reduce its holdings from 19.93% to 15.33%.

The major indexes saw about five minutes of volatility after the FOMC announcement. The statement was so inline with what most people expected there was no major sell off or rally. The bears were waiting for the official announcement to start a selling frenzy but the buyers were also waiting just under the market and the sell off was very short.

I was expecting a sell the news event since this announcement has been priced in for a month now. Just because it did not happen immediately after the announcement did not mean the danger has passed. We could still see it tomorrow or Friday.

However, after looking carefully at the charts tonight I am leaning towards a breakout instead of a breakdown. I believe if we did get a dip in the markets it would only be temporary.

The Nasdaq is leading the other indexes into the promised land above the early 2010 resistance. The Nasdaq has broken out over strong resistance at 2520 and is now testing resistance dating back to June 2008 at 2540. This is a strong signal that investors are moving into higher risk assets. While the Russell is lagging the Nasdaq it did close at a new five month high at 715 and apparently on the verge of a significant breakout. This is going to be key. Managers had been neutral on the small caps since Oct 13th. If they suddenly start piling into the Russell stocks in the days ahead it will be the starters gun for the end of year race.

The S&P closed at 1198 and ever so close to the psychological 1200 level. With no economic events other than the NonFarm Payrolls in the immediate future the bulls could stampede once over the 1200 level. The payroll report should be ignored if the number is roughly inline with estimates. Support is solid at 1180.

S&P-500 Chart

The Dow came to a dead stop at resistance at 11,215 but we did not get the instant sell off that we saw in the prior three touches of this level. The Dow appears poised for a breakout assuming that sell the news event does not appear. The dips are being bought so quickly that the fear of a sell off is dissipating. Should the Dow break over 11,215 the next material target is 11,650. That would be a strong run but all the warnings lights are turning from red to green. Support remains 11,100.

Dow Chart

The Nasdaq closed well over 2520 for the second day and that qualifies as a confirmation of the move. Granted the rally from August has been incredible but once retail investors and money managers find themselves chasing price and performance this trend could actually accelerate. Before you start sending me bearish hate mail I am not wildly bullish. I just believe the green shoots are sprouting and the FOMC is leading the charge. Don't fight the Fed! I would love to see a decent sell off to give us an entry point but I am not holding my breath.

Nasdaq Chart

Russell Chart

The Volatility Index collapsed today once the FOMC announcement hit the airwaves. The addition of another $900 billion Fed put completely killed the VIX. Traders who were long puts in case of a change in direction by the Fed immediately sold those puts and drove the VIX back to lows from late October.

VIX Chart

In summary the bears are going to want to sell the open on Thursday but the Fed is our new trading partner. Whether you believe in the program or not is immaterial. The Fed wants the market to move higher to create a wealth effect on consumers and businesses so they will feel more comfortable about spending money. By pushing the stock market higher they can create a speedier recovery. With the Fed put protecting our portfolio we need to continue buying the dips.

Jim Brown


New Option Plays

Emerging Market Telecom

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

VimpelCom Ltd - VIP - close 15.81 change +0.37 stop 14.80

Target(s): 16.70, 17.35
Key Support/Resistance Areas: 17.50, 16.75, 16.05, 15.30, 20-day SMA
Current Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see trigger

Company Description:
VimpelCom Ltd., formerly New Spring Company Ltd., is a telecommunication operator. The Company provides voice and data services through a range of wireless, fixed and broadband technologies. The Company operates its mobile telecommunications services in Russia, Kazakhstan, Ukraine, Armenia, Tajikistan, Uzbekistan and Georgia. In August 2010, the Company completed the acquisition of OJSC Vimpel Communications. (source: company press release or website)

Why We Like It:
VIP has broken out above a key long term pivot level near $15.30 on heavy volume. The stock looks poised to fill a gap from August that is about $1 higher from current levels. I would like to see the stock retrace some of todays's gains and suggest readers use a trigger of $15.60 to launch bullish positions. Our initial stop is $14.80 which is below the primary uptrend line and rising 20 and 50-day SMA's, which should provide support on dips. Our initial targets are +7% and +11% from current levels.

Suggested Position: Buy December $15.00 CALL if VIP trades to $15.60, current ask $1.25, estimated ask at entry $1.10

Annotated chart:

Entry on November XX
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010


In Play Updates and Reviews

Volatility Crush

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Cliffs Natural Resources - CLF - close: 66.87 change: -0.44 stop: 61.85

Target(s): 68.75, 70.75
Key Support/Resistance Areas: 71.25, 69.00, 65.00 62.00
Current Option Gain/Loss: Unopened
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
11/3: CLF came within 20 cents of triggering our entry of $65.40 to launch bullish positions, however, the stock reversed and closed +$1.48 off of its lows. I do not recommend chasing CLF higher unless you are looking for a short intraday move. We simply need to see more price action after today's QE announcement by the FOMC, and this will most likely take a few days to resolve itself. We have seen several sharp post FOMC sell-offs recently, however, the difference behind this one is that the Fed announced billions of dollars of asset purchases in the coming months. Whether the full amount is already priced into the market is still up for debate.

After some thought I actually think we should lower the trigger to $64.50 and try to get a more a favorable entry point on a pullback. This is near CLF's primary uptrend line that began in early July and the 50-day SMA.

11/2 (James): I don't see any changes from yesterday's comments. We want to wait for a dip to $65.40 to launch bullish positions.

11/01: Manufacturing data from around the world was better than expected today, including here in the US. Companies like CLF should benefit from an uptick in manufacturing because the manufacturers need materials such as coal and iron ore to make their products. Technically, CLF has been trending higher since its lows in July and looks poised to move back towards its highs from early October if the broader market cooperates. The stock also broke and closed above a short term downtrend line today. Considering the overbought market conditions I consider this is an aggressive play, however, the trend in CLF is up and until proven otherwise the trend should continue. I suggest we use a trigger of $65.40 (near today's lows) to launch bullish positions. Our targets are +5% and +8% higher than our trigger.

NOTE: This is a good hedge against our short MTL position. I also consider this an aggressive trade so small position size is suggested to control risk if the stock reverses lower.

Trigger = $64.50

Suggested Position: Buy 2010 November $70.00 CALL, current ask $2.89

Entry on November XX
Earnings Date More than two months
Average Daily Volume = 4.3 million
Listed on November 1, 2010


Genco Shipping - GNK - close 16.59 change +0.17 stop 15.50

Target(s): 16.10 (hit), 16.70, 17.00, 17.35
Key Support/Resistance Areas: 18.25, 17.75, 16.90, 16.25, 15.75
Current Option Gain/Loss: -50%
Time Frame: 1 to 3 weeks
New Positions: No

Comments:
11/3: GNK reported earnings after the bell today of 99 cents per share compared to estimates of 96 cents. Revenues also beat estmates and the CEO made positive comments. We'll have to see how this translates into trading tomorrow but I suggest using strength to close positions or tighten stops to protect capital. We need to be looking for an exit (even if it is a loss) to prevent further time decay as our options expire in November.

11/2 (James): GNK still acts like it wants to trade higher but I wonder what it's waiting for. The market's major indices are hitting new five-month highs and GNK is still inching along. I am not suggesting new bullish positions in this stock. More conservative traders may want to strongly consider exiting positions ahead of the FOMC announcement tomorrow afternoon!

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 11/3/2010 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on October 11, 2010


Humana Inc. - HUM - close: 59.57 change: -1.07 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:
11/3: HUM printed a bearish dark cloud cover candle pattern today which signals a decline is imminent and needs no confirmation. However, the comments below regarding the GOP gaining control in the House definitely throws a wrench in the pattern. I suggest we remain patient to see if HUM does in fact pullback and I agree with James that $53.80 to $54.00 is a logical entry point a dip to find support and continue higher. The rising 50-day SMA is currently near $52.50 so we will keep the trigger at $53.00.

11/2 (James): Grrr! Talk about buyer's remorse. I regret not buying HUM when we listed it the first time. This stock continues to surge without us! The stock added another +3.3% to close at two-year highs after being upgraded this morning. Expectations for the Republicans to gain a majority in the House in today's elections was also boosting the healthcare stocks. We do not want to chase HUM and may end up dropping it as a candidate before the week is out. For now our trigger to buy calls remains at $53.00 although I'm starting to think a dip to $55 or $54 might work.

11/1: HUM crushed earnings today on the bottom line but fell just short on revenue. The stock gapped higher but immediately began to trade lower. We are keeping our trigger at $53.00 and will use dips as buying opportunities. $53.80 could also be considered an entry point.

Suggested Position:

Trigger to buy calls at $53.00 <-- new trigger!

BUY the 2011 January $55 calls.

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


Volatility Index - VIX - close: 19.56 change: -2.01 stop: 17.45

Target(s): 24.90, 29.00
Key Support/Resistance Areas: 18.00, 21.00, 25.00, 30.00
Current Option Gain/Loss: -29%
Time Frame: Two or Three weeks
New Positions: Yes

Comments:

11/3: Ouch! After a quick spike higher following the QE announcement by the FOMC, volatility collapsed. Our calls are hanging tough considering the -9% drop in the VIX. In my opinion, today's price action looks like it could have been a capitulation event in volatility. I suggest we remain patient and not panic out of the position. Since 10/13 VIX has been trading in an upward channel of higher highs and higher lows, and now it finds itself at the bottom of the channel. Let's see what happens over the next few days so we can get a better sense of today's VIX beating.

11/2 (James): Tomorrow is the big day. I expect stocks (and the VIX) to drift sideways in a very narrow range tomorrow until the FOMC announcement in the 2:00-2:15 p.m. time frame. That's when the fireworks should start. If you want to be in this trade then open positions ahead of the announcement.

Current Position: Long 2010 December 25.00 calls (VIX1022L25), entry was at $2.25

Entry on November 1, 2010
Earnings Date N/A --/--/--
Average Daily Volume = xxx million
Listed on October 30th, 2010


PUT Play Updates

Fastenal Co. - FAST - close: 53.22 change: +0.12 stop: 53.40

Target(s): 51.20 (hit), 50.25, 49.65, 48.25, maybe lower
Key Support/Resistance Areas: 55.00, 52.00, 50.00, 48,00,
Current Option Gain/Loss: -70%
Time Frame: 3 to 4 weeks
New Positions: NO

Comments:
11/3: FAST was weak early and down nearly -2%, but the stock surged late in the day to close barely in the green. My comments haven't changed from James' below, except that I would add to be looking to close positions on weakness and salvage the remaining premium in our options positions.

11/2 (James): Homebuilders were some of the best performers today with the DJUSHB index up +4.2%. I think some of the builder's strength rubbed off on FAST and the stock gained +2.5% on no news. On a very short-term basis today's close over its 10, 20, and 30-dma is bullish. If I wasn't expecting a market sell-off in the next 48 hours I would consider an early exit right here and now! However, since we are looking for a market decline soon we'll stick it out but readers may want to adjust their stops. Currently our stop is at $53.40 and it wouldn't take much for FAST to stop us out tomorrow. No new positions at this time.

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 46.31 change -0.18 stop 47.83

Target(s): 44.95, 44.15, 43.50
Key Support/Resistance Areas: 47.75, 46.10, 45.50, 44.60, 44.00, 43.00
Current Gain/Loss: -20%
Time Frame: 2 to 3 weeks
New Positions: Yes

Comments:
11/3: ITW has been bouncing around between $45.60 and $47.70 for the past week. We are looking for a break but are going to need some help from the broader mmarket. The comments below all remain valid.

11/2 (James): ITW is still trying to bounce higher and managed a +0.5% gain today. I would keep an eye on the $47 level and the 20-dma (47.40) and 30-dma (47.25) as potential overhead resistance. A failed rally near these levels could be a new entry point.

11/1: The bounces in ITW keep getting sold. We need a break below $45.50 to get things moving towards our targets. I've raised the first target to $44.95 to account for the 100-day SMA. A move to this level should produce a +33% gain.

Current Position: Long December $45.00 PUT, entry was at $1.20

Entry on October 27, 2010
Earnings: More than two months (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 26, 2010


Mechel OAO - MTL - close 23.59 change -0.31 stop 24.60

Target(s): 22.30, 21.25, 20.25
Key Support/Resistance Areas: 24.25, 24.00, 23.60
Current Gain/Loss: -11.5%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
11/3: The bounce in MTL looks like it has failed at its 20-day SMA as the stock lost -1.30% today. However, MTL found support at its 200-day SMA, which is also near the top of the prior congestion level from last week. If MTL breaks below today's low of $23.31 I anticipate a retest of the 10/22 lows.

11/2 (James): We need to be nimble here. The $23.50-24.25 zone should be overhead resistance for MTL. The stock has managed to rally past $23.50 and its 200-dma and today saw shares challenge its 50-dma and $24.25 area. This could be a new bearish entry point but I'd like to see the stock roll over first!

11/1: Friday's bounce in MTL continued on Monday and the stock closed above its 200-day SMA. The stock rallied up to touch its 50-day SMA from below for the first time since it broke below on 10/21, which is where today's selling began. There is resistance at current levels but we are going to need to see the broader market correct to see MTL make new lows and reach our targets.

Current Position: Long December $23.00 PUT, entry was at $1.30

Entry on October 30, 2010
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 2.1 million
Listed on October 27, 2010


Millicom Intl. - MICC - close: 96.54 change: +0.44 stop: 98.25

Target(s): 90.25, and the 200-dma
Key Support/Resistance Areas: 98.00, 96.00, 92.00, 90.00
Current Gain/Loss: -16.5%
Time Frame: Three weeks
New Positions: Yes

Comments:
11/3: MICC is consolidating under its 50-day SMA and declining 20-day SMA (both at $96.50). There is resitance right here at current levels and this is a logical spot for the stock to turn lower and make a lower low. The 100-day SMA is just under $93.00 which may provide support on weakness. I like new positions to play for a pullback but we are most likely going to need help from the broader market.

11/2 (James): MICC is providing a potential entry point here. Over the weekend I suggested that readers may want to wait for a bounce toward $96.00 and MICC delivered that bounce today. Shares are also testing overhead resistance near their 50-dma. Aside from the new entry point I don't see any changes from our prior comments.

Current Position: Long December 2010 $90 puts (MICC1018X90), entry was at $2.45

Entry on November 1, 2010
Earnings Date 02/01/11
Average Daily Volume = 490 thousand
Listed on October 30th, 2010


PNC Financial - PNC - close 54.06 change +1.16 stop NONE

Target(s): 53.00(hit), 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: -85%
Time Frame: 1 to 2 weeks
New Positions: Neutral

Comments:
11/3: The break lower is not happening, at least not yet. Our thought process in PNC remains the same, which is to take advantage of more meaningful market correction and salvage 20 to 40 cents of our option premium. We have come close the past few days but the stock has once again been saved with support at its 50-day SMA. Throw in QE from the Fed, which appears to be an effort to steepen the yield curve (which will help bank earnings), and this trade could be over. PNC has traded in a downward channel over the past week and a half but looks like it is on the verge on breaking higher, however, the broader market direction will mmost likely determine PNC's immediate fate. I would continue to use weakness to exit positions. The comments below remain valid.

11/2 (James): Moody's issued some bearish comments on the banks this morning, which depressed the financial sector. The banks were the worst performers on Tuesday. PNC followed the group lower with a -0.5% decline. I am almost tempted to launch new positions here but readers may want to wait for a move under $52.50 first.

11/1: PNC lost -1.35% today and printed a bearish engulfing candlestick. However, the stock is finding support at its 20 and 50-day SMA's. We have three weeks for PNC to break down and are playing for a move back towards the recent lows. We are most likely going to take a loss on this trade but if we can gain another 20 to 30 cents in premium I suggest exiting the position.

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


VMWare Inc - VMW - close: 78.74 change: +1.08 stop: 80.25

Target(s): 72.25, 68.50
Key Support/Resistance Areas: 80.00, 79.00, 75.00, 72.00, 200-dma
Current Gain/Loss: -30%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
11/3: VMW was weak again this morning but gained +1.39% on the day, and our positions took a hit. The stock gained about +$2 off of its lows today and finds itself near $79.00 resistance, which is last week's highs. VMW is forming a symmetrical triangle near the bottom of its trading range from the past month. It looks like a bearish pennant to me but readers should use caution and may want to consider tighter stops. We are most likely going to need help from a broader market correction for this to be a profitable trade, and this is certainly still a good possibility.

11/2 (James): So far so good. VMW has seen a little bit of a bounce but it's still trading inside the trend of lower highs. I would still consider new positions at current levels.

11/1: VMW reached Friday's high in early trading and immediately turned lower. The stock is consolidating just below its 100-day SMA and declining 20-day SMA. The first level of support is near $75.00. If the stock breaks this level it may find support at $73.00 but I would be surprised if $72.25 is not reached.

Current Position: Long 2010 December $70.00 put (VMW1018X70), entry @ $1.85

Entry on November 1, 2010
Earnings Date 01/25/11
Average Daily Volume = 4.5 million
Listed on October 30th, 2010