Option Investor
Newsletter

Daily Newsletter, Monday, 5/9/2011

Table of Contents

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

Market Wrap

Dead Cat Bounce

by Keene Little

Click here to email Keene Little
Market Stats

Todd and I have switched nights this week. He will be with you on Wednesday.

The Sunday night futures were looking good for the bulls until Europe started selling off on more concerns about Greece and their debt. That had futures only slightly positive by the time the cash market opened and other than a quick pop higher around 12:00 PM there was virtually no trading being done. Trading volume was one of the lightest days of the year so the pattern of strong volume on selling and light volume on buying continues (not what the bulls want to see). The impression I was left with by the end of the day was that today was a dead cat bounce, probably in the commodities as well.

Luxembourg's Prime Minister Jean-Claude Juncker said today Greece "does need a further adjustment program." That was political speak for the "Greece needs to reorganize its debt." Standard & Poor's rating service also felt the need to downgrade Greece's debt yet again. The rating was lowered to B from BB- due to the discussed extension of the European Commission's portion of the debt (the 110B euro bailout).

Basically what the S&P ratings agency is telling everyone is that if Greece's debt payments are renegotiated for the EU's bailout loan then that would mean the same thing for all other commercial creditors who have loaned money to Greece (through bond purchases). If bond payments are extended that's a "distressed exchange" according to S&P's criteria, which results in a rating of SD, or selective default. Ah, default -- there's that bad word and one of the sectors suffering today was the banking sector.

As S&P stated, "Even if there were no discount of principal, such an extension of maturities is generally viewed to be less favorable to commercial creditors than repayment according to the original terms of the debt". S&P says Greece's ratings remain on CreditWatch with negative implications and essentially what many are coming to realize is that Greece is much closer to default that previously believed (hoped?).

While we didn't have any major economic reports to deal with today there was a report in the Wall Street Journal that mentioned a zillow.com survey that showed a significant further decline in the housing market. Numbers for Q1 2011 shows the decline was the steepest in the past three years. That's hardly what homeowners want to read and it will only further depress consumers.

The survey reported nearly 30% of borrowers are under water -- they owe more on their mortgage loans than their home is worth. It makes me wonder how many will take the "strategic default" route and simply walk away (I'm reading a lot more stories again about financial planners recommending this route). There are already a large percentage of homeowners who are more than one year, and in many cases two years, in their homes without making any mortgage payments.

The pipeline for mortgage defaults is expected to get even more stuffed in the coming year. And these properties are sitting on banks' balance sheets at full value. I've seen figures reporting more than a third of the housing market is in REOs (Real Estate Owned by a bank) as a result of previous foreclosures. And we've got more foreclosures coming that could choke a horse. The big question is how much longer the banks can sit with all that inventory on their books and not do something about it, especially if the economy goes south on us again.

The bottom line for housing is that it has already "double dipped" into recession, which is something most (all?) economists are saying will not happen to our economy. Home prices are now below where they were at the March 2009 low. The huge rally in the stock market hasn't helped Main Street one bit. So I'll take that bet and take the opposite side of all the economists -- I think there's little question that we'll dip back into a recession and in fact when all the numbers are rehashed years from now they'll show we've been in a depression and only by flooding the market with extra liquidity has the true problem been buried for a while.

Bernanke has stated many times that part of the reason for flooding the market with liquidity was an effort to get investors into riskier assets, namely the stock market. We've seen a huge rally (bubble) in commodities again because it's a relatively small market and there's been a lot of money chasing a small market higher (until last week). Bernanke is hoping the "wealth effect" will rub off on people and get them spending again. But people have mostly ignored the stock market because they feel poor everywhere else. With inflation (even though it's "transitory") is eating into budgets and wage growth is not keeping up with it.

Since most people own a home it's the home's value that makes people feel wealthy or not. And since most homes continue to decline in value I think it's fair to say most people are not going to be in a spending mood this year. Keep in mind that the nationwide housing bust is the first one since the Great Depression. And for all of Bernanke's efforts to keep interest rates down they're actually higher than when he announced QE2 last year. If he really wanted to make people feel wealthier he would have done a better job enticing people into the bond market. In reality he's proven beyond a shadow of a doubt that he's only interested in the health of the banks, not U.S. citizens. The Federal Reserve is a private consortium of banks interested only in self preservation. Ron Paul is one of the few Congressmen who seem to understand this.

As traders turn from exuberance (greed) to fear again we'll see them turn from riskier assets to safer ones. This will likely have traders leaving the stock and commodity markets and heading for the bond and cash markets. For this reason it's a good idea to keep your eye on the small caps because they're a very good measure of willingness to take on risk. So I'll start tonight's review with a look at the RUT.

The RUT briefly popped above its 2007 high but so far has not been able to hold it. I've got some channel lines within the parallel up-channel from 2009 and the highs since February have been pushing up against the upper dotted channel line. Combined with the uptrend line from August you can see a small rising wedge has formed. We could still see another press higher inside this wedge but at this point I'd say your upside potential is dwarfed by the downside risk. Bulls are still OK (in an uptrend) until price breaks below 825. Even though the RUT has made a new high above the 2007 high I've still got in counted as part of a larger pattern that calls for another bear market leg down, one that could break the 2009 low.

Russell-2000, RUT, Weekly chart

Looking a little closer with the daily chart below, the rising wedge pattern shows how we could get another leg up the 880 area this month. The bearish divergences on both the daily and weekly charts will likely continue if we get a new high and based on the wave count possibility for a new high, with the bearish divergence, I think it would be a screaming short play at the new high. At the moment I think it's a higher-odds play to short the current bounce in anticipation for the decline to continue. A break below 825 would be a confirmed break of its uptrend line from August and its 50-dma.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 860
- bearish below 825

The 60-min chart below zooms in the bounce off last week's low and I'm depicting a little more to the bounce (maybe to the 850 area) before heading lower. There is the possibility the bounce will finish right here with a test of last Friday's high near 843. Above 852 would be more bullish and above 860 would very likely mean the "one more high" scenario will play out (potentially into opex week).

Russell-2000, RUT, 60-min chart

SPX may also be hammering out a rising wedge pattern that could use one more new high, potentially up to the 1385-1390 area. But with last week's strong selling and what appears to be a dead cat bounce so far I'm having a difficult time believing in the possibility for another new high. Another break below the "neckline" that's near 1337 would be a bearish development and below last Thursday's low near 1329 would be a final nail in the rally's coffin.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1362 to 1385-1390
- bearish below 1329

The bounce pattern off last week's low supports the idea for another relatively small leg up (1360 area) before heading lower again. Right now 1350 is resistance and a drop back below 1337 would be a break of a few support levels which is why I would view it as a bearish move. Above 1362 would be a bullish and point us to the new high (1385-1390).

S&P 500, SPX, 60-min chart

The DOW has been relatively stronger since the April 18th low and has formed more of a parallel up-channel as shown on its daily chart below. So far it's holding above the mid line of the channel so that's bullish as long as it continues to hold above last Thursday's low at 12521. A break below that level would also be a break of its "neckline" from February. Above 12800 would be a good indication of a run up to 13K+.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,800
- bearish below 12,500

NDX looks different from the others but has exactly the same pattern and setup. The rising wedge pattern supports the idea for one more leg higher (2450 area) but currently looks too weak to do that. I think it's going to break down instead.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2418
- bearish below 2325

The bond market continues to rally and that has yields declining. Might the Fed's money finally be making it into the bond market now that their stock market work can be declared "mission accomplished"? We were seeing a divergence since mid April between TNX (10-year yield) and the stock market (as both the bond and stock market rallied together) but last week's decline in the stock market has it playing a little catch-up with the drop in yields.

TNX continues to work its way down to potential support in the 3.02%-3.08% area. Its 50-week MA is at 3.081%, a 50% retracement of its October-February rally is at 3.039%, its 200-dma is at 3.07% and two equal legs down from February is at 3.016%. This is going to one tough support level for TNX and I would not expect it to break on the first attempt (if ever). As shown on the weekly chart below, we could see the current decline get completely reversed as yields head much higher later this year (green) or we'll see a bounce (maybe) and then continue lower as part of a large sideways consolidation into late this year before dropping lower in 2012 (red). A rally back above 3.25% would be a break of its downtrend line from early April and an indication that we'll see at least a correction of that leg down (maybe back up to its 200-dma near 3.9%).

10-year Yield, TNX, Weekly chart

The daily chart below shows where I think TNX is headed in the next week -- the bottom of a parallel down-channel from February and the projection at 3.016% for two equal legs down makes for a good downside target. It might also find support at its 200-dma at 3.07%. The big question from there is whether the A-B-C pullback from February will lead to another strong rally into the summer and end of year or if instead we'll see just a bounce before heading lower again. The answer to that question will not become more obvious until we see what the bounce looks like (assuming of course we'll see a bounce rather than a decline below 3%). A corrective looking bounce will point lower once it's done otherwise a strong bounce will start to point higher.

10-year Yield, TNX, Daily chart

The banks were weak today and never got the kind of bounce we saw in the broader averages, which of course is bearish. Rallies without the banks will always leave the rallies suspect. The parallel down-channel for BKX calls for a continuation of the selloff and I've got two price projections based on the relationships between the waves at 48.19 (two equal legs down from February) and 48.28 (two equal legs down from early April). With the close correlation in the projections that strengthens the probability that we'll see it. But back above last week's high at 51.84 would obviously be a bullish breakout.

KBW Banking index, BKX, Daily chart

The Trannies have been strong although today it too was unable to join the broader averages in the green. The rising wedge pattern supports one more leg up to the 5650 area to complete the wedge but a break below Thursday's low near 5370 would confirm we've probably seen the high for its rally.

Transportation Index, TRAN, Daily chart

The dollar rallied strongly on Thursday and Friday partly on rumors that Greece was going to pull out of the European Monetary Union (or be forced out if it defaults), which had a negative effect on the euro. Several Greece officials adamantly denied the rumors. There's a saying that the stronger officials officially deny rumors the more likely the rumors are to be true. Do you remember all the denials of banking troubles before the financial collapse in 2008? Bear Stearns' officials adamantly denied the need for more capital.

At any rate, some short covering in the dollar likely started what could become a much larger rally in the U.S. dollar if it continues. The climb off last Thursday's low looks impulsive and that suggests a pullback will be followed by a continuation higher.

The dollar based for about a week with building volume and then popped higher, with strong volume, on Thursday and Friday. It rallied right up to the top of its down-channel from February and looks ready for a little more pullback, maybe to the 74 area or a little deeper, to correct last week's rally. Assuming we get a pullback correction I would look at it as a buying opportunity for what should be a strong rally to follow.

U.S. Dollar contract, DX, Daily chart

The dollar's weekly chart below is a projection for what I think we could see in the coming year+. Labeled in red on the chart below, a big A-B-C bounce off the 2008 low would have the dollar rallying slightly above 90 before it will be ready to resume its decline (towards what could be a very ugly chapter for the dollar as we head for 2016). But for now we've got a very sweet setup for the bulls (of which there are still very few).

U.S. Dollar contract, DX, Weekly chart

Commodities in general took a big hit last week, especially on Thursday and Friday. The commodity index, CRB, left a bearish engulfing candlestick for the week, taking back all the gains since the end of January. Three months of gains gone in 4 days. Unless you were short that was a painful move for commodity bulls. The CRB has bounced off support at its 50% retracement (337.06) of the 2008-2009 decline (it failed at its 62% retracement), which is where it found resistance in January and then support in February and March. I'm not sure how high a bounce we'll get but I believe commodities will head lower and potentially much lower. The A-B-C bounce correction to the 2008-2009 decline should have completed at last Monday's high, which now calls for another bear market leg down.

Commodity index, CRB, Weekly chart

Gold finished last week as an outside down week. The candlestick is a bearish engulfing candle giving us another good reversal signal. Making it stronger is the fact that gold did a throw-over above the top of its parallel up-channel from 1999-2000 and its trend line along the highs from December 2009 and then closed back below both. This puts gold in a bearish position which means look to short the bounces from here.

Gold continuous contract, GC, Weekly chart

Silver was probably one of the primary reasons why many of the other commodities suffered since the margin calls on silver probably forced the liquidation of many silver longs but also longs in other commodities as traders scrambled to meet their margin calls. But the crash in silver, and to a lesser extent in gold, very likely created fear in other traders who decided to quickly sell and simply take profits off the table.

Silver has bounced off support at its uptrend line from July, near 33.80, and made it back up to the 50% retracement of the July-May rally, at 38.06. A little higher, near 39, is its 50-dma and broken trend line along the highs from May 2006 - March 2008 (this trend line is shown on the weekly chart below). Watch that level for resistance as another opportunity to short silver since I think it will head much lower still.

Silver continuous contract, SI, Weekly chart

There are many fundamental reasons to believe oil will be different than other commodities. The trouble for me as a technical trader is that I don't trust fundamental reasons for pricing. I've seen too many times when strong fundamentals get completely run over with emotions (and I've been burned in the process). Markets are driven by emotions, not fundamentals (fundamentals follow price, not the other way around).

So I'm expecting oil to follow the price of other commodities. The price patterns between the commodities index and oil are too similar to ignore. The weekly chart below shows oil getting a bounce off its uptrend line from January 2009, near 99.75, but I'm not expecting it to hold. Once back below last Friday's low at 94.63 the next support level will be the 200-dma at 89.13 (and climbing) and its 50-week MA at 87.46. Eventually, and perhaps quickly, we could see oil breaking down.

Oil continuous contract, CL, Weekly chart

Getting in a lot closer to oil's decline and bounce, the 60-min chart below shows the impulsive (5-wave) decline last week and the bounce off last Friday's low, which is so far an A-B-C correction to the decline. The impulsive decline means we should get at least another leg down following the bounce.

Oil continuous contract, CL, 60-min chart

After hiking margin requirements five times on silver in a two-week period it looks like CME might be after oil traders now. They announced this evening that they'll be raising the margin requirement for crude-oil trades effective Tuesday. That could prompt some selling out of the gate.

Tuesday starts off the week's economic reports and we'll see how prices are looking. So far both import and export prices have been rising substantially and that of course is due to inflation. Transitory or not, consumers feel it and are not happy about it. More significant inflation numbers will come from the PPI/CPI numbers on Thursday and Friday. As long as the government can continue to hide true inflation, and not have to increase payments to those dependent on inflation adjustments, the more the government can save (and you thought the government was here to help you).

In fact if you look at a chart of these swings in inflation/deflation since 1996 you'll see the swings are becoming more volatile as they whip to higher highs and lower lows. This to me is a vivid example of the Fed being out of control. When a pilot starts chasing corrections in an airplane he gets what we call "behind the airplane". You try to correct nose down by pulling the stick back and then put in too much correction and the nose points too high so you push the stick forward to lower the nose back down but realize too late that you pushed it too low so you pull it back again and get even more out of control to the upside. It's call pilot-induced oscillation (PIO) and is very common with student pilots. What I'm seeing here is some PIO by our out-of-cotnrol Fed and many times PIO will lead to a crash or some other unpleasant event (like getting passengers air sick). Get my point?

Export and Import Price Changes, chart courtesy briefing.com

The balance of this week's economic reports, other than possibly retail sales on Thursday and Michigan Sentiment on Friday, is not likely to affect the market much.

Economic reports, summary and Key Trading Levels

My overall sense about the current market is that we have seen the high. The strong selloff has been followed by a weak bounce so far, which fits the dead-cat variety. Price is the final arbiter and the price pattern does support the possibility for a final high later this month (opex) and therefore I would stay aware of that potential when making plans for your May options positions. We could see a very low volume choppy rally that simply adds a few more points each day rather than sell off but at the moment I don't see enough evidence to support a recommendation on the long side.

I'm looking at the potential for 30 S&P points to the upside vs. 300 points to the downside. I don't see a strong move to the upside (with lots of volume) but I do see the potential for a strong move to the downside. Therefore it just doesn't make sense to try a play to the upside. If unsure about being short simply wait for breaks of the key levels to the downside that I discuss with the charts.

It's often hard to short the market into the hole after a big move down but I think the setup is there to chase it lower. The risk of course is for the market to come flying back in your face. Trade with options and smaller positions and if the market moves in your favor simply add to the position and adjust your risk/stop accordingly.

Trade carefully this week and good luck. I'll be back with you a week from this Wednesday.

Key Levels for SPX:
- bullish above 1362 to 1385-1390
- bearish below 1329

Key Levels for DOW:
- bullish above 12,800
- bearish below 12,500

Key Levels for NDX:
- bullish above 2418
- bearish below 2325

Key Levels for RUT:
- bullish above 860
- bearish below 825

Keene H. Little, CMT


New Option Plays

Healthcare Highs

by James Brown

Click here to email James Brown

Editor's Note:

A few stocks that caught my eye tonight are AMZN, BCR, and PSA.

AMZN is consolidating sideways and looks ready to breakout from this consolidation pattern. Aggressive traders might want to consider buying calls on a rally past its early May high of $203.42.

BCR has been rising steadily for weeks. You can see where traders have been buying dips near the rising 10-dma. I'm concerned this stock is too overbought and due for a correction. Yet last week would have been the perfect excuse to sell BCR and shares only saw a minor decline. If you're nimble enough and use a tight stop you might be able to scalp a few points here if the trend continues.

PSA displayed some relative strength today. Shares have bounced back toward the top of its new trading range near $118.00. A breakout past $118 or past the high of $118.88 might be a new entry point for calls.

- James


NEW DIRECTIONAL CALL PLAYS

Express Scripts - ESRX - close: 58.99 change: +1.06

Stop Loss: 56.75
Target(s): 64.00, 68.50
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ESRX was showing some relative strength on Monday. After a week of consolidating sideways (while the rest of the market was falling) the stock is breaking out to new all-time highs. I am suggesting we buy calls at current levels. Or if you prefer wait for a dip back toward to $58.50 level. It's possible the $60.00 level could be round-number resistance but if the market's major indices are bouncing higher I don't expect ESRX to stall at $60 for too long. Our targets are $64 and $68.50. FYI: The Point & Figure chart for ESRX is bullish with a $72 target.

- Suggested Positions -

Buy the June $60.00 call (ESRX1118F60) current ask $1.40

- or -

Buy the August $60.00 call (ESRX1120H60) current ask $2.82

Annotated Chart:

Entry on May 10th at $ xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on May 9th, 2011


In Play Updates and Reviews

Commodities Bounce Back

by James Brown

Click here to email James Brown

Editor's Note:

The rebound in commodities outshined the bounce in stocks on Monday. Gold, silver, and oil all rallied while stocks slowly drifted higher. I am suggesting an early exit for our MCP put play.

-James

Current Portfolio:


CALL Play Updates

Apple Inc. - AAPL - close: 347.60 change: +0.94

Stop Loss: 339.40
Target(s): 374.00, 395.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/09 update: AAPL underperformed the market on Monday. The S&P 500 and NASDAQ were up +0.4% and +0.5% respectively. AAPL only managed +0.2% and spent the entire day churning sideways in a very narrow range. I would expect a breakout one way or the other pretty soon. Currently our plan is to launch bullish positions when AAPL rises to $352.50.

Buy-the-breakout Trigger @ $352.50

- Suggested Positions -

Buy the June $370 calls (AAPL1118F370)

- or -

Buy the July $380 calls (AAPL1116G380)

Entry on May xxth at $ xx.xx
Earnings Date 07/20/11 (unconfirmed)
Average Daily Volume = 16.6 million
Listed on May 2nd, 2011


Fastenal Co. - FAST - close: 66.78 change: +0.42

Stop Loss: 63.75
Target(s): 69.50, 74.00
Current Option Gain/Loss: - 6.8% & -13.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/09 update: The rally in FAST reversed midday and shares pared their gains. FAST seems to be struggling with resistance in the $67.50-67.75 area. Cautious traders might want to use a higher stop loss near $65.00 instead of our stop at $63.75.

Don't forget that May options expire after May 20th.

Our targets are $69.50 and $74.00. We should expect the $70.00 area to offer some resistance and FAST will likely pull back on the first test of $70.

FYI: FAST is due to split 2-for-1 on May 23rd. Plus, the Point & Figure chart for FAST is bullish with a $72 target.

- Suggested Positions -

Long the May $65.00 calls (FAST1121E65) Entry @ $2.20

- or -

Long the June $70.00 calls (FAST1118F70) Entry @ $0.75

Entry on April 26th at $66.25
Earnings Date 04/12/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 23rd, 2011


Google Inc. - GOOG - close: 537.68 change: +2.38

Stop Loss: 529.00
Target(s): 549.00, 558.00
Current Option Gain/Loss: -35.0%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
05/09 update: Traders bought the dip in GOOG again. The last several days have shown investors buying GOOG on dips in the $532-530 zone. Aggressive traders could use today's bounce as an entry point. I am raising our stop loss on this trade to $529.00. We have less than two weeks left with May options set to expire after the 20th. Currently our targets are at $549.00 and $558.00.

Prior Comments:
This is a very aggressive, higher-risk trade. Keep positions small.

(Very Small Positions) Suggested Positions:

Long the May $550 call (GOOG1121E550) Entry @ $3.00

05/09 New stop loss @ 529.00
04/30 Adjusted exit strategy. First target at $549.00. Final target at $558.00.

Entry on April 25th at $525.25
Earnings Date 04/14/11 (confirmed)
Average Daily Volume = 3.3 million
Listed on April 23rd, 2011


International Business Machines - IBM - close: 169.10 change: +0.21

Stop Loss: 164.75
Target(s): 174.00, 179.50
Current Option Gain/Loss: + 23.0%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
05/09 update: IBM didn't see much of a bounce today and it appeared to fail near the $170 level. Readers may want to take a step back and wait for a dip near $166 or a rally past $170.25 as our next entry point. Our targets are $174.00 and $179.50. FYI: The Point & Figure chart for IBM is bullish with a $208 target.

- Suggested Positions -

Long the June $170 calls (IBM1118F170) Entry @ $2.60

Entry on May 5th at $167.50
Earnings Date 04/19/11
Average Daily Volume = 4.8 million
Listed on April 27th, 2011


Intuit - INTU - close: 54.14 change: +0.36

Stop Loss: 53.45
Target(s): 58.75
Current Option Gain/Loss: -60.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/09 update: There is no change from my prior comments on INTU. I am still suggesting that more conservative traders consider an early exit. INTU barely bounced today. For those of us holding on and willing to take the risk, I'm suggesting we plan on exiting on any bounce near resistance at $56.00. I am not suggesting new positions at this time. We do not want to hold over the mid May earnings date.

I would keep our position size small to limit our risk (1/2 or less than your normal trade size).

- Suggested Positions -

Long the May $55.00 call (INTU1121E55) Entry @ $2.40

05/09 consider an early exit
05/07 consider an early exit
04/30 Adjusted target to $58.75

Entry on April 20th at $55.25
Earnings Date 05/19/11 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on April 14th, 2011


Jos. A Bank Clothiers - JOSB - close: 52.84 change: +0.81

Stop Loss: 49.95
Target(s): 59.50
Current Option Gain/Loss: - 64.2% and -22.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/09 update: JOSB displayed some relative strength with a +1.5% gain on Monday. The stock appears poised to breakout higher from this sideways consolidation. The high today was $53.35. Over the weekend I suggested readers wait for a rise to $53.40 as a potential entry point to buy calls. Don't forget that May options expire after the 20th.

FYI: The most recent data listed short interest in JOSB at more than 21% of the small 27.3 million-share float. Together the increase the risk of a short squeeze.

- Suggested Positions -

Long the May $55 calls (JOSB1121E55) entry @ $0.70

- or -

Long the June $55 calls (JOSB1118F55) entry @ $1.75

Entry on April 26th at $52.75
Earnings Date 06/02/11 (unconfirmed)
Average Daily Volume = 510 thousand
Listed on April 25th, 2011


NetApp, Inc. - NTAP - close: 53.17 change: -0.13

Stop Loss: 50.75
Target(s): 58.00
Current Option Gain/Loss: -12.6%
Time Frame: about 3 weeks
New Positions: see below

Comments:
05/09 update: Monday was a quiet session for NTAP with the stock churning sideways in an 80-cent range. Volume was pretty light today. I would still consider new positions now or you could wait for a dip near the $52.00 level. I do see potential resistance near $55.00, which is the bottom of NTAP's gap down in February and there is potential resistance at the top of the gap near $58.00. However, if the wider market rallies I expect NTAP to power past the $55 level. We're setting our exit target at $58.00. FYI: The Point & Figure chart for NTAP is bullish with a $68 target.

NOTE: We do not want to hold over the late May earnings report. The date is still unconfirmed. This gives is about two or three weeks as our time frame.

- Suggested Positions -

Long the June $55 calls (NTAP1118F55) Entry @ $1.90

Entry on May 9th at $ xx.xx
Earnings Date 05/25/11 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on May 7th, 2011


O'Reilly Automotive - ORLY - close: 59.66 change: -0.04

Stop Loss: 57.75
Target(s): 62.75, 67.25
Current Option Gain/Loss: -42.8% & -21.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/09 update: Late last week ORLY produced what appears to be a short-term reversal. I'm warning readers to expect a dip toward the $59.00 or $58.00 levels of support. No new positions at this time. The plan was to keep our position size small to limit our risk.

- Suggested (Small) Positions -

Long the May $60 calls (ORLY1121E60) Entry @ $1.05

- or -

Long the June $60 calls (ORLY1118F60) Entry @ $1.65

Entry on May 4th at $60.15
Earnings Date 04/27/11
Average Daily Volume = 1.1 million
Listed on April 30th, 2011


Powershares QQQ ETF - QQQ - close: 58.69 change: +0.22

Stop Loss: 56.45
Target(s): 64.00
Current Option Gain/Loss: - 5.0% & - 3.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/09 update: Monday's action really doesn't tell us much since the QQQs drifted sideways. I would consider bullish positions now but more conservative traders could wait and hope for a dip near the 50-dma closer to the $57.00 level. Our upside target is $64.00. The Qs don't move very fast so we'll have to be patient.

- Suggested Positions -

Long the June $60 calls (QQQ1118F60) Entry @ 0.59

- or -

Long the July $60 calls (QQQ1116G60) Entry @ 1.00

Entry on May 4th at $58.15
Earnings Date --/--/--
Average Daily Volume = 50 million
Listed on April 30th, 2011


Ross Stores Inc. - ROST - close: 78.58 change: +0.39

Stop Loss: 74.75
Target(s): 77.25, 79.90
Current Option Gain/Loss: +166.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/09 update: Shares of ROST garnered an upgrade this morning but I'm not sure it had much effect. Shares are still hovering above the $78 level, which is impressive. I am not suggesting new positions at this time. Our final target is $79.90. We do not want to hold over the mid May earnings report.

- Suggested Positions -

Long the May $72.50 calls (ROST1121E72.5) Entry @ $2.25

05/05 New stop loss @ 74.75. Adjusted 2nd target to $79.90 from $79.50.
05/05 1st Target Hit @ 77.25. Option @ $5.00 (+122.2%)

Entry on April 28th at $73.55
Earnings Date 05/19/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 23rd, 2011


ProShares Ultra(long) S&P 500 - SSO - close: 54.90 change: +0.44

Stop Loss: 52.75
Target(s): 59.00
Current Option Gain/Loss: - 6.2% and - 6.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/09 update: The markets produced another bounce on Monday but volume was very light, which doesn't inspire any confidence. I remain bullish on the SSO here and would consider new positions but readers may want to consider waiting for another dip near the $54.00 or $53.50 levels as your entry point instead. The SSO is twice as volatile as the market so we want to keep our position size small. Our multi-week target is the $59.00 level.

Small Positions Only - Suggested Positions -

Long the June $56 call (SSO1118F56) Entry @ $1.60

- or -

Long the September $60 call (SSO1117I60) Entry @ $2.00

Entry on May 5th at $54.39
Earnings Date --/--/--
Average Daily Volume = 11.3 million
Listed on May 4th, 2011


Union Pacific - UNP - close: 102.47 change: +0.13

Stop Loss: 98.95
Target(s): 109.00, 114.00
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/09 update: Traders bought the dip in UNP this morning near $101.60 but the bounce wasn't very strong and volume was very light. I am still suggesting new positions here but readers may want to seriously consider waiting for a dip near the $100.50 area as their entry point instead. Our targets are $109.00 and $114.00. FYI: The Point & Figure chart for UNP is bullish with a $116 target.

- Suggested Positions -

Long the June $105 call (UNP1118F105) Entry @ $1.62

Entry on May 9th at $102.19
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on May 7th, 2011


United Technologies Corp. - UTX - close: 89.52 change: +0.31

Stop Loss: 83.49
Target(s): 89.50, 94.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/09 update: There is no change from my prior comments on UTX. We are waiting for a dip to $86.50 as our entry point to buy calls. More aggressive traders might want to consider jumping in early on a dip near $88.00 instead.

Buy-the-dip Trigger @ $86.50

- Suggested Positions -

Buy the June $90 calls (UTX1118F90)

Entry on April xxth at $ xx.xx
Earnings Date 04/20/11
Average Daily Volume = 3.7 million
Listed on April 27th, 2011


SPDR Oil & Gas ETF - XOP - close: 59.80 change: +1.83

Stop Loss: 55.99
Target(s): 61.00, 65.00
Current Option Gain/Loss: +38.2% & +10.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/09 update: Our aggressive trade on the XOP is off to a good start. Oil saw a bounce today, which helped fuel gains in the energy sector. The XOP opened at $58.32 and rallied toward short-term, round-number resistance at $60.00. I would not launch new positions at these levels. Wait for another dip or bounce near $58.00.

Our first target is $61.00. Our second, more aggressive target is $65.00 but the XOP will have to climb through a cloud over overhead resistance to get there.

I would keep our position size small to limit our risk.

- Suggested Positions - (Small positions)

Long the May $58.00 call (XOP1121E58) Entry @ $1.70

- or -

Long the June $60.00 call (XOP1118F60) Entry @ $1.85

Entry on May 9th at $58.32
Earnings Date --/--/--
Average Daily Volume = 4.8 million
Listed on May 7th, 2011


PUT Play Updates

Panera Bread Co. - PNRA - close: 118.84 change: -0.55

Stop Loss: 123.25
Target(s): 110.50, 102.50
Current Option Gain/Loss: -25.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/09 update: So far so good. After last week's failed rally at technical resistance PNRA continued to sink today. I do want to remind readers that this is an aggressive trade. If the S&P 500 and the NASDAQ rally higher it's going to be tough to make money on PNRA with puts. We want to keep our position size small to limit our risk. Our targets are the 100-dma (currently near $112.00, we'll take profits at $112.50) and the $102.50 level.

Suggested Positions

Long the June $110 PUTS (PNRA1118R110) Entry @ $1.60

Entry on May 4th at $119.00
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 647 thousand
Listed on May 3rd, 2011


CLOSED BEARISH PLAYS

Molycorp - MCP - close: 71.60 change: +2.67

Stop Loss: 76.15
Target(s): 63.50
Current Option Gain/Loss: -22.2%
Time Frame: only 4 days
New Positions: See below.

Comments:
05/09 update: Abandon ship! I'm giving up on MCP. Shares were showing weakness this morning but the stock reversed after dipping to $65.69. The big bounce carried it back above the $71 level. We were planning to exit tomorrow anyway. Instead of waiting until the closing bell we want to exit immediately.

Small Positions Only!

May $65 put (MCP1121Q65) Entry @ $1.80, Exit @ 1.40 (-22.2%)

05/09 Exit Early. MCP @ 71.60, Option @ $1.40 (-22.2%)

chart:

Entry on May 5th at $70.05
Earnings Date 05/10/11 (confirmed)
Average Daily Volume = 7.3 million
Listed on May 4th, 2011