Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/8/2010

Table of Contents

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

Market Wrap

Rally Holds Up But the Market Is Giving Us Some Important Signals

by Keene Little

Click here to email Keene Little
Market Stats

The market may not have a lot of points in the past few days and the new highs this week are showing some negative divergences but the bulls haven't done anything wrong yet and rally continues to hold some additional upside potential. But I wonder if too many are expecting a rally, and buying into it, which could cause some problems for follow through to the upside.

The day was generally quiet, almost pre-holiday-like, and the numbers in the table above shows it was a mixed day. A late-day surge protected the indexes from closing marginally in the red. Even the dollar and commodities were relatively quiet. There were no major economic reports, it was quiet overseas and no big news announcements. It was a day of rest. Now the big question was whether it was a bullish rest period or consolidation before selling off again.

I've got a few more charts than usual to show tonight since I think we're at a potentially important inflection point for the market. I think the market is due a pullback but what's not clear yet is whether we should be looking for a pullback that will be a dip-buying opportunity for a run higher into the end of the year and into the new year or if instead we should be looking for a significant shorting opportunity right here right now. So rather than spend a lot of your time reading market commentary I thought I'd spend a little more time reviewing the picture that I see developing for the market.

One of the things I really appreciated about OIN when I first subscribed to the newsletter (back in 2000) was the sincere effort being made to teach traders to trade. We've all seen countless web sites and blogs that call out trades--enter here and exit there--or worse they tell you how well they did if only you had done the same trade as they did (you know, the 1126% return on XYZ option trade in only 3 days). I know the majority of you want to learn how to trade, not what to trade (although trade suggestions are always highly appreciated).

You will find some writers very bullish and some very bearish and it provides you with an opportunity to see both sides. Todd Harrison at Minyanville constantly talks about the need to see both sides. It's hard for us to fight our bias and I'm as guilty of that as anyone. So if one of us is bullish and another is bearish, simply read, study and understand the rationale for our opinions. If we can teach you how to make trading decisions for yourself you'll trade with more confidence. And equally important you'll acknowledge that it's your trade and you will not blame or credit others for how the trade goes. How many could spit nails at Jim Cramer for one of his buy or sell recommendations? Why do analysts turn most bullish with high price projections at tops, and most bearish (as in "we're facing financial Armageddon") at bottoms? It's not just retail traders suffering from that.

So whether you're bullish or bearish you need to understand where each could be right and where they might be wrong. Depending on your trading time frame you could be switching sides on a daily basis. For this reason you should understand an analyst's time frame as well. I know a lot of traders do not like to trade in bear markets or on the short side. Bear markets scare a lot of traders away (as evidenced by the drop in trading volume, especially if it were not for the program and high-frequency trading volume). While I may be bearish longer-term (next year), I hope to give both sides some trading opportunities, whether it be with the trend or counter trend. If you want to see more or less of something we're doing, please provide feedback so that we can continue to meet your requirements.

So let's jump right in and take a look at the setups as I see them currently. SPX continues to struggle with the 62% retracement of the 2007-2009 decline, at 1228.74, which it closed marginally below today. The wave pattern can be considered complete at any time now. By that I mean an A-B-C bounce off the March 2009 low may have completed and that interpretation calls for the resumption of the bear market. From a weekly chart perspective, confirmation of a high would not come until it drops below 1129. We could see a pullback to 1185-ish, staying within a small parallel up-channel, and then another rally leg into January, potentially getting up to the 1300 area.

S&P 500, SPX, Weekly chart

Zooming in on the leg up from July, I'm showing a 5-wave count, which is why I'm saying the rally could be considered complete here. Yesterday's candle was a shooting star after gapping up, making a new high and then closing lower. It created a buying climax which is often a key reversal day. There was no follow through to the downside today so there's no confirmation of the key reversal. That leaves the bulls still in charge. Only a drop below 1200 would suggest the bulls have turned the ball over to the bears. But below 1220 would be a bearish heads up.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1220
- bearish below 1200 and more bearish below 1129

Zooming in closer to the leg up from November 29th, which I'm counting as the 5th wave, it also counts out well as a 5-wave move and that's what's had me looking for a reversal. The 5th wave even achieved equality with the 1st wave by tagging 1233.52 yesterday. There is still the possibility for at least one more new high but today's bounce looks very corrective and as such is pointing lower. Any decline below 1220 would be a stronger sell signal but still no major trouble for the bulls until 1200 is broken. But bulls be careful here--the setup is a good one for a stronger reversal back down.

S&P 500, SPX, 60-min chart

Last week I showed the setup for a high around Friday-Monday based on the MPTS (Moon Phase Trading System) since the new moon was on Sunday. So far, assuming Tuesday's high will result in at least a pullback, it was only off by a day. And how appropriate to have a shooting star candlestick around the time of a new moon. And some say astrology is just a bunch of phooey (wink).

S&P 500, SPX, Daily chart with MPTS

It could be purely coincidental but the DOW stopped yesterday right at the trend line that is parallel to the uptrend line from March 2009 (it's attached to the July 2009 low and price seems to have found it to be resistance in the past). The price pattern is the same as SPX and therefore the bearish setup is for a strong reversal back down from here. But the bulls are not in any trouble until 11200 gives way.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11,450
- bearish below 11,200 and more bearish below 10,720

NDX remains oh so close to its October 2007 high but left a bearish candlestick yesterday (gapped up but sold off the rest of the day, closing at its low). The setup is the same as the others and could start a more serious decline from here. But until it drops below 2085 there remains a possibility for a choppy rise higher into the new year (depicted with the dotted line), finishing at the October 2007 high. This is just a guess but so far the corrective nature of the move up supports it. The other possibility, shown with the dashed line, is for a steeper pullback and then another rally leg into January. But I'll worry about that possibility if and when it drops below 2085.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2200
- bearish below 2085 and more bearish below 1918

The RUT is at an important level and I want to show the weekly chart to give a sense as to what it's facing and where it could go. There is a price-level support/resistance band at about 760-764 and it was a bullish move when it gapped above and held above 764 yesterday and again today. It could certainly continue higher from here and the next price-level resistance is near 800. But I think the RUT is ready for at least a pullback in which case the move above 764 would look like a head-fake break (not that this market ever does anything like that).

Russell-2000, RUT, Weekly chart

If the market does pull back this month it's not going to be clear as to what the longer-term pattern will be into the early part of next year. With the 50 and 200-week moving averages and an uptrend line from March 2009 all located near 660 by the latter part of January, that would be strong support and could launch another rally leg from there (green), which would likely be a strong rally. A break below 660 would be the first indication on the weekly chart that the bulls are in trouble.

Moving in closer to the rally leg from August, the RUT has popped above the top of a potential rising wedge pattern, currently near 762 (so right in the middle of the 760-764 price-level support/resistance zone). So far that's bullish but a drop back below 760 would leave a throw-over finish to the rising wedge, which would be a sell signal. Confirmation would not come until the RUT breaks below the bottom of the wedge near 736. From a wave pattern perspective, the bulls would not be in trouble until the RUT dropped below 720. If the bulls continue to hang on here, a move up to at least 785, if not 800, looks to be the potential.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 764 up to 785-800
- bearish below 720 and more bearish below 672

Anyone watch Bernanke being interviewed on 60 Minutes Sunday night? I'll be kind and not call him a liar but his quivering-lip interview had me wondering how much faith he has in the American people to understand what he's really up to. I about fell off my chair when he answered the question about printing money by saying the Fed was not doing that and that they were only intending on keeping interest rates low so as to help economic growth. Even Jon Stewart caught him in the "misstatement" of facts: Jon Stewart's Bernanke Observations.

As to the Fed's efforts to keep yields low, well, let's just say it isn't working out as planned. Yet another conundrum in the bond market. You would think the Fed would learn that they don't control the bond market. The 10-year yield, which has the most influence on mortgage rates and many other variable-rate loans, has been climbing and this week it's been spiking higher. I've had 3.1% as a level I've been watching for and then I expected a pullback at a minimum. Bond players are telling the Fed to get out of their sandbox as they sell off their bonds, afraid the Fed is losing it and cause more of an inflation problem. Don't forget, it's the Fed (Bernanke) who never saw the crisis coming in the first place. And now he's going to fix it? The bond market apparently thinks he'll just make things worse.

Today Treasuries prices dropped the most since the Lehman bankruptcy. This has got to be causing more than a quiver in Bernanke's upper lip. The chart of the 10-year yield below shows the strong climb up through the 38% and then 50% retracements of the April-October decline. Not even the 200-dma at 3.1% slowed it down. The long-legged doji today has the potential to be a reversal candlestick if tomorrow we see yields turn back down. Then it will be time to watch the pattern of the decline to help determine whether it will be just a pullback (green) or the start of a more serious decline (red). A climb from here above 3.4% could indicate we're about to see yields shoot higher (4% quickly).

10-year Yield, TNX, Daily chart

Higher interest rates would put a lot more downside pressure on real estate, both homes and commercial. I continue to watch the DJ REIT index (DJR) carefully because I think it will provide a good heads up for the broader market, just as the housing industry gave us a heads up before the market topped in 2007. The rising wedge pattern for DJR's rally off the July low was convincingly broken in November after a classic throw-over finish on November 5th. I pointed out the sell signal on this index the following week, especially with the failed retest at the bottom of the wedge on November 11th.

After dropping sharply to the November 16th low it has been bouncing in a bear flag pattern and reached the 62% retracement of the November decline. Today it broke down from the flag pattern and the next leg down should be starting. Keep in mind that rising wedge patterns tend to get completely retraced in a much quicker time than it took to build it so back below the July low probably in January, possibly sooner. The first downside target is the H&S objective near 183. SRS is an inverse ETF for the real estate market.

DJ REIT index, DJR, Daily chart

A widening spread between the short-term and longer-term bonds (steepening of the yield curve) helps the banks since they can lend money (if they lend money) at a better rate than they pay on deposits. Actually I have little doubt that this is the true motive behind the Fed's QE program but clearly that's just a guess on my part. The banks have had a very strong run since the November 29th low, coinciding with the time TNX took off to the upside, and today the BIX tested its November 5th high at 141.70 (closed just shy of it at the day's high of 140.61). There is price-level resistance at 140.00-141.60 based on the quadruple highs back in June and July. So far the test of this resistance zone is leaving a bearish divergence on the daily chart so a turn back down would leave a double-top reversal. If the bulls can drive BIX above 142 on a closing basis that would be a bullish statement.

Banking index, BIX, Daily chart

Another money-related index that I like to watch is the broker index (XBD). It provides a good sense for how people and brokers are doing in the market. Currently we've got a very clean a-b-c wave pattern for the bounce off the July low. The 5th wave is just shy of the price projections at 118.79 where it would equal the 1st wave in the move up from late August. Currently it's just shy of the 78.6% retracement of the April-November decline and is very close to the trend line along the highs from July. Lots of potential resistance just overhead.

Broker index, XBD, Daily chart

Besides the money centers, another good sector to watch is basic materials since that will give us a sense about how well the economy is doing. IYM is the DJ Basic Materials ETF and it's interesting to see how it rallied back up to its broken uptrend line from March 2009 through the February 2010 low, which was broken in May. The move up from July can be counted as a completed 5-wave move to complete an A-B-C bounce off the March 2009 low. It could press a little higher this month and we don't have any sell signals on this one yet but it's now very close to signaling the possible completion of the 2009-2010 rally.

Notice the 62% projection for the c-wave at 75.99. Yesterday's high came within 14 cents of that level and has reversed sharply (pretty amazing after a run of more than $45 over 21 months and it gets within 14 cents of its projection (62% and 100% are the two most common projections for a c-wave). Slightly higher, at 76.48 (0.63 above yesterday's high), is the 78.6% retracement of the 2008-2009 decline. It's a setup for the start of the next bear market leg down but obviously price will need to prove it and there's a lot of work the bears need to do. The first bearish clue would be a drop below 71.25.

DJ Basic Materials ETF, IYM, Daily chart

On Friday the TRAN finally tagged its 5065.68 price projection (wave-c = 162% of wave-a) and its broken uptrend line from August. Yesterday it spiked back up in the morning, tagged the broken trend line again and fell back. Today it closed below 5065 and yesterday's low, confirming yesterday's shooting-star reversal candlestick. The pattern for the move up from November 16th supports the idea that we'll see the TRAN stair-step a little higher (dashed line) but the risk is for it to start heading lower from here. Confirmation of a high would not come until it drops below 4917. So far the TRAN's climb above the November high has not been confirmed by the DOW, leaving a bearish non-confirmation from a DOW Theory perspective.

Transportation Index, TRAN, Daily chart

I'm not quite sure yet what the dollar is doing. It was looking very bullish until last week's pullback which was larger than the first pullback in mid November. That calls into question the impulsive wave count to the upside and now the dollar has broken its uptrend line from November 4th and finding it to be resistance, including today. It could be setting up for a larger pullback to the 78 area before setting up another rally leg. I have little doubt the dollar will be rallying much higher; the only question is what form the rally will take. Short term, a deeper pullback in the dollar could give the stock and commodity markets another shot in the arm.

U.S. Dollar contract, DX, Daily chart

Tonight I'm going to take a look at the dollar and commodities with a longer-term perspective so we can keep a bigger picture in mind. What the dollar and commodities do over the next few months will likely have a big effect on the stock market. The dollar is either in a very bullish pattern with higher lows since the March 2008 low or it's in a sideways triangle bearish continuation pattern. In either case I see a rally up to the 87-88 area (downtrend line from March 2009) and that will put a lot of pressure on stocks and commodities. What it does from there is something we can worry about when it gets there.

U.S. Dollar contract, DX, Weekly chart

The stock and commodity markets will likely remain more in synch than not so keeping an eye on the commodity index (CRB) can help confirm a move or alert us to the possibility one or the other is in a false move. CRB has been in a parallel up-channel since its March 2009 low and has tagged the top of it while testing the November high. So far the test of the high is showing a fairly significant negative divergence, hinting at the possibility we'll get at least a pullback from here. It remains bullish as long as any pullback does not drop below 280, the August 5th high. In the meantime be careful about any further upside if you're playing in the commodity market.

Commodity index, CRB, Weekly chart

Gold is getting pinched. It's in a rising wedge pattern from October 2008 and the final move up from July is also forming a rising wedge. You can see the significant bearish divergence on RSI since the high in early October. There could be a little more upside (1480-ish) but holding out for more moves you into the hog's group (pigs get fat, hogs get slaughtered). The high in gold could be a very significant one.

Gold continuous contract, GC, Weekly chart

Silver is showing the same reversal potential. It has rallied up to the top of a parallel up-channel from 2008, in November and again yesterday. It's leaving a bearish divergence at the new high. The wave count calls this the end of the rally from October so like gold, this could be a very significant top that is forming.

Silver continuous contract, SI, Weekly chart

I want to get in a little closer on the oil chart because of the potential reversal signal we might have received this week. Yesterday price jumped briefly above the top of a rising wedge pattern but then did a sharp reversal back down and closed inside the wedge, leaving a shooting star candlestick. Price action since yesterday's low looks corrective and points to lower lows for oil. The longer-term pattern is a setup for a significant decline from here but the bulls are not in trouble until oil drops below 82.

Oil continuous contract, CL, Daily chart

There were no significant economic reports today. Mortgage applications were less bad at -0.9% vs. the -16.5% last week. This is a very volatile number so week to week it's not very helpful. The trend remains negative. Crude inventories dropped but that didn't help the price of oil much. Tomorrow will be light as well, with unemployment numbers and wholesale inventories.

Economic reports, summary and Key Trading Levels

In summary, the charts are warning me of a reversal in the making. At least that's the potential. At the same time bullish sentiment is scary high. One look at VIX, and especially VXX, you can see there's no fear out there. Everyone is convinced the Fed won't let anything bad happen (tell that to the bond holders) and that we're going to get our Santa Claus rally. I'm beginning to wonder if Santa is going to be able to get his sleigh off the ground with all the bulls that have clamored aboard.

The dip buyers are active and call buying is going through the roof, as evidenced by the ISEE call/put ratio (which does a good job at measuring newly created speculative positions vs. hedge and spread positions). A chart of the 5-dma of the ISEE equity-only readings shows a spike above highs seen in 2007 and April of this year, which is clear evidence of the bullish exuberance out there. Santa's sleigh is looking overloaded indeed. Rarely does the market accommodate so many betting the in the same direction.

ISEE Equity-only Call/Put ratio, 5-dma

When I see as many reversal setups as I currently see, combined with extreme bullish sentiment, it has me on the edge of my seat wondering what could trigger a selloff. Sometimes it's nothing more than good ol' fashioned profit taking. There are a lot of profits to protect right now and while fund managers may have been caught in chasing performance to the upside I suspect more than a few are nervously perched over their sell buttons to protect what they have. We could see a sell-first-ask-questions-later response to any piece of news, be it domestic or foreign.

But keep in mind that the reversals, or setups for reversals, are very early. This market has had a knack for immediately reversing the reversals, especially with so many looking to buy the dips. There may be enough buying power to hold the market up into the holidays and then we'll deal with a potential hangover afterwards. I think it's a market that requires caution by both sides right here.

Tomorrow is another big Fed POMO (Permanent Open Market Operations) day with the Fed scheduled to buy another $7-$9B. This will be the last one for the month. Whether it will have an impact on either Treasuries or the stock market is the big unknown. It certainly hasn't helped the bond market. As many have observed, this week's auctions have gone poorly, the weakest since February. As mentioned earlier, bond prices haven't dropped as hard as they did today since the Lehman bankruptcy. As far as the stock market benefitting from the Fed's money creation (correct that, Bernanke said Sunday night that he's not creating money), I think it's more a factor of trader hope that the Fed is helping to hold us up. The market is overdosed with hopium and the backside of that euphoria could cause some painful withdrawals.

So be careful out there--I sense a tipping point but the market hasn't done anything wrong yet. We've got some early sell signals but no confirmation to the downside. Trade both sides carefully, good luck and I'll be back with you next Wednesday.

Key Levels for SPX:
- cautiously bullish above 1220
- bearish below 1200 and more bearish below 1129

Key Levels for DOW:
- cautiously bullish above 11,450
- bearish below 11,200 and more bearish below 10,720

Key Levels for NDX:
- cautiously bullish above 2200
- bearish below 2085 and more bearish below 1918

Key Levels for RUT:
- cautiously bullish above 520
- bearish below 423

And remember, whether the market continues to rally to new highs over the next year or succumbs to greater selling pressure, our goal is to help you trade the moves. Teaching a trader to fish has always been OptionInvestor's goal and it's the reason I continue to write for the newsletter. I learn more by teaching and more importantly I learn from all of you who send in questions and observations. The market is a constant learning experience (part of the challenge and fun) and together we'll continue to learn how to trade this sometimes difficult market. I hope you'll take advantage of the great end-of-year special that Jim is offering. I think 2011 will present us with some very exciting trading opportunities in both directions.

Keene H. Little, CMT

Message from Jim:
It is that time of year again. It is time for the End of Year Renewal Special. How much is Option Investor worth to you? At the $499 End of Year Special price ($1.36 per day) only one profitable trade pays for the entire year's subscription. Just one critical point in a market commentary can make you hundreds or even thousands of dollars. Just one warning comment about an impending event could save you thousands.

If just one comment or profitable play can cover the entire cost of the subscription then the other 364 days of the year are free. Renew your subscription today and then keep track of the money you make or save in 2011. I think you will be surprised!

For one low price you will get the following:

Option Investor
Premier Investor
Option Writer
LEAPS Trader
Couch Potato Trader
Top Ten List of ETFs for 2011
Top Ten List of Stocks Under $10 for 2011
Two Option Expiration Calendar Mouse Pads

You get everything listed above for the low price of $1.36 per day!



New Option Plays

Building Materials

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Fastenal Co. - FAST - close: 58.52 change: -0.04

Stop Loss: 53.75
Target(s): 59.75, 62.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description:
Fastenal sells different types of industrial and construction supplies in the following product categories: threaded fasteners and miscellaneous supplies; tools; metal cutting tool blades and abrasives; fluid transfer components and accessories for hydraulic and pneumatic power; material handling; storage and packaging products; janitorial, chemical and paint products; electrical supplies; welding supplies; safety supplies; and metals, alloys and materials. (source: company press release or website)

Why We Like It:
Investors are bullish on anything related to industrials. Shares of FAST have broken out to new all-time highs after forming a big cup-and-handle pattern. The action over the past couple of days suggests upward momentum is about to run out of gas. We want to be ready to buy calls on a dip at $56.00 since the longer-term trend is so bullish. Conservative traders could wait for a dip closer to $55 or $54 before launching positions. If triggered our first target is $59.75.

FYI: FAST announced a special, one-time cash dividend of 42-cents on November 18th and all of the option strikes have been adjusted for this 42-cent dividend.

Trigger @ 56.00

Suggested Positions:
Buy the 2011 January $54.58 calls (FAST1122A54.58)

- or -

Buy the 2011 February $59.58 calls (FAST1119B59.58)

Annotated Chart:

Entry on December xxth at $ xx.xx
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume = 880 thousand
Listed on December 8th, 2010


In Play Updates and Reviews

No Follow Through

by James Brown

Click here to email James Brown

Editor's Note:

There was no follow through on yesterday's short-term bearish reversal in the market. That doesn't mean we won't see more profit taking but bulls remain in control.

-James

Current Portfolio:


CALL Play Updates

CH Robinson Worldwide Inc. - CHRW - close: 77.15 change: +0.72

Stop Loss: 71.90
Target(s): 74.90, 79.00
Current Option Gain/Loss: +160.8%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/08 update: The relative strength in CHRW is impressive. Shares quickly rallied off the morning low and hit another new record high. The stock remains short-term overbought and due for some profit taking. If you're looking for a new entry point I would prefer to buy calls on a dip near $74. Our final target is $79.00.

Current Position:
Long the January $75.00 calls (CHRW1122A75) Entry @ $1.15

12/01: New Stop loss @ 71.90
12/01: First target hit @ $74.90 Exit all December calls: $0.95 (+111.1%)
12/01: First target hit, take profits on January calls: $ $2.00 (+73.9%)
11/27: New stop @ 70.75, new first target at $74.90

Entry on November 22nd at $72.44
Earnings Date 02/03/11
Average Daily Volume = 1.1 million
Listed on November 18th, 2010


CSX Corp. - CSX - close: 63.11 change: -1.00

Stop Loss: 59.75
Target(s): 64.25, 67.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
12/08 update: We have been waiting for a pull back in shares of CSX and it looks like shares are finally starting to sink. We want to buy calls on a dip at $62.50. Cautious traders could wait for a dip closer to $62 or $61.

Trigger to buy-the-dip @ $62.50

Suggested Position: Buy the 2011 January $60 calls (CSX1122A60)

- or -

Suggested Position: Buy the 2011 February $65 calls (CSX1119B65)

12/02: New trigger @ 62.50.
12/01: New trigger @ 62.25, New stop @ 59.90, New targets.

Entry on December xxth at $ xx.xx
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 5.9 million
Listed on November 23rd, 2010


CenturyLink, Inc. - CTL - close: 43.46 change: -0.28

Stop Loss: 41.45
Target(s): 44.90, 47.25
Current Option Gain/Loss: + 25.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/08 update: As expected CTL dipped toward the $43.00 level and traders jumped in. Shares found lots of buying pressure near $43.10. I would use this pull back as a new entry point to buy calls. I will point out that SmartMoney ran an article that included CTL discussing the sharp increase in short interest. There is a growing camp of investors betting against this stock. This raises the chance that CTL could see a short squeeze if the stock continues to show strength.

FYI: Investors should know that CTL is currently involved with a $10.6 billion stock-swap merger with Qwest Communications (Q). The merger isn't supposed to be completed until the first half of 2011. The trend for both stocks is up and naturally looks very similar following the M&A announcement.

Current Position:
Long the 2011 January $45.00 calls (CTL1122A45) Entry @ 0.20

12/01: Adjusted secondary target to $49.00

Entry on November 29th at $42x55
Earnings Date 02/22/11
Average Daily Volume = 3.0 million
Listed on November 27th, 2010


Express Scripts - ESRX - close: 54.40 change: +0.17

Stop Loss: 49.65
Target(s): 53.95, 57.25
Current Option Gain/Loss: +45.2%
Time Frame: 5 to 6 weeks
New Positions: Yes, see below

Comments:
12/08 update: ESRX churned sideways in a narrow range. Volume is fading during this consolidation. Shares act like they want to break higher but I'm concerned the major indices still look vulnerable to a decline. FYI: I updated our exit on the December calls at $2.01 (instead of $2.03).

If you're looking for a new entry point I would consider buying January calls on a dip near $53-52.

We currently only have half a position open.

Current Position:
Long the 2011 January $52.50 calls (ESRX1122A52.5) Entry @ $2.10

12/07: Exit the December calls. option @ $2.01 (+64.7%)
12/01: First Target Hit @ $53.95. Dec's @ $2.20 (+80.3%). Jan's @ $3.10 (+47.6%)

Entry on November 18th at $51.81
Earnings Date 02/24/11
Average Daily Volume = 4.3 million
Listed on November 17th, 2010


FedEx Corp. - FDX - close: 92.81 change: +0.15

Stop Loss: 88.45
Target(s): 94.75, 99.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/08 update: FDX slipped toward $92.00 this morning and managed a minor bounce. Volume was very light. There is no change from my previous comment. Our plan is to buy calls on a dip at $91.00.

FYI: FDX is due to report earnings on Dec. 16th. Holding over earnings is risky. More conservative traders will want to exit ahead of the announcement.

Suggested Position: TRIGGER @ $91.00

Buy the 2011 January $90.00 call (FDX1122A90) current ask $4.85

- or

Buy the 2011 April $95 call (FDX1116D95) current ask $5.00

Entry on December xxth at $ xx.xx
Earnings Date 12/16/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on November 29th, 2010


Goldman Sachs - GS - close: 166.14 change: +4.55

Stop Loss: 152.75
Target(s): 169.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
12/08 update: I'm starting to think I've been too cautious on our GS entry point. Yesterday's decline suggested GS was poised to pull back into the $160-158 zone. Today financials were the market's best performers. GS surged +2.8%. I would not chase it here. I'm leaving our trigger to buy calls at $160.25 for now but another bounce from $162 could be a tempting entry.

Trigger @ 160.25

Suggested Position: Buy the 2011 January $165 calls (GS1122A165) current ask $5.25

Entry on December xxth at $ xx.xx
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 7.2 million
Listed on December 2nd, 2010


W.W. Grainger Inc. - GWW - close: 132.13 change: -0.50

Stop Loss: 124.75
Target(s): 129.90, 138.50
Current Option Gain/Loss: + 84.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/08 update: I'm not surprised to see a little profit taking after yesterday's failed rally. If the market corrects we should look for GWW to pull back toward $128. If you're looking for new positions wait for the decline. FYI: Our options have doubled. More conservative traders may want to take profits now.

FYI: The stock could see a little short squeeze since the most recent data listed short interest at more than 5% of the 58.5 million share float (which isn't very big as far as floats go). FYI: The Point & Figure chart is bullish with a $140 target.

Current Position:
Long the 2011 January $130 calls (GWW1122A130) Entry @ $2.50

12/02: First target hit @ 129.90, option @ $4.10 (+64%)
12/02: New stop loss @ 124.75, New final target at $138.50

Entry on November 24th at $126.75
Earnings Date 01/25/11 (unconfirmed)
Average Daily Volume = 567 thousand
Listed on November 22nd, 2010


Humana Inc. - HUM - close: 56.46 change: +0.32

Stop Loss: 54.40
Target(s): 59.75, 64.00
Current Option Gain/Loss: -25.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/08 update: HUM managed another bounce from its rising 50-dma but I don't find the action very bullish. HUM continues to drift lower under this trend of lower highs. There is no change from my prior comments. I am concerned that if the market drops sharply on profit taking this week that we could see HUM breakdown under support near $55.00. More conservative traders may want to consider a tighter stop loss. I am taking a more defensive posture on new positions. Wait for a close over $57.00. We'll up our stop loss to $54.40.

Current Position:
Long the 2011 January $55 calls (HUM1122A55) Entry @ $3.80

12/08/10 New stop @ 54.40
11/22/10 New stop @ 53.75
11/22/10 New (2nd) target at $64.00

Entry on November 18th at $55.05
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010


Nike Inc. - NKE - close: 87.32 change: +0.13

Stop Loss: 82.45
Target(s): 86.75, 89.50
Current Option Gain/Loss: +43.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/08 update: NKE saw a small gap open higher that immediately failed but traders bought the dip at $86.40. Volume was pretty light on the session. We have less than two weeks left before NKE is due to report earnings. Cautious traders do not want to hold over this announcement. If you're looking for new positions wait for a dip toward $84.00. FYI: The December $85 calls opened at $2.25, spiked to $2.87 and then rolled over. Our exit is at $2.25.

We still want to take profits (sell half) of our January calls at $89.50.

(Second position) Current Position:
Long the January $85.00 CALLS (symbol:NKE1122A85) Entry @ $2.78

12/07/10 Exit the December calls, option @ $2.25 (+95.6%)
12/01/10 New stop loss @ 82.45
11/30/10 Readers may want to exit December options early for a gain
11/30/10 Entry on January calls @ $2.78
11/29/10 Buy the bounce from $84.00
11/24/10 Target hit @ 86.75, Dec. option @ $2.60 (+126%)

Entry on November 11th at $83.00
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010


Oceaneering International - OII - close: 73.15 change: +0.28

Stop Loss: 67.75
Target(s): 74.80, 79.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/08 update: OII posted another gain but the action today looks bearish. The stock spiked to new highs on an upgrade this morning. Yet OII rolled over in the second hour of trading and the move looks like a bearish reversal. We are still waiting to buy calls on a dip at $70.25. Please note that I am raising our stop loss to $67.75.

Trigger to buy @ $70.25

Suggested Position: Buy the 2011 January $75 calls (OII1122A75)

- or -

Suggested Position: Buy the 2011 April $75 calls (OII1116D75)

Entry on December xxth at $ xx.xx
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume = 584 thousand
Listed on December 4th, 2010


Transocean Ltd. - RIG - close: 71.03 change: +1.35

Stop Loss: 64.75
Target(s): 72.50, 74.90
Current Option Gain/Loss: +23.7%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/08 update: The OSX oil service index managed a +0.3% gain today. RIG outperformed its peers with a +1.9% gain. I would wait for a dip toward $68 or its 50-dma before considering new positions.

- Current Position -
Long the 2011 January $70.00 calls (RIG1122A70) Entry @ $2.95

12/03/10 Target hit @ $72.50, option @ $4.95 (+67.7%)

Entry on November 30th at $68.18
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 6.3 million
Listed on November 29th, 2010


Union Pacific - UNP - close: 92.47 change: -1.66

Stop Loss: 87.90
Target(s): 96.25, 99.75
Current Option Gain/Loss: + 25.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/08 update: Ouch! Railroads were not happy today. The group underperformed the rest of the market. Shares of UNP slipped -1.7%. I have been warning readers to look for a dip back toward $92.00. This should be support but if the market's major indices see another decline this week UNP could test $90.00. More conservative traders might want to consider a tighter stop loss. Aggressive traders could buy calls on this dip to $92. The rest of us may want to wait for a dip closer to $90.00.

- Current position -
Suggested Position:
Buy the 2011 January $95 calls (UNP1122A95) Entry @ $1.52

Entry on November 30th at $89.83
Earnings Date 01/20/11
Average Daily Volume = 2.9 million
Listed on November 20th, 2010


United Parcel Service - UPS - close: 72.01 change: +0.32

Stop Loss: 66.85
Target(s): 74.75, 78.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/08 update: UPS is still consolidating sideways. We are waiting for a dip back toward broken resistance and what should be new support at $70.00. I'm suggesting a trigger to launch positions at $70.25. If triggered our first target is $74.75.

Trigger @ 70.25

Suggested Position:
Buy the 2011 January $70.00 call (UPS1122A70)

- or -

Buy the 2011 April $75.00 call (UPS1116D75)

Entry on December xxth at $ xx.xx
Earnings Date 02/01/10 (unconfirmed)
Average Daily Volume = 3.9 million
Listed on December 6th, 2010


United Technology Corp. - UTX - close: 77.69 change: -0.85

Stop Loss: 73.90
Target(s): 81.50, 84.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/08 update: UTX underperformed the Dow Industrials with a -1% decline. We've been waiting for a decline. I'm suggesting we buy calls on a dip at $77.10. Cautious traders could wait for a pull back closer to $76.00 or even $75.00.
FYI: The Point & Figure chart is bullish with a $91 target for UTX.

Trigger to buy calls @ $77.10

Suggested Position: Buy the 2011 January $80 calls (UTX1122A80)

- or -

Suggested Position: Buy the 2011 February $80 calls (UTX1119B80)

Entry on December xxth at $ xx.xx
Earnings Date 01/26/11 (unconfirmed)
Average Daily Volume = 3.2 million
Listed on December 4th, 2010


Cimarex Energy Co. - XEC - close: 85.38 change: -1.65

Stop Loss: 79.85
Target(s): 87.40, 89.90
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/08 update: Right on cue XEC is seeing some profit taking. Let's hope it continues tomorrow. We want to buy calls on a dip at $84.00. Cautious traders could wait for a dip closer to $82 instead.

Trigger @ 84.00

Suggested Position:
Buy the 2011 January $85 calls (XEC1122A85)

Entry on December xxth at $ xx.xx
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume = 907 thousand
Listed on December 1st, 2010


PUT Play Updates

Expedia Inc. - EXPE - close: 27.01 change: +0.08

Stop Loss: 27.75
Target(s): 25.10, 24.25
Current Option Gain/Loss: - 8.3%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Comments:
12/08 update: EXPE recovered from its late morning dip but shares struggled with the $27.00 level on the bounce. Volume was low. I would still consider new positions now or you could wait for another failed rally under resistance at $27.60.

Current Position: Buy the 2011 January $25 Put (EXPE1122M25) Entry @ $0.60

Entry on December 8th at $26.88
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on December 7th, 2010