Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/23/2011

Table of Contents

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

Market Wrap

The Nod Goes to the Bears

by Keene Little

Click here to email Keene Little
Market Stats

Equity futures had rallied during the overnight session, with ES (S&P futures) up about +6, but then something spooked the futures market and we ended up opening the day near the flat line. That may have set a bit of a negative tone for the open since the usual "lift" that the market has been able to get during the overnight session did not work this time. Another change in character of the market? That's what many are wondering.

The news about what's happening in the Mideast is of course weighing on traders' minds. On the one hand these countries should not have any effect on our economy/market. When the market reacted negatively to Greece last year or Egypt at the end of January or Libya now the question was always asked -- so what? Why do we care (from a pure stock market perspective) what happens in these relatively small and/or obscure countries. And in reality they don't mean much to us. Yes, there are some oil concerns and that could tip us into a recession but that's of course all speculative right now since there's been virtually no disruption and will probably not have much of an impact.

But thinking this way misses the greater point (in my opinion). The stock market is one of the best mirrors of social mood that we have. The patterns that I watch are a measure of social mood swings (which has clearly been exuberant, especially since last August). The Fed spiked the punch bowl (with promises of more money and an implied promise to not let anything bad happen to the markets) but in reality it was traders doing all the buying, not the Fed. The Fed does not have the capability to raise the market up. Only by making traders feel safe does the Fed help the market. When traders stop feeling safe, for whatever reason, they'll start to sell, no matter how much money the Fed creates. I can almost guarantee, based on my longer-term opinion of the market, that we'll get QE3, 4, etc. And each time they announce a program we'll get another hope-filled rally.

We are a global community. We are linked financially, commercially and socially. Therefore the increased level of protests, including in the U.S. as witnessed in Madison, WI, is creating some angst even if we don't quite understand why. And that angst creates fear and when greed turns to fear we start selling. Forget fundamentals or an improving economy; the market rises and falls on mood shifts. And my sense is that the mood is shifting.

I've received several emails from readers in the past couple of weeks asking what my opinion is of the market. Usually that has not been a problem since usually I have a strong opinion (or will state when I don't). I often quote Bill Fleckenstein who would say something to the effect "I'm often wrong but never in doubt." At any rate, since I've been asked more about my opinion recently it shows I did a good job in past couple of months in presenting myself as neutral and letting the technical analysis speak for itself. That was done in an effort to not scare away too many readers who have been feeling very bullish the market.

But in all fairness I think you deserve to know my opinion, especially if it's strong and counter to the majority, whether you like it or not. You can then incorporate other opinions, such as Jim's, Todd's, Leigh Steven's, and other analysts, into your own opinion. Only then can you make trading decisions and take ownership for those decisions and trade results. Teach a man to fish...

So with that in mind, let me make it perfectly clear what my opinion of the market is -- bearish. Correct that -- very bearish. If my bearish opinion scares you, good. Use it to at least control your bullish enthusiasm and make the market prove to you why you should remain bullish. It's been proving countless times to me why my bearishness has been wrong. Anyone in any trade should constantly look to the market to prove them wrong, not right. You already think you're right when you get into a trade and the only way to protect yourself is to ask the market (including analysts with different opinions) to show you why you're wrong.

Last week I showed a long-term chart of NDX (from 1985) and pointed out that it was up against a broken uptrend line from 1990 (the bold blue line on the daily chart in tonight's chart). I've got an even longer-term chart for SPX which shows a parallel up-channel for price action following the 1932 low. I posted this chart Monday night on the Market Monitor to make the point of why I have been and will remain bearish until the secular bear market is finished. There will of course be cyclical bulls, such as the 2009-2011 rally and they make great trading opportunities but when you know my longer-term opinion I think it will make it easier to understand why I'm looking to position trade the market from the short side now.

Reference the quarterly chart below and make note of price action following the breakout above the top of the channel in the late 1990s. It then dropped back inside the channel in 2001, did a quick test of it and then dropped down to the 2002 low and found support at a trend line along the highs from the 1960s across the 1987 and 1992-1993 highs (blue dotted line). It then rallied back up to the top of the channel in 2007 and then fell away (bearish kiss goodbye) and broke below the uptrend line in 2008 on its way down to the 2009 low. As I noted in my weekend update, its current rally had it back up testing that broken uptrend line and again, the high-odds play was for price to do what it did after testing the top of its up-channel in 2007. Whether it will only pull back before pressing higher again or drop to a new bear market low as depicted is something we'll have to figure out later. For now the risk is simply for a market decline from here.

S&P 500, SPX, Quarterly chart

The notes on the above chart, "As above, so below?", has to do with a common occurrence around channels and trend lines. In this case, the break above the top of the channel created the throw-over to the 2000 high and that throw-over has a good chance of being duplicated with a throw-under of equal size below the bottom of the channel. So the outside channel lines, in light dotted black, are to show the distance from the main channel and the lower line crosses a down-sloping trend line along the two lows from 2002 and 2009 out in mid 2016. That happens to be a time frame that I've got with other studies that point to the summer of 2016 for the end of the bear market. The price projection at that intersection is near SPX 550. Will it get there? I can't know for sure but I wanted to point it out as one reason why I'm longer-term bearish the market and why I've been looking for a reason the market is going to turn back down. The uber-bullish sentiment leading to the current high has been a warning flag and not confirmation of a strong rally. Note also on the above chart the significant bearish divergence on RSI, especially at the 2007 high, which has been a warning to the bulls.

SPX had punched up through resistance at the August 2008 high near 1313 but with the close back below it (so far) it's leaving a potential head-fake break. The weekly close will be important in this regard. On a weekly basis the bears need break below 1275 to confirm the top is in place. To review the wave count, the rally from March 2009 is an A-B-C bounce correction to the 2007-2009 decline (a cyclical bull within a secular bear). Wave C needs to be a 5-wave move and that's the way it's labeled. The 5th wave (the leg up from November) extended higher than I thought it would but it's the reason I've been looking for a top.

S&P 500, SPX, Weekly chart

Bullishly the uptrend line from August has not broken yet. It was tested today but held. It takes a break below 1296 to break the uptrend line and confirm the uptrend has finished and we're into a deeper pullback at a minimum. The daily chart below shows the rising wedges within rising wedges, pointing to the very bearish setup. RSI has broken its uptrend line from November, confirming the price break. I'm looking for a bounce to finish on Thursday and then continue lower. Obviously a rally above 1350 would say the bulls have very different ideas and it would be very bullish. Abandon the short side if that happens.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1350
- bearish below 1296

The 60-min chart below shows the smallest rising wedge on the daily chart in more detail, which is the move up from January 28th (the "Egyptian" low). The wave count finished nicely as price did a small throw-over above the top of the wedge on Friday. I was calling for a high on Friday's Market Monitor but said we'd need a down day on Tuesday to confirm it. The breakdown was faster than even I expected, which is not surprising since this market doesn't make it easy for either side to get entries or exits. The breakdown from a rising wedge is almost always violent and fast, and one look at the chart below certainly supports that perspective.

S&P 500, SPX, 60-min chart

The bulls stepped in where they needed to (and shorts covered some) and the uptrend line from August held. Ideally we'll see a little more to the bounce that started today and I'm showing the Fib price retracements as well as time projections for where to watch for a typical bounce. Typically the retracement will be a little less than 50% and take 62% of the time of the 1st wave down. That places the upside target near 1320 by early afternoon on Thursday. Assuming the top really is in place, the bounce will be an ideal short entry since the next leg down could exceed the Tuesday/Wednesday decline. I'll be trying to nail the entry on the Market Monitor but if you don't follow the live commentary and want to try a short play you can try an entry with a stop at 1335 since anything higher than that will likely lead to new highs.

S&P 500, SPX, 10-min chart

The DOW looks similar to SPX and Friday's throw-over finish above the top of its rising wedge pattern has been followed by a breakdown below its uptrend line from November. The bears need to see a break below 12K and the uptrend line from August. I'm showing the potential for another leg up and a new high should lead to a rally to 12800. I don't think that will happen but a new high is where the market proves me wrong and I'll be listening if it happens. Watch for the possibility of a bounce back up to its broken uptrend line form November, near 12180 (log scale), for a retest. A 38% retracement is at 12188.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,400 to 12,800
- bearish below 12,000

Last week I pointed out that I thought NDX 2400 was going to be a brick wall to the bulls. There are important Fibs and trend lines located there and with an overbought market I didn't think the bulls had a snowball's chance in Hell to get through. It was an ideal entry for a short play. But the bulls are still holding on by using the 50-dma near 2293 as support. If they can get back above the broken uptrend line from mid November, near 2318, it will be a good start. But it will still have to deal with the Fib retracements (50% is near 2343). Until proven otherwise I think there's a good chance we'll see the NDX work its way down to its uptrend line from March 2009, perhaps near 2130 by the time it gets there.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2400
- bearish below 2318

The RUT is a little more negative at the moment because of its break of the uptrend line from August through the January low. It too used its 50-dma near 795.75 for support and if can get back above its broken uptrend line and hold above it will leave just a head-fake breakdown. But the break below the January 27th high at 797.53 says the wave count for the move up from January 28th has completed. That has me looking at bounces from here as shorting opportunities instead of looking for dips to buy.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 838 to 840-850
- bearish below 797

Looking at the big market, DWC, it's giving us the same picture and actually more bearish. Even if I draw the uptrend line from August through the January low this week's decline has broken it. As pointed out on Friday's Market Monitor I really liked the bearish setup on this index on Friday. It rallied right up into strong Fib resistance at 14169 and 14237 (Friday's high was in the middle at 14211.95). The lower number is where the c-wave of the A-B-C bounce off the March 2009 low was 161.8% of the b-wave (meaning it was a 161.8% extension of the April-July decline, a common Fib projection for the head of a H&S pattern, meaning we'll be looking for the right shoulder later this year). The higher Fib is where the c-wave (the rally from July) would be equal to 62% of the a-wave (the March 2009 - April 2010 rally), a common Fib relationship). Friday's candle was a star doji at this Fib resistance and at the top of its rising wedge pattern. Setups just don't get prettier than this one and the follow through to the downside was icing on the cake for the bears.

Total Market index, DWC, Daily chart

Volume has been the bull's enemy during the rally and is now the bear's friend. Leading up to last Friday's high February was on track to score the lowest volume in 5 years, this while prices were stretched to the upside with uber-bullish sentiment. Other than price continuing to make new high after new high (and price is the final arbiter), there was nothing to like about the rally and another reason I'm not looking for it to continue from here. As noted on the chart of SPY below, since September the only volume spikes have been during the selling. The last leg up from November had abysmal volume and now the break of its rising wedge is on high volume, which helps confirm the break.

S&P 500 SPDR, SPY, Daily chart

Looking at just the chart above and no others, nn my opinion you just don't want to be thinking about buying the dips from here (other than day trading). In a bit we'll have some nice swing trade setups to the long side but the better trades from here will be short plays. Don't like playing the short side? If you're a trader or want to learn, you've got a great opportunity ahead and I highly recommend trying it and learning with small positions (preferably put options so you know exactly how much you're risking). Trades to the short side can be very lucrative and you're in the trade for shorter periods of time, which lessens your risk.

But again, the bulls are back in control if they even close Tuesday's gaps. So any new short plays must be managed properly. As bears should well know by now, the bulls can run roughshod over them for no reason at all. Just because they don't like bears (certainly the Fed despises them).

The 10-year yield, TNX, which has been in synch with stocks (bond prices opposite) did a brief throw-over above its downtrend lien from June 2007 but has since dropped back below, giving us a "sell" signal on yields (buy signal on bonds). I'm looking for a multi-week pullback at a minimum before possibly heading higher again (green) or continue on down to the bottom of a sideways triangle, which could play out into 2012 before breaking lower (if deflation wins over inflation).

10-year Yield, TNX, Weekly chart

The banks were one of the leading sectors pointing to trouble for the bulls and once again showed why we should follow the money. The BIX topped a week ago Tuesday and did not confirm the new highs by the broader averages later in the week. It broke down from its rising wedge pattern and looks to be finding support near the lows of the prior consolidation in January, which should be good for a bounce to correct the first leg down from its high. But keep in mind that rising wedges are retraced faster than it took to build them and that means a return to the November low in less than 3 months (probably much less).

Banking index, BIX, Daily chart

The TRAN rallied 14 days from its January 28th low and it gave it all back in 2 days. This is the kind of disconnect to the downside I've been warning about. When it breaks and fear reenters the market the sellers can't get out fast enough. The break below the January 28th low confirms the end of the rally from July. Look for a possible bounce back up to its broken uptrend line from August, near 5160, to hold as resistance now.

Transportation Index, TRAN, Daily chart

The U.S. dollar has been weaker than I thought it would be here. I've been expecting a stronger rally, and I still am, but it can't break below 77 otherwise the dollar bears take over again. One thing that's happening with the dollar, based on its bounce pattern since November, is that it supports the idea that even if we get another leg up to the 88 area (top of its sideways triangle pattern), the longer-term bearish pattern looks like it will hold. I don't see good things for the dollar in the future and that could mean all fiat currencies are headed for the dust bin in the next several years as central banks continue to grind out new money in hopes of inflating something other than commodities.

U.S. Dollar contract, DX, Daily chart

The bounce in gold since its January 28th low has brought it back up close to its previous highs for a possible test of those highs or more bullishly we could see gold head up to the 1500 area. As you can see on the weekly chart below, the top of a parallel up-channel for price action since 2005 crosses a broken uptrend line from October 2008 in mid March. But if gold fails to make a new high and then drops below the January low near 1309 it will spell trouble for the gold bulls. We'll have time to evaluate later but if gold heads higher than 1500 and the dollar drops below 77, our global economy is headed for the basement sooner than I'm anticipating.

Gold continuous contract, GC, Weekly chart

The strong move back up in silver has gold playing catch me if you can. Silver pushed to a new high above January's and is clearly more bullish than gold at the moment. But silver is now at a level where the rally will either continue strongly higher or fail right here right now. The weekly chart below shows silver has pushed marginally above the top of a longer-term parallel up-channel from 1993-2003 and hit the top of its parallel up-channel from 2008. It has also achieved a Fib price projection for the 5th wave of the move up from 2008, where it is equal to 162% of the 1st through 3rd waves (common for an extended 5th wave, which is common in commodities). It's a setup for a reversal back down, which is what I'm showing on the chart, but price needs to confirm (similar to what the stock market was setting up for us). The bearish divergence shown on RSI supports a possible top here as well. A drop below 32 would be bearish and below 28 would confirm we've seen the top.

Silver continuous contract, SI, Weekly chart

Anyone who could get in front of a microphone the past two days has been declaring we'll see oil well over $200 before you can say boo. They could certainly be right but it seems to me I've heard their song before and they always start singing it when we get some kind of Mideast event. I'll continue to stick with the charts and simply say I don't see it happening (yet).

The weekly chart below shows the sharp spike down in 2008 followed by a big bear-flag pattern, or possibly a more bearish rising wedge pattern. This week's rally might even be giving us a throw-over above the top of the wedge on the Libyan news (a throw-over finish is very common on a news-related event). A drop back below 95 would give us a sell signal by this pattern. Otherwise I see further upside potential to the 103 area (a couple of Fibs point to that area) and then 115 (two equal legs up from 2008 low) before turning back down.

Oil continuous contract, CL, Weekly chart

Seeing the oil chart above is another reason I'm watching the dollar carefully for clues. Hopefully by next week we'll have a better answer as to where each is headed.

Thursday will have more economic reports to start the day and the durable goods orders and new home sales could see a market reaction. The first will be before the market opens and then home sales at 10:00 AM so be careful trading around that time.

Economic reports, summary and Key Trading Levels

As the bull market has progressed, and even when the market was declining, we have often heard that a good way to protect yourself is by diversifying into different sectors and even different countries. I know many have investments in emerging markets. While the different sectors and country stock exchanges will trade to their own beat and they're not always in synch, a look at the below chart will show you exactly how much they are in fact in synch.

Different indexes in different countries, Weekly charts, courtesy elliottewave.com

If you think you're protected by being invested in different markets, you might want to rethink that. If the stock market turns back down like I think it will, there will be nowhere to hide except cash (and even cash is a little iffy at the moment). U.S. Treasuries remains one of the safer bets (stick with the 3-5 years maturities.

The VIX has also given us a sell signal by closing above its January high, which is a confirmed break of its downtrend line from May 2010. The bullish descending wedge from May suggests it will be completely retraced faster than it took to build the wedge. Back to the May 2010 highs for the VIX will likely coincide with a stock market return to the lows at that time, which was about SPX 1050, which was the January 2010 low as well.

Volatility index, VIX, Weekly charts

The final chart is an update to the MPTS chart for SPX, a system that's been an abysmal failure for most of the rally from July. Where it was accurate was on the full moon back in April 2010. Another important high on a full moon perhaps? At this point my answer is an emphatic "yes".

S&P 500, SPX MPTS, Daily chart

Another sell signal comes from Tom DeMark who uses a proprietary method to count the candles of a move and when it reaches 9 (not necessarily sequential candles) there's often a reversal and 13 typically marks the point of a major reversal (the potential for one). As of last week and now today's new low his indicators are now in alignment on a daily, weekly and monthly basis so it's significant. In his words, as interviewed on CNBC: DeMark interview

Many are pointing to bullish statistics to support their view of a continuing bull market this year. We've heard about the 3rd year of the presidential cycle and most are predicting SPX 1550 or higher for this year and much higher next year. When we have traded this strongly into this time of year it has typically bode well for the rest of the year, except when we do so with the kind of weak volume with over extended prices as we are currently experiencing. In both of the previous cases where we've had a similar condition -- in 1931 and in 1937 -- the results were not pretty and resulted in over -40% declines for both years.

The average return for the entire year in which we trade strongly into President's day is +14.5%. We were up about +7% for the year last week, which left a potential for another +7.5% gain by the end of the year. But with the weak internals and extended prices one could argue we'll follow the pattern of 1931 and 1937, which means the potential for a -55% decline, as happened in 1931. So we measure the odds and make our trades accordingly -- 7% upside potential vs. -55% downside potential. Only you can decide how you want to trade from here.

If you read through tonight's newsletter it should be abundantly clear which side of the fence I stand. The past couple of months I've made more of an effort to hold back on my bearish opinion and simply present the charts, both bullish and bearish and let price breaks lead the way. I've recently received a number of complaints that I haven't been clear enough in my opinion of the markets and for that I apologize. You shall henceforth have my opinion whether you like it or not.

Opinions are of course like the round opening somewhere on our body -- everyone has one. It's whether or not it makes sense and whether or not you should incorporate it into your own market analysis. We attempt to teach traders to read the markets so that you can make your own trading decisions. While you might be able to make some money following someone else's trade recommendations, understanding why you entered and exited where you did will enrich your lives to a much greater extent. You'll truly be able to trade for yourself for the rest of your life.

But in reality it boils down to the charts and right now, at least for the short term (a few weeks at least), the charts produced sell signals this week. The only way to negate the sell signals is with a rally back to new highs. The bulls did just that after the January 28th selloff and they could do it again. Never say never. But the odds have switched over to the bear's camp and I think you should look at bounces as opportunities to at least try some short trades. Protecting long positions should now be your priority.

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

Key Levels for SPX:
- bullish above 1350
- bearish below 1296

Key Levels for DOW:
- bullish above 12,400 to 12,800
- bearish below 12,000

Key Levels for NDX:
- bullish above 2400
- bearish below 2318

Key Levels for RUT:
- bullish above 838 to 840-850
- bearish below 797

Keene H. Little, CMT


New Option Plays

Is 3% Enough?

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500's drop to the 1300 level is a -3% pull back. Is that enough to satisfy the market's need for profit taking as we watch the Libya self-destruct on TV? Almost anything consumer-related was hammered lower as investors worry about higher oil prices and the impact filling up our gas tanks will have on consumer spending.

Technically the S&P 500 should have some support at the 1300 level and the NASDAQ composite is testing potential support near 2700 and its 50-dma. Thus this would appear to be a buy-the-dip entry point but if you do jump in I would use small positions and tight stop losses.

No new plays tonight. I'm still out of the office and will be back for a normal weekend newsletter.

- James


In Play Updates and Reviews

An Ugly Day

by James Brown

Click here to email James Brown

Editor's Note:

Wednesday turned out to be another ugly day in the market. Gold miners and energy names seemed to be the exception. We had several candidates get stopped out tonight.

REMINDER: I am away from the office this week for a seminar. Play updates will be brief and we might see fewer new positions added to the newsletter.

-James

Current Portfolio:


CALL Play Updates

Peabody Energy Corp. - BTU - close: 63.47 change: +0.54

Stop Loss: 61.75
Target(s): 69.75, 74.00
Current Option Gain/Loss: -59.8%, and -26.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: BTU bounced off the initial move lower this morning. It looks like technical support near the 50-dma might hold. After watching the S&P 500 test the 1300 level today I would be inclined to buy calls on BTU right here but more conservative traders may want to inch up their stop losses. Our first exit target is $69.75.

The Point & Figure chart for BTU is bullish with an $80 target.

- Suggested Positions -

Long the March $70 calls (BTU1119C70) Entry @ $1.07

- or -

Long the June $70 calls (BTU1118F70) Entry @ $3.60

Entry on February 17th at $66.30
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on February 16th, 2010


Caterpillar Inc. - CAT - close: 100.02 change: -1.99

Stop Loss: 97.90
Target(s): 104.75, 107.50
Current Option Gain/Loss: -20.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/23 update: CAT is another industrial name that was hammered lower today. The stock opened at $101.91 and then dropped toward its 30-dma. Traders finally bought the dip at $98. That's a -7.5% correction from its recent high near $106. Believe it or not the up trend is still intact at the moment.

Our bullish play was triggered when CAT hit our entry point at $101.00 this morning. I would still consider new positions here; especially since our stop loss is at $97.90.

- Suggested Positions -

Long the March $105 calls (CAT1119C105) Entry @ $1.35

02/23 Triggered @ $101.00. Option @ 02/22 Still waiting for a dip to $101.00
02/12 Adjusted our trigger, targets, stop loss and strike price.

chart:

Entry on February 23 at $101.00
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on February 5th, 2010


Fastenal Co. - FAST - close: 60.96 change: -1.22

Stop Loss: 61.90
Target(s): 67.25
Current Option Gain/Loss: -70.5%, and -35.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/23 update: The correction continues for FAST and the stock has now seen a -5% decline. I cautioned readers last night to look for a dip into the $61-60 zone. I would use this dip as an entry point to buy calls or you could wait for a bounce.

Readers may want to keep in mind that the most recent data listed short interest at 11.4% of the 132 million-share float.

- Suggested Positions -

Long the March $65 calls (FAST1119C65) Entry @ $0.85

- or -

Long the May $65 calls (FAST1121E65) Entry @ $2.25

02/23 New entry point @ 60.96. March $65 call @ 0.25, May $65 call @ $1.45
02/22 Entry @ 62.99, NEW STOP @ $59.90
02/19 Adjusted entry point. Buy calls now. Very small positions
02/12 New trigger @ 61.55, new stop loss @ 59.40

Entry on February 22nd at $62.99
Earnings Date 04/12/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 8th, 2010


Nike Inc. - NKE - close: 86.19 change: -1.04

Stop Loss: 83.85
Target(s): 88.00, 91.50
Current Option Gain/Loss: + 30.6%, and + 42.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/23 update: NKE gave up -1.1% on Wednesday and I am still expecting a pull back toward the $85.00 area. Shares may actually dip toward the 100-dma near $84.00. Let's wait for NKE to near the $85 area before we consider buying the dip or buying the bounce.

Our final exit target is $91.50.

- Suggested Positions - (Small Positions Only!)

Long the March $85 calls (NKE1119C85) Entry @ $2.09

- or -

Long the April $90 calls (NKE1116D90) Entry @ $0.94

02/19 Adjusted final target to $91.50
02/18 1st Target Hit @ 88.00. March $85 call @ 3.75 (+79.4%)
02/18 1st Target Hit @ 88.00. April $90 call @ 1.80 (+91.4%)

Entry on February 15th at $85.25
Earnings Date 03/17/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on February 9th, 2010


Occidental Petrol. - OXY - close: 102.l4 change: -5.23

Stop Loss: 97.25
Target(s): 106.75, 109.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

Comments:
02/23 update: OXY rallied this morning and hit $105 before paring its gains. I am still expecting a dip toward the $101-100 zone. Let's stick to our plan and wait for the dip. The trigger to buy calls is at $101.00. More nimble traders could try and time a dip near the $100.00 mark instead. I'm expecting the 50-dma near $97.50 to offer some support. If we are triggered at $101.00 our targets are $106.75 and $109.75.

Investors will want to take note that this is not without risk. OXY does a lot of oil and gas exploration across the U.S. and internationally. The company does do business in Bahrain and Yemen, which have been two hotspots for protests and violence in the last couple of weeks. You can see from the chart that headlines from these two countries really did not have an affect on OXY on the stock. Today's move lower appears to be a reaction to the market-wide event.

Trigger @ $101.00

- Suggested Positions -

Buy the March $105 calls (OXY1119C105) current ask $1.89

- or -

Buy the April $105 calls (OXY1116D105) current ask $3.25

Entry on February xxth at $ xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on February 22nd, 2010


The Toronoto-Dominion Bank - TD - close: 80.18 change: -1.17

Stop Loss: 76.90
Target(s): 84.00, 89.00
Current Option Gain/Loss: + 11.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/23 update: TD is still holding up reasonably well. Shares lost -0.9% and look headed for the $78.00-77.50 zone. Wait for a dip or bounce in this area before considering new bullish positions. Our targets are $84 and $89. We will plan to exit ahead of the early March earnings report (unconfirmed date).

FYI: The Point & Figure chart for TD is bullish with a $98 target.

- Suggested Positions -

Long the March $80.00 call (TD1119C80) Entry @ $1.35

02/16 New stop loss @ 76.90

Entry on February 11th at $78.89
Earnings Date 03/03/11 (unconfirmed)
Average Daily Volume = 583 thousand
Listed on February 10th, 2010


Proshares Ultra(long) Russell 2000 - UWM - close: 44.29 change: -1.57

Stop Loss: 42.99
Target(s): 49.75, 54.00
Current Option Gain/Loss: -41.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Small Positions - UWM Position -

Long the April $48 calls (UWM1116D48) Entry @ $2.75

02/14 UWM opened at $46.90. Option opened @ $2.75

iShares Russell 2000 - IWM - close: 79.81 change: -2.14

Stop Loss: 78.65
Target(s): 84.95, 87.25
Current Option Gain/Loss: -45.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: The UWM has seen a sharp correction back toward its rising 50-dma. This should be technical support and a bullish entry point.

The IWM has seen a similar correction back toward its rising 50-dma. This dip should be a new entry point to buy calls.

Small Positions - IWM Position -

Long the April $84 calls (IWM1116D84) Entry @ $1.92

02/14 IWM opened @ 82.11. Option opened @ 1.92

UWM Entry on February 14th at $46.90
IWM Entry on February 14th at $82.11
Listed on February 12th, 2010


CBOE Market Volatility Index - VIX - close: 22.13 change: +1.33

Stop Loss: N/A
Target(s): 22.50, 28.00
Current Option Gain/Loss: +12.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/23 update: Target achieved. The market's continued weakness pushed the VIX to a new relative high of $23.22 intraday, temporarily past the 200-dma. Our first target to take profits was hit at $22.50. I am not suggesting new positions at this time. Our final exit target is 28.00.

- Suggested Positions -

Long the 2011 March $22.50 calls (VIX1116C22.5) Entry @ $1.60

02/23 1st Target Hit @ 22.50, Option @ 2.35 (+46.8%)

Chart:

Entry on January 26th at $17.00
Earnings Date --/--/--
Average Daily Volume =
Listed on January 25th, 2010


PUT Play Updates

Freeport-McMoran - FCX - close: 51.01 change: +0.63

Stop Loss: 56.55
Target(s): 50.25, 46.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see trigger

Comments:
02/23 update: It looks like FCX might hold support near the $50 level. The market continues to drop but FCX eked out a bounce. The current trend is down but we don't want to open positions at this time. I'm going to keep FCX on the play list for another day or two and see if shares offer an entry point. No trigger yet. Let's just wait and see what happens.

Trigger @ ??.??

- Suggested Positions -


Entry on February xxth at $ xx.xx
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 14.4 million
Listed on February 19th, 2010


CLOSED BULLISH PLAYS

Ashland Inc. - ASH - close: 56.67 change: -1.89

Stop Loss: 56.75
Target(s): 63.00, 67.00
Current Option Gain/Loss: -46.4%, and -41.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: It was not a good day for industrial names. ASH did not have any specific headlines today but shares underperformed the broader market indices. The stock fell to $55.79 intraday, which was more than enough to hit our stop loss at $56.75 closing our trade. The $55.00 level or the 50-dma might offer some support so readers may want to keep an eye on ASH at these levels.

March $60 calls (ASH1119C60) Entry @ $1.40, Exit @ $0.75 (-46.4%)

- or -

April $60 calls (ASH1116D60) Entry @ $2.55, Exit @ $1.50 (-41.1%)

02/23 Stopped out @ 56.75. Options @ -46.4%, -41.1%
02/16 New stop loss @ 56.75, New 2nd target at $67.00

Chart:

Entry on February 14th at $58.30
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 12th, 2010


Coach Inc. - COH - close: 56.36 change: -1.92

Stop Loss: 54.95
Target(s): 58.25, 62.00
Current Option Gain/Loss: +21.4%, and + 17.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/23 update: Retail stocks were hit pretty hard today and shares of COH underperformed its peers to make matters even worse. Selling was strong with a -3.8% decline and a breakdown past the 50-dma and potential support near $55. The stock hit our stop loss at $54.95 closing this trade. Our options quickly turned from being in the green to in the red.

- Suggested Positions -

2011 March $55.00 calls (COH1119C55) Entry @ $2.10, Exit @ $1.45 (-30.9%)

- or -

2011 March $57.50 calls (COH1119C57.5) Entry @ $0.85, Exit @ $0.50 (-41.1%)

02/23: Stopped out @ 54.95, Options @ -30.9% and -41.1%
02/19: New stop loss @ 54.95
02/18: 1st Target Hit @ 58.25. Options @ +69% and +117%
02/12: Adjusted 1st target to $58.25
02/12: New stop loss @ 54.40
02/08: New stop loss @ 53.49

Chart:

Entry on February 7th at $55.35
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on January 31st, 2011


Costco Wholesale Corp. - COST - close: 72.84 change: -1.05

Stop Loss: 72.95
Target(s): 79.75
Current Option Gain/Loss: -50.3%
Time Frame: six trading days
New Positions: see below

Comments:
02/23 update: Yesterday I discussed the issue that our stop loss might be too tight for a market that has suddenly turned a lot more volatile. Consumer-related names like COST continued to see selling. As I warned you last night COST did indeed hit our stop loss today. The stock did manage to pause at technical resistance near its 50-dma. Aggressive traders may want to buy calls again on a bounce from here at the 50-dma. I am watching for another close above the $74.00 or $75.00 levels before considering new positions.

March $75 calls (COST1119C75) Entry @ $1.61, Exit @ $0.80 (-50.3%)

02/23 Stopped out @ 72.95, Option @ -50.3%
02/22 COST opens at $75.11. Option @ $1.61
02/19 New entry point. Buy calls now!

Chart:

Entry on February 22nd at $75.11
Earnings Date 03/02/11 (confirmed)
Average Daily Volume = 5.8 million
Listed on February 7th, 2010


Cognizant Technology - CTSH - close: 75.55 change: -2.18

Stop Loss: 74.45
Target(s): 84.50, 89.00
Current Option Gain/Loss: -60.0%, and -42.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/23 update: The NASDAQ Composite underperformed its major index rivals on Wednesday. That didn't help shares of CTSH. The stock gapped open lower at $75.04 and quickly fell toward short-term support near $74.50. The stock finally broke this level and hit our stop loss at $74.45 near lunchtime. Today's close under the 50-dma is definitely short-term bearish for CTSH.

March $80 call (CTSH1119C80) Entry @ $0.95, Exit @ $0.38 (-60%)

- or -

April $80 call (CTSH1116D80) Entry @ $1.75, Exit @ $1.00 (-42.8%)

02/23 Stopped out @ 74.45, Options @ -60% and -42.8%
02/18 CTSH hit our trigger to buy calls @ 77.55

Chart:

Entry on February 18th at $77.55
Earnings Date 05/04/11 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on February 15th, 2010


DineEquity, Inc. - DIN - close: 54.99 change: -2.30

Stop Loss: 54.90
Target(s): 64.00, 68.50
Current Option Gain/Loss: -54.3%
Time Frame: 7 trading days
New Positions: see below

Comments:
02/23 update: Our DIN play didn't last very long. Anything related to consumers was hit pretty hard on Wednesday. DIN gave up -4% by the close and hit $54.39 intraday. Our stop loss was hit at $54.90. On a short-term basis DIN might have additional support in the $52.50-50.00 zone so it might be worth adding to your watch list.

March $60 calls (DIN1119C60) Entry @ $2.30, Exit @ $1.05 (-54.3%)

Chart:

Entry on February 22nd at $57.98
Earnings Date 03/03/11 (confirmed)
Average Daily Volume = 150 thousand
Listed on February 19th, 2010


Joy Global Inc. - JOYG - close: 93.04 change: -3.48

Stop Loss: 93.75
Target(s): 97.25, 104.50
Current Option Gain/Loss: - 6.4%, and -10.4%
Time Frame: 3 weeks
New Positions: see below

Comments:
02/23 update: Ouch! JOYG was hit pretty hard with a -5.6% decline intraday. The low was $91.05. That means the stock has seen a two-day (intraday) correction around -9%. Our stop loss was hit at $93.75 within the first five minutes of trading this morning. JOYG could still offer an opportunity to buy calls on a dip near $90.00 and its rising 50-dma but if you do, I would try and play with a tight stop loss to limit your risk. Remember, JOYG is being added to the S&P 500 but earnings are coming up as well and I would not want to hold over earnings.

- Suggested Positions -

March $95 calls (JOYG1119C95) Entry @ $3.85, Exit @ $3.60 (-6.4%)

- or -

April $100 calls (JOYG1116D100) Entry @ $3.46, Exit @ $3.10 (-10.4%)

02/23 Stopped out @ 93.75, Options @ -6.4% and -10.4%
02/19 New stop loss @ 93.75
02/17 New stop loss @ 91.75
02/17 1st Target Exceeded on Gap Higher. Options @ +50.6% and +41.6%
02/16 New stop loss @ 89.45

Chart:

Entry on February 14th at $94.44
Earnings Date 03/02/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on February 12th, 2010


Lear Corp. - LEA - close: 104.83 change: -5.11

Stop Loss: 107.45
Target(s): 114.95, 119.00
Current Option Gain/Loss: -36.8%, and -33.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: LEA followed many of the industrial names lower. After performing relatively well on Tuesday they plunged -4.6% today. Our stop loss was hit at $107.45. Shares are now hovering near technical support at the 50-dma.

March $115 calls (LEA1119C115) Entry @ $1.90, Exit @ $1.20 (-36.8%)

- or -

Jun $120 calls (LEA1118F120) Entry @ $3.90, Exit @ $2.60* (-33.3%)

02/23 Stopped out. Options @ -36.8% and -33.3%
*The June $120 call did not trade today. This is an estimate.

Chart:

Entry on February 22nd at $110.78
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume = 747 thousand
Listed on February 19th, 2010


PACCAR Inc. - PCAR - close: 49.84 change: -1.17

Stop Loss: 49.95
Target(s): 53.45
Current Option Gain/Loss: -57.1%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
02/23 update: The correction in PCAR has accelerated lower and shares hit new relative lows today. Shares hit our stop loss at $49.95.

March $55 call (PCAR 1119C55) Entry @ $0.35, Exit @ 0.15 (-57.1%)

02/23 Stopped out @ 49.95, Option @ -57.1%
02/17 Planned Exit for February calls @ close: $2.60 (+73.3%)
02/16 New stop loss @ 49.95
02/12 Adjusted our final exit target to $53.45

Chart:

Entry on February 7th at $50.60
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on February 5th, 2010


Schnitzer Steel Industries - SCHN - close: 62.39 change: -2.52

Stop Loss: 61.45
Target(s): 68.75
Current Option Gain/Loss: -52.7%, and -33.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: The correction in SCHN continues. As I feared yesterday shares of SCHN hit our stop loss at $61.45. Support near $60 held up so far so readers may want to keep SCHN on their watch list.

March $65 calls (SCHN1119C65) Entry @ $1.80, Exit @ $0.85 (-52.7%)

- or -

May $65 calls (SCHN1121E65) Entry @ $4.20, Exit @ $2.80 (-33.3%)

02/23 Stopped out. Options @ -52.7% and -33.3%
02/22 SCHN hit our trigger to buy calls @ 63.75.

chart:

Entry on February 22nd at $63.75
Earnings Date 04/07/11 (unconfirmed)
Average Daily Volume = 250 thousand
Listed on February 17th, 2010