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Daily Newsletter, Thursday, 11/4/2010

Table of Contents

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

Market Wrap

What A Difference A Day Makes

by Keene Little

Click here to email Keene Little
Market Stats

In Tuesday's newsletter I had mentioned I thought the sell-the-news expectation may be getting a little too crowded and that I don't like being part of the crowd (except in a momentum move). With the crowd looking for a reversal after the FOMC announcement I thought it was ripe for a big short-covering squeeze. When the market didn't sell off after the FOMC announcement on Wednesday, followed by buying in the futures Wednesday night/early Thursday morning, we were looking at a monster squeeze and that's what we got.

Now the question is whether or not enough shorts were squeezed out of the market to make it vulnerable to the downside now. The answer of course will be determined by the amount of new money coming into the market vs. short covering. The rally finished at the high of the day and in the past this has typically been the result of short covering right into the close. The risk therefore is that today was a one-day wonder rally that will not see any follow through. That's of course the bearish perspective. The bullish perspective is that we just kicked off the next leg of this great bull rally and SPX 1250 here we come.

The DOW blasted past its April high near 11258 (gapped right over it) while SPX inched higher into the close by about 2 points. The NDX of course has been above its April high since gapping above it on October 15th. The RUT is the laggard in comparison, still under its April high by about 12.50 points (1.7%). So we've got a mixed bag between the indexes in regards to the April highs but clearly the market looks bullish at the moment. Prior to today we had bullish sentiment (as measured by trade-futures.com with the Daily Sentiment index readings) exceeding previous market highs so I can only imagine what the readings will look like now.

But interestingly, the DSI bullish sentiment has been dropping back over the past week or so. It seems even the bulls recognize we've run too far too fast. While today's rally could spark a lot more bullish sentiment, it also remains possible more bulls will be feeling very nervous up here, especially if the bulk of the buying was more short covering than anything else and we fail to see follow through. At past highs we've seen sentiment tail off even as the market made a new high. The chart below shows the highs in sentiment and then higher market highs with lower sentiment. It's another form of bearish divergence and it's showing up again.

SPX vs. Daily Sentiment index, chart courtesy elliottwave.com

As noted on the above chart, in April the DSI peaked on April 14th while the market peaked April 26th, a Fibonacci 8 trading days later. So far we've got a peak in DSI on October 18th and today's new high is a Fibonacci 13 days later. Does that mean today's high will be THE high? I have no earthly idea and I'm sure not recommending that you go ahead and short it right here. My tactic, as I've been saying for weeks now, is to follow this higher since I don't like the risk playing the upside (although in hindsight there clearly was very little risk) and I'm trailing up my key levels that indicate when a top has been made and when it's safe for bears to get back in the water.

One bullish sentiment that hasn't pulled back yet is from the AAII (American Association of Individual Investors). The bullish minus bearish sentiment had a reading of 29.60 as of last week and as the chart below shows, this puts it higher than all of the highs since 2007. Each time it has reached 26-29 it has marked an important high, even if it was good for just a stronger pullback. But more bullish sentiment at a retest of the April high for SPX is probably not something the bulls want to see. Sentiment can easily go higher but when it gets this high it usually makes good sense to start watching for reversal patterns rather than continuation patterns.

AAII Bulls minus Bears Sentiment, chart courtesy elliottwave.com

Following the Fed's desire to crush the U.S. dollar, um, I mean, insert more money into the banking system, the rest of the world's bankers are not very happy with US. And I don't blame them. Geithner, et al, said at the G-20 meeting a couple of weeks ago that the U.S. supports a strong dollar. Once again he's proven that if his lips are moving he's lying. Our government and the Federal Reserve continue to take the U.S. down a lonely path and it's "damn international opinion, full speed backwards".

Last night, following the Fed's decision, Bloomberg Asia analysts discussed the idea that they thought the U.S. was running a giant Ponzi scheme, which echoes Bill Gross' (PIMCO) statement made last week. You can see how the Fed, and the U.S. in turn, is losing credibility and quickly. A country with the world's reserve currency needs to be more responsible to the world community and our government and Fed are clearly showing a complete lack of responsibility to the rest of the world (imho). If this is what Obama meant by "change" and making an effort towards reconciliation towards other countries, he has a funny way of showing it (end of political commentary).

Of course the government has been running one of the biggest Ponzi schemes ever created--the Social Security system. If the U.S. ever tries to push China in the future to let their currency rise and to stop manipulating it, China will have every right to jam those words down our throats and demand that we practice what we preach. We have clearly lost the moral high ground (many would argue we lost it years ago).

Europe's central bank, the ECB, has been talking about removing some of the stimulus as they're worried too much will cause an inflation problem that could get away from them. Of course they've got their own internal problems with very different economies to deal with. Strong exporting countries like Germany are leading the effort to deflate the value of the euro in order to make their exports cheaper to the outside world. Now the Fed has taken a big step towards a continuing to deflate the dollar in an effort to do the same for the U.S. It's a race to the bottom and exactly the same thing that happened in the 1930s. That didn't work out too well for the world back then and I seriously doubt it will work out any better this time. From the man who supposedly understands the Great Depression Bernanke sure is repeating a lot of the same mistakes.

Europe and the U.S. economies are performing roughly the same. But the Fed and ECB have disagreed on how best to proceed. The Bank of England and ECB have parted company with the Fed as they don't believe more QE is the answer. They announced today that they would hold rates the same and that they would not be expanding their own bond purchasing program. Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam, said, "That reflects a deep-seated difference in central bank philosophies. The ECB is happy with moderate growth and moderate inflation; the Fed finds it totally unacceptable."

I think one of the missing pieces here is that the Fed wants the stock market to rally in hopes it will spark positive consumer sentiment, which in turn will spark some buying interest and get the economy moving. It's a dangerous game he's playing and one that I think will fail miserably. But he clearly feels he's running out of options and does not want to go down in history as someone who didn't try everything at his disposal to fight deflation. I expect he'll soon throw a kitchen sink into the middle of the stock market trading floor.

But for the time being Bernanke's plan is working like a charm--the DOW is up about 15% from August and more than 18% from July. Not a bad return if you bought those lows. For the year the DOW is up about 7.5% which is still a very good return, especially on top of the 2009 return. The DOW is now challenging the level seen in September 2008, just before the crash, so back to break even on that time frame.

Back to the September 2008 level. Think about that for a minute. This was just before the Lehman Brothers collapse and bankruptcy. From there the market crashed lower into October/November 2008 based on fears of a poor housing market, overleveraged banks and a slew of bad investments called mortgage-backed securities and the alphabet-soup of derivatives based on those securities. Have we seen any improvement in these areas? I'd say no and in fact they've gotten worse. We now know the banks may soon be forced to take back many of these MBS products that they fraudulently sold as AAA investments. Housing looks ready for another leg down as mortgage resets continue to spike higher (and the foreclosure rate with it). If not for FASB (Financial Accounting Standards Board) rulings, such as allowing the banks to carry mortgage assets at full value instead of market value, the banks' balance sheets would be toast. So have we simply returned to the scene of the crime, ready for another whipping?

I'm going to look at the DOW's weekly chart tonight because it has jumped above its April high and reached a potentially important level. Back in July-September 2008 price was consolidating in a sideways triangle from which the DOW then broke down. The apex of these continuation patterns is often support/resistance when retested. This is the first time the DOW has made it up to this level and therefore a retest and kiss goodbye is a distinct possibility. Any reversal from here that drops below the week's low (Monday's low at 11062) would be a sell signal. So bullish above and bearish below (call it 11K).

Dow Industrials, INDU, Weekly chart

The daily chart shows a little more upside potential, to about 11500, if it's headed for the trend line along the highs since September 21st. It might even do a little throw-over above the line if we're into a blow-off finish. If the market is going to work its way higher this month it will still (typically) need a little pullback before making a final(?) high later this month, shown with the dashed line. In this case the upside target would be near 11725 which is where the 2nd leg up in the a-b-c bounce off the July low would achieve 162% of the 1st leg up. It takes a drop below 11097 to tell us the top is already in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11,260
- bearish below 11,097

One could argue that the price shelf of support back in August/September 2008 was near 1235 and once that level was broken in September the flood gates opened and flushed the market away. Therefore a return to that level could be the "thank-you-God" opportunity for many. This is the level that caught longs by surprise, they held during the entire decline, swear at themselves for not using a stop and then promise their god that if and when price gets back to that level they'll get out of their position and promise never to trade without stops again (until next time, wink). So, will we see these players get out at or near 1235? Interestingly, the 162% projection for the 2nd leg of its a-b-c bounce off the July low is near 1231. As for today, SPX ran up to its trend line along the highs since September 21st and is therefore vulnerable to a reversal from right here, or at least a pullback before proceeding higher later this month.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1202
- bearish below 1183

The 60-min chart below shows how exact SPX tagged its upper trend line. More than a few traders are watching that line. As noted on the chart, the uptrend line from October 4th and the trend line along the highs since September 21st creates a parallel up-channel, which are typically very good for trading. Therefore it's a setup for at least a pullback and if the pullback is a choppy sideways/down kind of consolidation/pullback then we'll have a good idea that another leg up would be coming, shown with the dashed line. That would create a 5-wave move up from November 1st and could complete the rally (emphasis on "could"). Otherwise a stronger and steeper (impulsive) decline would be a heads up that the market is breaking down. A break below 1183 is needed to confirm the high was made.

S&P 500, SPX, 60-min chart

For NDX I've been watching the 127% extension of the April-July decline as a potential upside target (common reversal Fib extension). This morning's gap up cleared that hurdle and the next Fib extension that I often see as a reversal level is the 138.2% extension. That's at 2196.70 which was missed by about 3 points today. It's also near the top of a parallel up-channel for price action since the October 4th low. Today left a big gap to close but if we get a price consolidation near the high we could see price press higher to its October 2007 high near 2239 (shown with the dashed line). Also near that level is a price projection for two equal legs up from August, near 2242, to finish off a double zigzag wave count (a-b-c-x-a-b-c) for the corrective bounce off the July low. Bears need to see NDX back below 2132, Wednesday's low, in order to get confirmation that the top is in place and you're free to start shorting rallies. Bears need to stay very defensive in the meantime.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2160
- bearish below 2132

The RUT has been playing serious catch-up the past 3 days, especially Tuesday and today. It's the last one to get above its April high and clearly trying to get there fast before the others leave it in their dust, which might be back down. But for now it clearly looks bullish with upside potential to its April high near 746 and possibly 760 if we see just a pullback and then press higher into mid to late November. A break below 705 and its uptrend line from August would tell us it already made its high, otherwise continue to respect for the potential for more rally.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 720
- bearish below 705

Since the Fed is intent on keeping downward pressure on bond yields, especially the 10-year (since that rate has the most influence on loan rates, including mortgages), it will be important to keep an eye on the TNX (10-year yield) over the next few weeks. The bond market will tell us whether or not the Fed will be successful and based on what the bond market tells us we'll have a better sense of what the stock market could do next. TNX broke its downtrend line from April on October 22nd but appears headed back down to it for a possible retest. The bullish implications of a test would of course thwart the Fed's efforts to keep rates down. If the Fed is failing then the stock market would eventually take notice. A drop back below 2.33%, the October 8th low, would say the Fed is being successful with their QE program.

10-year Yield, TNX, Daily chart

In Tuesday's wrap I has looked at HYG the High-Yield Corporate ETF, and suggested it was setting up for a move down after bouncing back up to its broken uptrend line from May. Not so fast is what the market said yesterday and today. Especially after today's strong rally it spiked well above resistance near 91. Plus a reader emailed me (thanks Don) to let me know that HYG kicks out a 60-cent dividend on the 1st of every month and that's how much it had dropped on Monday (you can see how important it is to know such things if you're trading ETFs).

Since this is an important sector to watch (an indication of willingness to take on higher risk) I wanted to see why it stopped where it did today. The weekly chart below shows it rallied up to the level where it broke down (seriously broke down) in September 2008. So another symbol back to the scene of the crime. Now we'll see how many decide to take profits and get out while the getting is good.

High-Yield Corporate Bond ETF, HYG, Weekly chart

The real beneficiaries of the Fed's QE program will be the banks (of course). They can borrow from the Fed for virtually free and then use the money to buy the Treasuries and get an immediate no-brainer return on the interest rate spread. And for this their managers get paid huge bonuses for being so brilliant. So the banks have enjoyed a rally the past two days with the broader market, they continue to significantly lag in the rally off the August lows. The BIX, the S&P bank index, has done marginally better than the BKX, the KBW bank index, and today exceeded the September highs near 132.50 (BKX has not been able to do the same yet).

Not much higher for BIX is the price projection at 135.22 where the bounce off the October low would have two equal legs up. The multitude of 3-wave moves in this index tells us that level could be tough. Slightly higher is would close its gap from August 10th, at 135.86. And then at 137.17 is where the bounce off the July low would have two equal legs up. So there's a little more upside potential but the risk is for the banks to start selling off hard (dark red line). The other possibility, shown with the dashed line, is for the market to continue higher into the end of the month (Thanksgiving day finish?) and then start a serious selloff. The bottom line is that between price projections, trend lines and the 200-dma, all in a range of 135-140, it's going to be very difficult to climb through all that, especially with an overbought market.

Banking index, BIX, Daily chart

The TRAN almost made it up to its trend line along the highs since early September, currently near 4970. As with the other indexes and sectors, this could be ending the rally from August or we could get a pullback and then another new high later this month. A break below 4800 is needed to confirm the top is in.

Transportation Index, TRAN, Daily chart

Thanks to the Fed the dollar took another hit today and dropped to a new low for its decline from June. It's now poking below the uptrend line from 2008 through the November 2009 low, currently near 76.27, with today's close at 76.02. Since the June 8th closing high the dollar is down -14%. Since the June 8th closing high of 1062 on SPX it's up +15%. That means foreign holders of U.S. stock have gained a whopping +1%, thanks to the depreciation in the dollar. Gold is up a little less than +12% over the same period so foreign holders of gold have lost money even after what looks like a strong rally in gold. The bottom line is foreign holders of U.S. securities, be they bonds, stocks or commodity ETFs, will soon tire of the Fed's refusal to accommodate anyone other than their own interests and start selling U.S. assets. With such an overbought market--in bonds, stocks and commodities--it wouldn't take much foreign selling to get the ball rolling down hill.

At this point it looks like the dollar could drop down to a trend line along the lows since August, currently near 75. I'm not sure if yesterday's low on the chart is a bad tick (happened right after the FOMC announcement) but at 75.235 it could be where the dollar is headed. Sometimes these "bad" ticks have a way of predicting where price is heading. In any case, I expect to see the new low met with bullish divergence and set up a strong rally leg, which will catch about 97% of the traders leaning the wrong way (that's the bearish sentiment on the dollar right now).

U.S. Dollar contract, DX, Daily chart

With the dollar dropping we've seen a concurrent rally in the euro as investors sell the dollar and buy the euro, which makes it more difficult for the Europeans to compete with their international trading partners. The weaker dollar/rising euro, as well as the lower Treasury rates, is also forcing investors to seek commodities as investments, which is forcing commodity prices higher and will add to inflation pressures. Today we saw a big spike across the commodities, including the metals (precious as well as copper), soft commodities (grains, sugar, coffee, etc.) and oil. Certainly I would expect the decline in the dollar and rise in commodity prices to be at least a little disconcerting to the Fed. If not then they really do have their head in the sand (I'm trying to keep it clean, smile).

The commodity related equity index, CRX, took a big jump up today and smacked its head at the top of a parallel up-channel from August. If the dollar finds its footing and leaves just a throw-under below its uptrend line from 2008 and starts rallying from here we could see CRX tuck tail and dive lower from here. Otherwise it remains bullish as long it stays inside its up-channel.

Commodity-related Equity index, CRX, Daily chart

Another weekly chart of a commodity, one that I showed on Tuesday, is copper. This is a reflection of both commodity prices in general (especially with a weak dollar) and global economic conditions/expectations. It has been pushing up underneath its broken uptrend line from early 2009 and today it pushed right back up to it again. Unless it can climb back above this trend line, it's a bearish setup, especially with the bearish divergence at the new highs. But it needs to break below last week's low (370.35) to confirm it.

Copper continuous contract, HG, Weekly chart

Gold made a new high today and in so doing it ruined a perfectly good EW setup for an impulsive decline. I hate it when that happens. But the impulsive leg down from the October high should still mean the trend has changed to the downside. Today's new high, which could press a little higher, is part of a more complex corrective pattern that will unfold to the downside. It means the downward projection will be more difficult to determine. But especially with the bearish divergence at the new high, I'd be looking for a selloff rather than a continuation of the rally.

Gold continuous contract, GC, Daily chart

Oil came very close to testing the May high at 87.15 (today's high was 86.83). The new high above early October's is showing bearish divergence so far and therefore the risk for bulls is a double-top failure of the rally (dashed line). But we could see just a pullback and then another press higher into later this month (like the stock market) in which case a 113% Fib extension of the May decline, at 90.13, could be the upside target. This is the first Fib extension to watch for a possible double-top pattern if it makes it through the previous high. Not shown on the chart is the 50% retracement of the 2008 decline which is at 90.23.

Oil continuous contract, CL, Daily chart

Today's economic reports were pretty much ignored. The big gap up had everyone feeling bullish no matter what the reports said. In previous weeks the market rallied on the "less bad" news about unemployment claims. Today's number showed an unexpected jump back up -- +20K to 457K vs. expectations for 442K. Ach, don't bother me with deteriorating fundamentals, I've got a rally to attend!

The other reports, Productivity and Labor Costs showed some improvement but the positive productivity number (+1.9%) was merely a reversal of the previous month's -1.8%. If you look at the chart of productivity and labor costs since 1994 you can see the trend for the past few quarters is not good. Labor costs have bumped up this year but still in negative territory (part of deflation). Productivity has taken a sharp turn back down once the government stimulus money ran out.

Productivity and Labor Costs, chart courtesy briefing.com

Friday's reports include the very important nonfarm payrolls number, unemployment rate (which no one believes), earnings, work week, home sales and consumer credit. It's a full docket and could be market moving, especially before the bell.

Economic reports, summary and Key Trading Levels

If today's rally was mostly short covering, which I have no doubt considering the number of people piled up on the sell-the-news side of the fence, and considering the market closed at its high, there's a good possibility we'll see a reversal of at least some of today's rally. This makes the pre-market economic reports potentially explosive. However, if there's any hint of trouble for the rally we might see "someone" step in to help it before the market opens. That's pure speculation on my part of course. Just be careful of any early volatility one way or the other.

When the market has had a strong up day, closing near or at its highs, the following day has tended to be weak. I've mentioned this many times before -- it's like little capitulation days and then there's nothing to follow through the next day. The shorts had to get out and usually end-of-day short covering by the last to throw in the towel leaves no one to buy the next day. So that's the setup heading into Friday.

The Fed and their minions would love nothing better than to see the week close out near today's highs. That way they avoid the embarrassment of a failure of the market to support the Fed. So how active some will be to support the market tomorrow can't be known but consider the possibility if you're thinking of playing the short side.

It being a Friday, there's also a good chance we'll see the market simply digest this week's price action. I think both sides are going to be a little leery about what's next. The bulls know this market has gone too far too fast even if they're enjoying the ride. Fear of losing profits may become too strong for some. Bears know they've been steam-rolled multiple times by a market that constantly gives off sell signals and setups and yet refuses to sell off. They're going to be on the sidelines licking their wounds and letting the market prove it's done before they enter the fray. The combination could result in a very quiet market tomorrow.

So I see either a selloff because there are simply no more buyers and the early economic reports start the snowball or we'll see a consolidation/choppy pullback in preparation for pushing higher next week. Don't be anxious to short this market -- keep following it higher with the key levels. It's an irrational and exuberant market right now, one that's very dangerous for both sides but especially the bears.

Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1202
- bearish below 1183

Key Levels for DOW:
- cautiously bullish above 11,260
- bearish below 11,097

Key Levels for NDX:
- cautiously bullish above 2160
- bearish below 2132

Key Levels for RUT:
- cautiously bullish above 720
- bearish below 705

Keene H. Little, CMT


New Option Plays

Financials Need to Play Catch Up

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

iShares DJ Financial ETF - IYF - close 55.34 change +1.72 stop 52.40

Target(s): 56.00, 57.40, or higher
Key Support/Resistance Areas: 57.75, 56.15, 54.25, 53.65, 52.50
Current Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see trigger

Company Description:
iShares Dow Jones U.S. Financial Sector Index Fund (the Fund) seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Financials Index (the Index). The Index measures the performance of the financial sector of the United States equity market, and includes companies in industry groups, such as banks, non-life insurance, life insurance, real estate and general finance. The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. (source: company press release or website)

Why We Like It:
Financials have seen two pieces of good news over the past two days. First, the QE2 program announced yesterday is targeted towards the short to middle end of the yield curve, not the long end as many thought. This should make the yield curve steeper which is likely to enhance bank profits. Second, the WSJ said today that the Fed may be considering removing restrictions from allowing TARP banks to pay dividends. And this is sure to attract investors into financial stocks. More nimble traders may consider launching positions now, however, there could be a dip in the broader market so it can gather energy for another move higher. Technically, IYF broke over long term resistance at $54.30 today. We want to use this area as a trigger to launch bullish positions $54.50. Our initial stop is below the rising 50-day SMA at $52.30. We are targeting a move towards the May highs.

Suggested Position: Buy December $55.00 CALL if IYF trades to $54.50

Annotated chart:

Entry on November XX
Earnings Date N/A (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 4, 2010


In Play Updates and Reviews

Tough Day For Short Positions

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Cliffs Natural Resources - CLF - close: 70.00 change: +3.13 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:
11/4: It's too bad our trigger to launch bullish positions in CLF was barely missed yesterday as CLF has surged nearly +7% off of those lows. Now the stock has run away from us and is already trading between the middle of our targets. Chasing an entry at these levels is a high risk proposition for a swing trade. I think a move back towards CLF's 20-day SMA and rising trend line provides the best entry point (between $64 and $66), however, this may be too shallow of a pullback. We'll keep the trigger at $64.50 for now and reassess market conditions after we see how the week closes.

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.

Trigger = $64.50

Suggested Position: Buy 2010 December $70.00 CALL

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


Humana Inc. - HUM - close: 59.26 change: -0.31 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:
11/4: Surprisingly HUM lost -0.52% today despite the broader market strength. The healthcare sector is considered a defensive play and considering some of the runs these stocks have made I suppose some profit taking was expected. The bearish candle pattern I mentioned below is working. Let's get ready to buy the dip if HUM trades to $53.00.

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 on 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.

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


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

Comments:
11/4: We were hoping for a dip to launch bullish positions in VIP, but the stock gapped higher today along with the broader market. Chasing the stock it at these levels is a higher risk play. At a minimum VIP should fill today's gap at $15.81, but I think it eventually trades to our trigger at $15.60 before going too much higher. Let's remain patient and we'll reassess conditions after this week's close.

11/3: 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, estimated ask at entry $1.10

Entry on November XX
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 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: -50%
Time Frame: Two or Three weeks
New Positions: Yes

Comments:

11/4: The VIX continues to peel back but seems to have found support at $18.00, which is where it bounced to close +3% off of its lows. The upward channel mentioned yesterday has been broken. Tomorrow's close will be telling and we will reassess the play in this weekend's updates.

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

Millicom Intl. - MICC - close: 96.97 change: +0.43 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: -22.5%
Time Frame: Three weeks
New Positions: Yes

Comments:
11/4: MICC gapped higher this morning and it was all down hill from there. The stock immediately collapsed to fill the gap and then bounced a bit into the close for small gain on the day. MICC clearly underperformed the broader market and should head lower in a hurry if we get a broader market correction. Our stop is above todays high so trying short positions here with a tight stop is a good set-up if you think the market heads lower before higher.

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 55.93 change +1.87 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: -93%
Time Frame: 1 to 2 weeks
New Positions: Neutral

Comments:
11/3 & 11/4: 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 most 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


CLOSED BULLISH PLAYS

Genco Shipping - GNK - close 16.41 change -0.18 stop 15.50

Target(s): 17.00 (hit), 17.35
Key Support/Resistance Areas: 18.25, 17.75, 16.90, 16.25, 15.75
Current Option Gain/Loss: -37.5%
Time Frame: 1 to 3 weeks
New Positions: No

Comments:
11/4: Per last night's updates we closed GNK on strength this morning. This is a disappointing loss but the right move to make considering options expire in two weeks.

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!

Closed Position: Long November $17.00 CALL at $0.50, 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 11/3/2010 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on October 11, 2010


CLOSED BEARISH PLAYS

Fastenal Co. - FAST - close: 53.75 change: +0.53 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,
Final Option Gain/Loss: -75%
Time Frame: 3 to 4 weeks
New Positions: Closed

Comments:
11/4: Today's strength got us and our stop was hit in FAST. Our first target was hit last week for a small gain but we kept the position open and paid for it. If readers still have positions I would use weakness as an opportunity to close positions.

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.

Closed Position: Long November $50.00 PUT @ $0.25, 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


Illinois Tool Works - ITW - close 47.89 change +1.58 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
Final Gain/Loss: -54.16%
Time Frame: 2 to 3 weeks
New Positions: Closed

Comments:
11/4: ITW broke out of its bear flag and surged higher today, hitting our stop along the way. We are flat the positions for a dissapointing loss. There is a big gap to fill from 10/19 so I would be very cautious holding short positions, especially if the market continues higher prior to correcting.

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.

Closed Position: Long December $45.00 PUT at $0.55, entry was at $1.20

Annotated chart:

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 25.27 change +1.68 stop 24.60

Target(s): 22.30, 21.25, 20.25
Key Support/Resistance Areas: 24.25, 24.00, 23.60
Final Gain/Loss: -42.3%
Time Frame: 1 to 3 weeks
New Positions: Closed

Comments:
11/4: Yesterday's failed rally at MTL's 20 and 50-day SMA's proved to be a head fake. The stock ripped +7% higher today and through our stop so we are flat the position for a loss. There is resistance at $25.50 and if MTL breaks through this level it could easily run another $1 higher.

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!

Closed Position: Long December $23.00 PUT at $0.75, entry was at $1.30

Annotated chart:

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


VMWare Inc - VMW - close: 77.28 change: -1.46 stop: 80.25

Target(s): 72.25, 68.50
Key Support/Resistance Areas: 80.00, 79.00, 75.00, 72.00, 200-dma
Final Gain/Loss: -43.2%
Time Frame: 3 to 4 weeks
New Positions: Closed

Comments:
11/4: This one is tough to take. VMW surged higher this morning, hit our stop, and then collapsed to close -1.85% lower on the day. Nonetheless, we are flat for a disappointing loss. If readers still have open positions they are near breakeven. Look for weakness to book a profitable trade.

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 at 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.

Closed Position: Long 2010 December $70.00 put (VMW1018X70) at $1.05, entry was at $1.85

Annotated chart:

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