Option Investor
Newsletter

Daily Newsletter, Wednesday, 6/8/2011

Table of Contents

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

Market Wrap

Bears Do Not Want to Let the Bulls Up for Air

by Keene Little

Click here to email Keene Little
Market Stats

Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again.

Mother Goose nursery rhyme, originally published 1803

One of the early appearances of Humpty was in Lewis Carroll's "Through the Looking Glass" (1872) where he often talked about semantics and pragmatics with Alice. An example:

"I don't know what you mean by 'glory,' " Alice said.
Humpty Dumpty smiled contemptuously. "Of course you don't -- till I tell you. I meant 'there's a nice knock-down argument for you!' "
"But 'glory' doesn't mean 'a nice knock-down argument," Alice objected."
"When I use a word," Humpty Dumpty said, in a rather scornful tone, "it means just what I choose it to mean -- neither more nor less."
"The question is," said Alice, "whether you can make words mean so many different things."
"The question is," said Humpty Dumpty, "which is to be master -- that's all."

Now I know where the Fed Reserve governors go to school before they're allowed to become members, and certainly before they're elected Chairmen. And now the important question is who Humpty Dumpty is. Is he Chairman Bernanke or is he the economy? Perhaps it's King Bernanke trying to put Humpty Economy back together again.

Bernanke's speech yesterday left the market wanting for more. The stock market has been dependent on a continuation of the drug injections to keep the drug (money) high from turning into the cold sweats. The market knows the economy is not healthy enough to support the current valuations, which have been built up on the premise (promise?) that the Fed would fix things and get Humpty put back together again. In his speech he admitted he's disappointed with the pace of the economic recovery but tried to assure us that the king's horses and men are still working hard to get Humpty together again and that he should be propped up on the wall by the end of the year. The market is looking over his shoulder at the shattered pieces and thinking, "Hmm, maybe not", especially since it would appear Bernanke is out of glue.

So the selling from yesterday afternoon continued into this morning, starting with a gap down. There were a couple of bounce attempts but the bulls just couldn't hold it up. The bears are pressing their bets and not letting the bulls up for air. The decline from the spike up to June 1st, which turns out to have been one helluva bull trap, has been followed by relentless selling with the S&P losing about 70 points in six straight days of selling, the longest selling streak since February 2009. But there are hints that the bears are getting tired of holding the bulls down so we could be nearing the point where the bulls will be allowed to breathe again. Admittedly, they might not get that much time before they're pressed back down. And the risk is that the market is oversold and crashes come out of oversold conditions.

The morning was spent consolidating the losses but formed a bear flag in the process. Sure enough the market broke down again in the early afternoon, just before the Fed Beige Book was released and was then a little more volatile in the afternoon with no net result for either the bulls or the bulls and the market finished down again. The Beige Book (so named for its color) pointed out what Bernanke was telling us yesterday. This is a snapshot of economic conditions from the central bank's 12 districts and the bottom line is that it shows a slow economic recovery that is slowing again (still recovering but "less well").

Consumer spending is mixed since the April 13th Beige Book report and we all know the importance of consumer spending in our GDP. We of course all know that the way to create wealth is through increased spending (huh?). At least that's the way our government works, especially since most of our economists follow John Maynard Keynes' theories. There are some competing theories, particularly those who follow Austria's Frederich Hayek. For a well-done music video of the argument between Keynes and Hayek, I recommend the following two videos (if you didn't see the first one, done last year, watch the bottom one first). The most recent one is particularly well done, and the final message is rather poignant. Keynes vs. Hayek

Consumers are of course feeling the pain at the pump and at the grocery store. Bernanke is feeling the heat from complaints about inflation (where it matters) and his protestations that the problem is only "transitory" is not helping to sooth anyone's concerns. His reluctance to entertain the thought of implementing QE3, which many argue is absolutely necessary lest we fall back into a recession, is indicative of his concern about inflation spreading from commodities into the broader economy. I have long said the Fed is going to paint itself into a corner and that corner is now very small.

This is what Jeff Cooper reported in his morning update: "For 6 months the market rallied viciously against the backdrop of a weakening economy, causing most market participants to deduce it as a sign of strength, that the market was all-knowing and looking over the horizon at a sunny future. Surely, the market's willingness to shrug off a clear and present lack of confirming fundamentals was a sign of strength.

That was April 1930."

Some things repeat and it's another example of the similarities between what we're going through now vs. what we went through during the last Great Depression, which even takes us back to the argument between Keynes and Hayek and the role of government spending and monetary policies. Following the 1930 rally there was an even stronger selloff into the 1932 low, which is of course what Bernanke has been struggling with and trying to avoid a repeat.

Not helping the consumer, or the economy, is the continuing struggle in the housing market. Many are pointing to the last year as a recovery period but we still saw personal bankruptcies rise +9% to more than 1.5 million. According to the American Bankruptcy Institute and the National Bankruptcy Research Center this is the highest level since new bankruptcy laws were passed in 2005. In the meantime RealtyTrac reported foreclosures have hit a record 1.05 million, exceeding the previous record of 918,000 in 2009. Of all homes sold last year, more than a quarter of them were foreclosures. There are still a huge number of homes where the homeowner has stopped paying but the foreclosure process hasn't yet started.

So it's no wonder the mighty consumer is feeling more like Popeye without his spinach. The Beige Report also showed a slowing in auto sales but blamed it on supply disruptions due to the Japanese earthquake. This sounds a bit like the dog-ate-my-homework excuse and I suspect even when those disruptions are no longer a factor we'll continue to see slowing in auto sales. The consumer simply doesn't feel like consuming. Saving will be better for our collective long-term health, especially if some of those savings are used to help finance the government through Treasury purchases as the Fed backs off on their purchases.

So the market is oversold but that of course doesn't mean we're going to rally. But one thing to thing about for tomorrow is that it's the Thursday prior to opex week. This is a day that we often see a head-fake move and then reversal. Most of the time those head fakes have been to the downside and then a rally into opex. Considering how oversold the market is right now, a gap down or further selling in the morning has the potential for a quick reversal back up and then higher bounce into next week.

Mixing things up a little, I'll start with a top-down view of the DOW tonight, starting with its weekly chart. The price pattern, both on a longer-term view and shorter-term view remains very challenging because it is filled with mostly correctly 3-wave moves and very few impulsive 5-waves, the latter providing a better sense of the primary trend. This makes the use of EW more difficult and therefore it's very important to use other technical tools that work well when clarifying wave counts, such as trend lines/channels and Fibonacci retracements/projections.

The DOW's weekly chart shows we're clearly in a longer-term uptrend as long as the uptrend line from March 2009 holds. The bears have some work to do to even get there, which is currently near 11750 and with the pullback from May looking corrective we still have to give the bulls their due until the primary trend (up) is broken. On a shorter-term basis, an uptrend line from November-March is currently being tested, near 12050 (today's low was 12027 and it closed on the line). Based on the wave count ideas I'm watching, plus some Fibs and this trend line, I think a break below 12K would be important for the bears to achieve. Until that happens, especially as we approach opex week (next week), there is the possibility that the rubber band has been stretched to the downside in order to give the market a slingshot move back up into next week.

Dow Industrials, INDU, Weekly chart

With the solid red line I'm showing a bounce into next week and then a continuation lower. But a stronger rally back above the June 1st high near 12570 would be strong confirmation that a new high is coming. If we get a 3-wave bounce that stops at or below 12450 I think it would give us a shorting opportunity to then see if another leg down is coming. This is shown on the daily chart below. Notice today's candlestick -- a spinning-top doji at support (the uptrend line). An up day on Thursday would confirm a likely reversal and call for a multi-day bounce/rally. But a break below 12K would target the uptrend line from March 2009, near 11760 or another 100 points lower to its 200-dma near 11667, followed by a bounce and then continue lower to a downside target near 11200 by the end of the month. So the next day or two will be important as far as how next week looks (for all you option players wondering how your June positions are going to do)

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,450
- bearish below 12,000

The bearish thing I see on the DOW is the breakdown from its parallel down-channel from the May 2nd high. Not only did it break down below the bottom of the channel but it then tested it yesterday and sold off, leaving a bearish kiss goodbye in its wake. This kind of price action is indicative of further selling to come. So any break lower on Thursday, that doesn't quickly recover by early morning, will lead to a drop down to the lower targets mentioned above.

Dow Industrials, INDU, 60-min chart

When SPX broke below the bottom of its parallel down-channel it also broke its uptrend line from November-March. As with the DOW, any further selling on Thursday will likely have SPX targeting its 200-dma near 1251 (many people are talking about a move down to 1250 so it will either not happen or it won't stop there). A little lower near 1238 is its uptrend line from March 2009. But if we do get a rally into next week I see upside potential to about 1318 to retest its broken uptrend line from November (and the mid line of the down-channel, not drawn in).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1318
- stay bearish below 1300

There is a wave count for the move down from June 1st that suggests the bottom is either in or it will be marginally lower. Based on some Fib projections I think the bounce potential is good as long as SPX stays above 1275. Below 1275 opens the door to 1250 or lower. Keep in mind that "lower" could be much lower. It's never good to predict crashes but they come out of oversold conditions and we're oversold (but showing some bullish divergences). If some big players are positioned wrong for opex they could exacerbate the selling when they cover their positions.

S&P 500, SPX, 60-min chart

One thing that is worrisome for the market is the VIX, which is not showing enough fear. Comparing previous selloffs in the market, specifically last November and March, the VIX shot higher. Too many got too bearish too quickly and all the selling (shorting, selling out, buying puts) quickly became supportive for the market. We have no such fear this time as you can see at the right side of the VIX chart below. Without fear there is no bottom, or at least that's the concern right now and actually supports the crash scenario. It is possible that it's reflecting the summer doldrums already but just stay aware of the bearish interpretation.

SPX vs. VIX, Daily chart

NDX hasn't been in the same kind of parallel down-channel but the same trend line drawn along the lows since May 4th shows it was reached today and held. I show a rally from here to a new high (green dashed line) but that's just a projection to show the possibility. I've believe it if it can rally above 2340. A bounce and then continue lower, as shown in the above charts, would be more likely. A continuation lower tomorrow would target its 200-dma near 2211.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2340
- stay bearish below 2300

The semiconductor index, SOX, is also approaching support at its 200-dma, near 407, less than a point below today's low. I would think the first test of this support level will pull in some buyers and any rally in the SOX would be helpful to the tech indexes which would likely be helpful to the broader market.

But there could be some trouble for the SOX and techs tomorrow if the after-hours reaction to Texas Instruments (TXN) sees some downside follow through in the morning (just be careful about a gap down to suck in the bears and then a reversal back up as part of the pre-opex Thursday head-fake move). TXN reported earnings after the bell and said it expects a lower range of earnings and revenue, with earnings expected to be 51-55 cents vs. the previous range of 52-60 cents. They expect revenue to be lighter at $3.36B-$3.5B vs. the previous range of $3.41B-$3.69B. It's just more evidence of a slowing economy and the after-hours reaction did not bode well for tomorrow. The good news is that TXN had dropped almost 5% after the bell but then recovered the loss as the afternoon progressed. Equity futures are rallying slightly in after-hours.

The RUT is looking bearish. Monday it had closed below the trend line along the lows from May 5th but Tuesday saw a recovery with a gap up back above the trend line. The close brought it right back down to the line and it looked like a potentially bullish setup coming into this morning. Unfortunately the bulls did not capitalize on the setup and Wednesday gapped back down below the trend line. It tested it at its high for the day but sold off again, leaving a bearish kiss goodbye. If the broader market recovers tomorrow, and into next week, the RUT will do the same but right now it's looking like it could head lower to its 200-dma near 767 before getting a bounce and then heading lower again into the end of the month. If we do get a bounce into next week it should offer another shorting opportunity once we get a better idea about how high the bounce could get.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 835
- stay bearish below 820

Treasury yields are still struggling as bonds continue to be overbid at Treasury auctions. Many fund managers are thinking it's better to pay the government a little money to protect their invested money rather than invest in a risky stock market (the low yield, especially on very short-term paper, can actually result in a negative return when inflation is considered). TNX has been struggling to break out of its down-channel from early April but dropped to a new low today. It looks like it could head for the 62% retracement of the October-February rally (2.87%) before starting a bigger bounce/rally). Below 2.87% opens the door for a move down to 2.64% where the 2nd leg of the move down from February would be 162% of the 1st leg down and retrace 78.6% of the Oct-Feb rally (neither Fib is shown on the chart). It takes a break above 3.1% to get TNX at least on a short-term bullish path, even if it will be just a larger bounce before heading lower again.

10-year Yield, TNX, Daily chart

TNX and the stock market have been mostly in synch, especially since 2008, so it will be interesting to see what TNX does from here and whether or not the stock market will react similarly (eventually that relationship will break).

The steep yield curve (higher rates on the long bond vs. the short-term bonds) is normally very good for banks. A steep yield curve makes banks profitable, they loan more money, which increases the monetary base and all of that primes the economic pump. But the long stretch of having a steep yield curve has done nothing to help the banks. That's how sick the banks are.

The BIX dropped out the bottom of its parallel down-channel from February (as well as a trend line drawn along the lows -- gray line on the chart below), which is obviously bearish. The wave count is never easy to figure out on the banks (too much manipulation?) but the move down from early May calls for a stair-stepping move lower into July, which is what I'm depicting. But price is now close to its uptrend line from July 2009 (I'm not sure it's a relevant trend line) and any bounce from here back above 132.50 should lead to at least a larger bounce before heading lower again. Above 141.23, the May 27th high, would clearly be bullish.

Banking index, BIX, Daily chart

Following last Wednesday's big spike down the Transports had the rug pulled out from under them. Talk about dropping out the bottom of its bull flag pattern! It also broke its August-March uptrend line at the same time and has sold off hard, right down to its uptrend line from March 2009. If we see a bounce from here, watch for a move back up to the bottom of the broken down-channel to see if it holds as resistance and heads lower from there. If it continues lower this week, look for possible support at its 200-dma near 4993 (similar to the broader averages).

Transportation Index, TRAN, Daily chart

The U.S. dollar dropped to within 10 cents of the downside target at 73.40 (78.6% retracement of the May rally and broken downtrend line from February). Today's bounce may indicate the bottom is in but obviously that's an early call. It's a good setup for it so now we'll just to see if the dollar bulls (of which there are very few) will step back in. More than likely it's going to be short covering that gets the strong rally going. Assuming the bullish wave count is correct, we should be at the start of a multi-month strong rally leg (well above 80).

U.S. Dollar contract, DX, Daily chart

If the dollar rallies it should put some downside pressure on commodities and the metals (and possibly the stock market although there's not always a close relationship, which can diverge for many days at a time). Gold's pattern is not yet clear enough to determine whether it's going to give us one more high (1580-1600 upside target) or turn back down from here and drop to its 200-dma and uptrend line from October 2008, both near 1395.

Gold continuous contract, GC, Daily chart

Silver has stayed relatively weak compared to gold and that's a bearish sign. Silver usually outperforms gold at the end of a bullish run when chasing risk is the trade du jour. Underperforming gold now indicates traders are looking to reduce risks. Its bounce pattern continues to look more bearish than bullish and a continuation lower is expected. It's currently finding support at the bottom of an up-channel from the May low and the uptrend line from July 2009. A break below 35 would confirm the next leg down has started and then the downside target is near 25, potentially lower.

Silver continuous contract, SI, Daily chart

I found an interesting silver chart done by Tom McClellan where he compares the chart pattern following the 1980 high and the current pattern. He compressed the timeframe of the price action this year to line up the highs and lows in 1979-1980 and concluded that the pattern points to a new low by early July. The fractal pattern suggests we could see silver trade sideways for a little longer (maybe a week) before it drops down.

Silver, 1979-1980 vs. 2011, chart courtesy mcoscillator.com chart

Trading sideways for another week is supported by the pattern I see developing for oil. Oil has been chopping up and down in a sideways consolidation for the past month and is looking like a sideways triangle, which is a bearish continuation pattern following the spike down in early May. It should be in the final leg of the triangle pattern but could work its way slightly higher to the top of the triangle (perhaps with a small throw-over finish), currently near 102.65. There is still the possibility we'll see a higher bounce to its broken 50-dma and broken uptrend line from February 2009, both near 105. Any higher than 105 would be more bullish otherwise I'm looking for another leg down. As shown on the chart, an equal leg down from an expected finish near 102.65 gives us a downside target near 82.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports should not influence the market so it will be on its own tomorrow morning. We'll have the usual unemployment claims and then the Trade (im)Balance and Wholesale Inventories.

Economic reports, summary and Key Trading Levels

The market is oversold and due a bounce. Countering that expectation with the warning that market crashes come out of oversold. Last week I mentioned the full moon and total lunar eclipse on June 15th, sometimes associated with market crashes. At the very least it could be associated with a market turn so if the market continues lower into mid week next week we will likely find a turning point. Similarly, if the market bounces from here we'll watch for the possibility for a reversal mid week back down.

The market is in the middle of a break down to lower levels, specifically the 200-dma's and some potentially important uptrend lines. So any additional selling tomorrow, without a quick recovery right back up, should see continued selling pressure into the end of the week. Keep in mind that it's Thursday prior to opex week, a day known for its head-fake move in the morning that then gets reversed into opex week.

Good luck with your trading into next week and I'll be back with you on Wednesday to see if we've got a reversal setup.

Key Levels for SPX:
- bullish above 1318
- stay bearish below 1300

Key Levels for DOW:
- bullish above 12,450
- bearish below 12,000

Key Levels for NDX:
- bullish above 2340
- stay bearish below 2300

Key Levels for RUT:
- bullish above 835
- stay bearish below 820

Keene H. Little, CMT


New Option Plays

Falling Toward Key Support

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Apple Inc. - AAPL - close: 332.24 change: +0.20

Stop Loss: 317.45
Target(s): 337.50, 347.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Everyone loves AAPL but the stock has been subjected to some profit taking this week. I suspect that support at $330 will break this time around. However, there is a strong chance that AAPL will bounce from technical support at its 200-dma, which is quickly approaching the $325 area. It's an aggressive trade, given the short-term down trend, but I'm suggesting we buy calls on a dip at $325.00. This will be close to the 200-dma and relatively close to AAPL's long-term trendline of higher lows. The April low was near $320 so I'm setting our stop loss at $317.45 just in case AAPL does see a spike toward the $320 area. I will repeat that this is an aggressive trade. AAPL can be volatile and the options aren't cheap. Let's keep our position size small to limit our risk. We have two targets at $337.50 and $347.50.

Trigger @ $325.00 (SMALL POSITIONS)

- Suggested Positions -

buy the July $340 call (AAPL1116G340)

Annotated Chart:

Weekly Chart:

Entry on June xxth at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 12.9 million
Listed on June 8th, 2011



In Play Updates and Reviews

WFM Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Our bearish play on Whole Foods Market (WFM) has hit our bearish target. Unfortunately our UNP call play isn't looking so hot. I am also suggesting we exit our SRCL June puts now to lock in a gain.

-James

Current Portfolio:


CALL Play Updates

Baker Hughes Inc. - BHI - close: 72.69 change: +0.11

Stop Loss: 69.90
Target(s): 79.00
Current Option Gain/Loss: -57.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/08 update: Shares of BHI were upgraded this morning but the news had little effect on the stock price. Even the +2% bounce in oil prices failed to have much impact. I remain wary here and I'm not suggesting new positions. We're running out of time with our June options. I am seriously tempted to just exit early right now!

More conservative traders may want to raise their stop loss near the $71.75 area to limit their risk since $72.00 is short-term support. Although I will point out that $70.00 and the 100-dma should offer stronger support, which is why our stop is at $69.90.

Earlier Comments:
We wanted to keep our position size small to limit our risk.

-Small Positions - Suggested Positions -

Long June $75 call (BHI1118F75) Entry @ $1.61

06/04 new stop loss @ 69.90

Entry on May 26th at $73.34
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on May 25th, 2011


Fossil Inc. - FOSL - close: 102.41 change: +0.62

Stop Loss: 99.39
Target(s): 109.75, 114.00
Current Option Gain/Loss: - 89.1% & -53.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/08 update: Positive analyst comments helped propel FOSL higher this morning. Shares are up two days in a row. Volume increased on today's trading. Thus far support at the $100 level is holding. I'm not suggesting new bullish positions in the current market atmosphere but aggressive traders could buy calls on this bounce and just use a tight stop to limit your risk.

NOTE: If FOSL sees a bounce toward resistance in the $105-106 area I would strongly consider an early exit for our June calls. We're running out of time on June options, which expire at the end of next week.

Earlier Comments:
We wanted to keep our position size small to limit our risk.

- Suggested (SMALL) Positions -

Long June $110 call (FOSL1118F110) Entry @ $1.38

- or -

Long July $110 call (FOSL1116G110) Entry @ $3.00

Entry on May 27th at $104.96
Earnings Date 08/09/11 (unconfirmed)
Average Daily Volume = 842 thousand
Listed on May 26th, 2011


Forest Labs Inc. - FRX - close: 37.06 change: +0.06

Stop Loss: 34.45
Target(s): 39.00, 42.50
Current Option Gain/Loss: - 0.0% & +25.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/08 update: FRX is still showing strength and managed to deliver another gain although it was pretty anemic. The stock essentially spent the day drifting sideways. There is no change from my prior comments. The relative strength is very encouraging I wouldn't chase it.

NOTE: Conservative traders may want to exit their June calls now. With the bid at 65 cents we can avoid a loss.

Our targets are the $39.00 level and the $42.50 mark but I'm starting to worry that FRX just doesn't move fast enough.

- Suggested Positions -

Long the June $37 call (FRX1118F37) Entry @ $0.65

- or -

Long the August $37 call (FRX1120H37) Entry @ $1.40

06/04 new stop loss @ 34.45
05/28 New stop loss @ 33.75

Entry on May 20th at $35.29
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.2 million
Listed on May 19th, 2011


Goldman Sachs - GS - close: 131.59 change: -1.40

Stop Loss: 128.45
Target(s): 134.00, 137.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
06/08 update: Financial stocks continue to underperform. GS lost another -1% and closed on its lows for the session. The stock is on the verge of testing support near $130.00. It will be make it or break it time. Remember, this is a high-risk trade as we try to catch the falling knife. UPDATE: I am updating our option to Julys instead of the Junes!

Earlier Comments:
The 2010 lows are near $130. I am suggesting we launch very small bullish positions on a dip at $130.25. This is a very aggressive, higher-risk trade.

Trigger @ 130.25 (very small positions)

- Suggested Positions -

buy the July $135 call (GS1116G135) current ask $3.20

Entry on May xxth at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 6.5 million
Listed on May 21st, 2011


Union Pacific - UNP - close: 99.74 change: -0.93

Stop Loss: 98.95
Target(s): 109.00, 114.00
Current Option Gain/Loss: -90.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/08 update: Warning! UNP has closed under round-number, psychological support at the $100.00 mark. At $99.74 the stock is very close to our stop loss at $98.95 and if the market is negative tomorrow we'll probably get stopped out. I am not suggesting new positions at this time.

- 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


PUT Play Updates

Amazon.com Inc. - AMZN - close: 188.05 change: +0.50

Stop Loss: 195.15
Target(s): 180.25, 175.00
Current Option Gain/Loss: -23.1% & -10.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/08 update: Hmm... technology stocks were some of the worst performers today and yet AMZN managed to eke out a gain. You could argue AMZN isn't a tech stock but instead just an online retailer but that doesn't change the relative strength in the stock today. Shares remain under resistance near $190 and its 50-dma. I don't see any changes from my prior comments.

06/07 update: This move can be used as a new entry point to buy puts. More conservative traders may want to use a lower stop loss just remember that AMZN can be a volatile equity.

Earlier Comments:
The plan was to keep our position size small. Our first target is $180.25. Our second target is $175.00 (or the simple 200-dma, whichever one AMZN hits first).

- small bearish positions -

Long June $185 PUT (AMZN1118R185) Entry @ $2.89

- or -

Long July $180 PUT (AMZN1116S180) Entry @ $4.40

06/07 New stop loss @ 195.15.

Entry on June 6th at $188.01
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on June 4th, 2011


Diamond Offshore Drilling, Inc. - DO - close: 68.47 change: -0.41

Stop Loss: 72.65
Target(s): 64.50, 62.50
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/08 update: Crude oil prices managed to bounce on Wednesday (+2%) but that didn't help the oil service stocks. DO continues to sink. I don't see any changes from my Tuesday night comments and would still buy puts at current levels.

Earlier Comments:
DO has found support in the $69.00-68.60 area in the past so more conservative traders may want to use a trigger to buy puts at $68.50. Our targets are $64.50 and $62.50. The Point & Figure chart for DO is currently still bullish but the stock is on the verge of forming a new sell signal.

FYI: Traders should note that the most recent data listed short interest at more than 14% of the float. That does raise the risk of a short squeeze should the stock suddenly find strength.

- Suggested Positions -

Long July $67.50 PUT (DO1116S67.5) entry @ $2.09

Entry on June 8th at $ xx.xx
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 7th, 2011


Nike Inc. - NKE - close: 80.10 change: -1.80

Stop Loss: 84.05
Target(s): 75.50
Current Option Gain/Loss: +35.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
06/08 update: So far so good. Shares of NKE are following our script and the bounce just reversed at resistance. I would consider new positions now although readers might want to consider a tighter (lower) stop loss.

Our target is $75.50 but we'll adjust the target as the trade progresses. NKE is due to report earnings on June 27th and we do not want to hold over the announcement.

- Suggested Positions -

Long July $80 PUT (NKE1116G80) Entry @ $2.00

Entry on June 7th at $81.75
Earnings Date 06/27/11 (confirmed)
Average Daily Volume = 2.3 million
Listed on June 6th, 2011


SanDisk Corp. - SNDK - close: 42.64 change: -0.41

Stop Loss: 46.25
Target(s): 40.50, 36.00
Current Option Gain/Loss: +50.0% & +31.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/08 update: SNDK extended its losses with another -0.9% decline. Shares are starting to look a little bit oversold. Readers may want to wait for a bounce near $44 or $45 before initiating new positions. Please note that I am lowering our stop loss to $46.25.

Our targets are $40.50 and $36.00, given enough time. FYI: The P&F chart for SNDK is bearish with a $30 target.

- Suggested Positions -

Long July $42.00 PUT (SNDK1116S42) Entry @ $1.10

- or -

Long July $40.00 PUT (SNDK1116S40) Entry @ $0.69

06/08 New stop loss @ 46.25

Entry on June 6th at $44.31
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on June 4th, 2011


Stericycle Inc. - SRCL - close: 85.28 change: -0.42

Stop Loss: 90.05
Target(s): 84.00, 80.50
Current Option Gain/Loss: +100.0% & +46.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/08 update: I am suggesting we take profits on our June $85 puts. The trend is still down but we only have a few trading (7) days left on June options. With SRCL hovering near support at $85.00 the stock could see an oversold bounce, which would make our June options crumble. Let's sell our June puts now!

I am not suggesting new bearish positions at current levels.

- Suggested Positions -

June $85 PUT (SRCL1118R85) Entry @ $0.50, exit $1.00 (+100%)

- or -

Long July $85 PUT (SRCL1116S85) Entry @ $1.50

06/08 Exit June $85 puts. Bid @ $1.00 (+100%)
06/04 new stop loss @ 90.05

Entry on May 31st at $88.78
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 502 thousand
Listed on May 28th, 2011


Whole Foods Market - WFM - close: 54.44 change: -2.55

Stop Loss: 60.15
Target(s): 55.10, 52.00
Current Option Gain/Loss: +150.0% & +134.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/08 update: Target achieved. WFM hit our first target at $55.10 and kept right on going. The June $60 put was trading near $4.30 at the time. The July $55 put was near $1.92. More conservative traders may want to exit the rest of our June position now. The stock might find support near the bottom of its February gap near $54.00. I am not suggesting new positions at this time.

FYI: We still have an aggressive, secondary target at $52.00.

- Suggested Positions -

Long June $60 PUT (WFM1118R60) Entry @ $2.20

- or -

Long July $55 PUT (WFM1116S55) Entry @ $1.05

06/08 1st target hit @ 55.10. June $60 put @ 4.30 (+95.4%), July $55 put @ 1.92 (+82.8%)
06/06 new stop loss @ 60.15
06/04 new stop loss @ 60.65

chart:

Entry on June 2 at $58.70
Earnings Date 08/11/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on June 1st, 2011