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Daily Newsletter, Saturday, 6/18/2011

Table of Contents

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

Market Wrap

Streak Broken By Half A Point

by Jim Brown

Click here to email Jim Brown

The Dow and S&P ended their losing streak at six weeks but the S&P only avoided a weekly loss by a half a point. This microscopic technical break lacked a significant amount of conviction and remains uninspiring.

Market Statistics

I think I will start ordering in Greek food every Friday so I can get completely into the spirit of the market. The Greek tragedy playing out in Europe acts like it is never going away or at least not in the way everyone would like. The market rallied on Friday morning after French and German leaders agreed in principal to some less stringent terms for another Greek bailout. A deal has not yet been struck and the Greek government is also less than inspiring with their musical chair routine last week and a change in faces and positions.

I don't know why the market appeared to be encouraged by the news because even if they get another bail out deal done it will only delay the inevitable. Greece will default. The country is broke, the citizens in revolt and leadership is falling apart. The IMF and the EU blinked as the week ended and reportedly will agree to give Greece funds already approved as part of last years bail out package despite Greek failures to meet all the required considerations for the next round of funding and the potential for the government to implode over the coming weeks.

By dispersing the money it allows Greece to avoid a default for another couple months but it does nothing to fix the problem. This is just another kick of the proverbial can down the road to an eventual default. An ECB official said the European bail out fund for Greece, Ireland and Portugal should be doubled to $2.15 trillion in order to calm the markets. Because of the impending default by Greece none of those troubled countries can borrow from the debt markets at anything resembling a reasonable rate. Greek two-year bonds are now over 30% and that assumes that anyone would actually buy them. They need to boost the fund to allow for Italy, Belgium and potentially Spain as well.

About the only way Greece is going to avoid a future default is if the ECB forgives their debt in order to avoid a default on outstanding debt to banks and institutions. The EU is not likely to take this action. Germany and France will not allow it. European banks held nearly $190 billion in debt from Greece, Ireland and Portugal at year-end and the ECB holds another $65 billion in Greek bonds. The EU can't afford for the debt to those banks to be restructured for pennies on the dollar. It would bankrupt the EU banks and cause even more havoc to the EU economy.

Lastly if Greece ends up getting a debt forgiveness program or some kind of structured default then Ireland, Portugal and others will want the same deal. What goes around comes around. Greece is only the first chapter of a very long book.

The current chapter would take between 12-20 billion euros to smooth over the current Greek problems for another 60-90 days. The real challenge will be the July meeting to work out a longer-term solution. This will take another 150 billion euros for a total of 340-350 billion or so and the outlook is not good. If they are having this much trouble handling the small problem you can imagine the challenge when there is real money on the line. The decisions the EU finance ministers will make in July will determine if their governments are reelected.

When the next chapter of the Greek problem arrives we could have an entirely new different cast of characters sitting around the conference table. If their predecessors were voted out of office for lending money to Greece that will never be paid back you can bet the new crop of finance ministers will have some strict marching orders and rules of engagement. Greece may end up on the short end of that deal if the governments in the Eurozone finally decide they would rather use their hard earned money to bailout their own banks rather than send it to Greece never to be seen again.

The reason these weekly episodes create so much volatility in our market is due to the impact on the currencies and the risk of U.S. banks taking it on the chin from the credit default swaps they wrote on Greek debt years ago. U.S. banks only hold about 6% of the outstanding Greek debt but they are rumored to be holding another 6-10% of the outstanding credit default swaps. The combined liabilities could be in the $60-$70 billion range. However, U.S. banks also hold debt on the European banks. If Greece defaults, as most believe they will, some European banks could go under or at least default and then be nationalized. Bank debt and those pesky swaps on the bank debt would then compound the losses to U.S. banks from the Greek default. European banks are reportedly holding $165 billion in Greek debt. That is about the same number as the amount of loans Greece is at risk of defaulting on this July.

Fitch reported that as much as 43% of U.S. money market funds are invested in or held by European banks because they were paying more interest than U.S. banks. The company said 55% of this money is invested in commercial paper of French banks with exposure to Greece including Societe General, BNP Paribas, etc. French banks hold 33% of the $165 billion in Greek debt. See how the dominos are lining up?

Greenspan said last week a default by Greece is "almost certain" and could drive the global economy into recession. According to Greenspan that may leave U.S. banks "up against the wall" because of their loans, investments and swaps to these banks.

This is really a can of worms because nobody really know how intricately intertwined all these debts and swaps really are. When banks hold debt on banks that own debt on other banks and all the parties may or may not have sovereign debt on Greece, Ireland, Portugal, etc there is no way to really know how the event will shake out until it does. It is like the subprime crisis all over again. Nobody knew who owned the subprime loans and mortgage-backed securities until they were forced to take monster writedowns and ask for handouts to keep from going under. Lehman, Merrill Lynch, Wachovia and Bear Stearns were just the headliners in the press. There were hundreds of smaller banks and institutions that were caught in the same trap. The ECB is turning into Europe's toxic waste dump because they have bought so much paper on the PIIGS countries to solve short-term problems. A Greek default could have serious repercussions to the ECB.

We won't know the final outcome on Greece for years to come and that means event volatility in some form will be with us for a long time. There are analysts who believe an eventual Greek default will start the dominos falling that create another recession similar to the subprime crisis. Let's hope they are wrong.

On the economic front the U.S. had a mild calendar with the Consumer Sentiment report the biggest headline. Sentiment for June fell sharply to 71.8 from 74.3 after two consecutive months of gains. Consensus estimates were for a small decline to 74.0. The recent low was 67.5 in March. The present conditions component declined to 79.6 from 81.9 and the expectations component declined from 69.5 to 66.8.

Slower job growth and the falling stock market were given as the two main drivers of the decline. Add in the debate over the debt ceiling and the constant warnings of dire circumstances if the ceiling can't be raised, plus the continued crisis in the Middle East and Northern African countries, European debt crisis and high gasoline prices and I am surprised sentiment was not significantly lower. With home prices sharply declining again the odds are good sentiment will continue to decline.

Consumer Sentiment Chart

The Risk of Recession report for May rose to the highest level since December at 23% and a +2% increase from the 21% in April. This is far from predicting a recession since the prior two downturns reached probability levels over 60%. Friday's report may be at a five-month high but it is still well away from critical levels. This report predicts the probability of a recession over the next six months by factoring in critical data from other reports.

A quick note on the two manufacturing surveys from last week. On Thursday the Philly Fed survey fell sharply again and this time into contraction territory at -7.7 from +3.9 in May and a two year low. This extends the drop from the March high at 43.4 to more than 50 points! New orders fell from +5.4 to -7.6. Back orders went even further negative from -7.8 to -16.3. The employment component fell from 22.1 to 4.1. This was a VERY negative report.

Philly Fed Chart

On Wednesday the NY Empire Manufacturing Survey for June fell sharply from 11.9 to -7.8. That is the lowest level since November, which was a data glitch and not a real decline. New orders fell from 17.2 to -3.6 or better than a 20-point drop. Back orders fell to zero from 9.7 and the employment component fell from 24.7 to 10.2. Even worse the average workweek fell from 23.7 to -2.0. That is an index value not hours worked but what it means is that hours worked fell off a cliff probably as a result of layoffs.

Empire Manufacturing Chart

This sharp decline over the last two months in the New York area is very troubling. It is especially bad when combined with the identical drop in the Philly Fed Survey. Having these manufacturing reports fall into negative territory will increase fears of a double dip recession.

The economic calendar is headlined next week by the FOMC meeting on Tuesday and Wednesday and the Bernanke press conference after the FOMC announcement on Wednesday. This is a two-day meeting with the FOMC announcement at 12:30 on Wednesday and the Bernanke press conference to follow at 2:15. Considering the Fed is likely to lower its economic outlook at this meeting and the end of QE2 in June this could be a highly volatile Wednesday. The Fed is not expected to announce any new stimulus until they see how the bond market is going to react to the end of QE2. Nobody expects a major reaction since the Fed will still be buying some treasuries every month as existing assets mature and are paid off. The Fed will use the funds from those payoffs to purchase more treasuries. The FOMC is expected to further define how that program will continue and approximately how much will be spent per month.

The Fed releases their quarterly economic forecast at this meeting and analysts will be expecting a downgrade in the estimates. In April they were predicting economic growth of 3.1% to 3.3% and higher than the estimates of the top 50 economists, which averaged +2.6% growth. That means the Fed was actually more bullish than everyone else. When they release their quarterly economic forecast on Wednesday the odds are good they will lower those bullish estimates significantly.

Bernanke has already said growth will be lower than previously expected, "uneven" and "frustratingly slow." Some analysts are expecting growth more in the 1.5% range for Q2 and maybe only 2.0% for the rest of the year. With the manufacturing surveys falling like a rock the actual Q2 growth could be a shocker.

Bernanke's press conference will be the equivalent of talking suicidal investors down from the ledge over the probable impact of the end of QE2 while at the same time telling them "oh by the way, growth could be +1.5% through year end and unemployment could be 9.5% instead of the 8.4% we previously predicted."

Fortunately the market has been pricing in the potential for another disappointment and maybe Bernanke will surprise us with a bullish outlook. As the cheerleader for the economy he can't really afford to be negative. Regardless of the numbers he MUST deliver them in the context of "things are going to get better soon" in order to avoid crashing the markets.

This makes Wednesday a potentially pivotal day for the markets and that suggests Monday and Tuesday could be a setup for whatever the Fed reveals. We know from the many "reveals" on reality TV that what is behind door number three can be either an all expenses paid trip to the Bahamas or something worthless like a pair of burros. While I doubt uncle Ben will give us the equivalent of a wooden nickel in his comments I seriously doubt he will have the capability to promise us an all expenses paid trip down the yellow brick road to higher economic growth. This meeting should be negative but some of that is already priced in.

The other reports of note are the home sales for May and the GDP revision for Q1. The last GDP revision was an upgrade from 1.75% to 1.84% growth in Q1. That is down from +3.1% in Q4. Estimates for this revision are basically flat. The next big GDP report will be on July 29th when the first reading on Q2 GDP is released. What the Fed says on Wednesday will definitely color analyst estimates for that July report.

Economic Calendar

Also on the calendar will be some earnings reports and more than likely some earnings warnings as we head into the warning cycle for Q2. High profile earnings will come from FedEx, Oracle, Micron and Adobe.

The financial sector is currently undergoing some anxiety as worries over warnings and charges emerge. The banking sector is struggling to deal with the new financial regulations and earnings are expected to take a hit. The sector ended the week flat after four months of declines but a few high profile guidance warnings could send it down again.

In stock news Research in Motion (RIMM) was knocked for a -21% loss after slashing guidance again and posting disappointing earnings. The guidance downgrade was the third time in the last quarter and probably not the last. The lowered guidance launched a downgrade parade that had nearly every analyst covering the stock slashing prices and earnings estimates. RIMM is suffering from execution problems. They can't seem to get their products to market in a timely fashion, which causes continual user frustration when the products are delayed. Even the new generations of the BlackBerry Bold have been delayed several times.

The competition from the Android and iPhone is causing them serious grief. If enterprise customers ever begin defecting in large numbers the BlackBerry's fate is sealed. Today, the enterprise space is still largely a BlackBerry market but nobody knows how long that will last. RIMM still posted 67% revenue growth in the international market so sales are still there. However, price targets for RIMM were dropping faster than anyone would have believed 36 months ago. RIMM hit $148 in June of 2008 and closed at less than $28 on Friday. Several analysts lowered targets to $20 and $25.

Barclay's Capital was the sole standout saying they maintain an overweight rating but they cut the price target from $77 to $52 and about twice today's closing level. Barclay's said the Bold 9900, that has slipped more than once, is now in certification with 31 carriers so further slippage is not likely.

The mighty RIMM may not be dead but it will need a stiff shot of adrenaline and a jolt from the paddles soon or it will find itself in the same category as PALM.

I am reminded of the famous quote from Cool Hand Luke, "What we have here is a failure to communicate." RIMM has a great product but it can no longer convince users that it can do what it says. There have been too many promises and not enough production.

RIMM Chart

Pandora (P) got a wake up call from investors on Friday. The IPO was priced at $16 on Tuesday night and hit $26 at the open on Wednesday. Since that big debut it has been downhill from there. Pandora sank to $12.16 intraday and closed just over $13 on its third day of trading. BTIG Research put a SELL rating on Pandora with a price target of $5.50. While customers are expected to rise to as many as 193 million by 2015 and revenue to quadruple to $1.1 billion the company will still lose money through 2013. Competition is also growing with Spotify and Turntable.fm expected to come to market soon.

Pandora Chart

Recent IPOs are having a tough time in the market. LinkedIn is the only major winner still trading significantly above its IPO price. RenRen went public at $14 in May and traded as high as $24. It closed at $7 on Friday. The much-touted IPO bubble appears to have burst only a couple weeks after it formed.

RenRen Chart

LinkedIn Chart

Apple (AAPL) shares closed at $320 on Friday and well under prior support at the 200-day at 325. The $320 level marks the last significant support before $300. Should that level break the next material support would be $240. Apple has not closed below its 200-day average since early 2009. The decline in Apple shares suggests the market weakness may not be over. Funds are selling their winners and Apple has been a safe deposit box for mutual fund cash since March 2009 when it was trading for $85. The rise to $365 has been remarkable and it created a lot of profits for the Apple faithful along the way.

Apple is currently involved in several patent suits over its iPad and iPhone products. Apple sued Samsung in April saying the company copied its devices. The suit was 38 pages long. Samsung filed a counter suit claiming Apple had copied the Samsung devices. On Thursday Apple filed an updated 63-page complaint listing 14 additional products Samsung was alleged to have produced as copies including the Galaxy Tab 10.1 and Galaxy S II tablets. Apple said Samsung had blatantly copied the iPhone. This battle could run for years but Apple should be the winner. Numerous technical sites have mentioned in the past in great detail on how Samsung had cloned the Apple products. For Apple this is just noise because they will eventually win the suit if the third party claims are true. Getting a monster judgment from the Korean company could be a different challenge.

The decline in Apple is not related to the daily news headlines on the Samsung suit but more to the lackluster iCloud presentation a couple weeks ago and videos of a frail Steve Jobs visiting cancer treatment centers. Apple will continue to rule the tablet world for sometime to come and the iPhone 5 will eventually be released. However, in this market where the major indexes were down for six weeks there are plenty of profits to be taken. While everyone may eventually believe Apple will move over $400 there are very few willing to give up -10% to -20% in order to ride out the volatility. You can bet there are tens of thousands of investors watching Apple's decline with their finger on the mouse just waiting for signs of a bounce to convince them to buy. Until then Apple and Google will continue to drag the Nasdaq lower.

Apple Chart

A more pressing problem for the Nasdaq is the drop in Google. Shares of Google fell -3% or $15 on Friday as the news over the Google-Oracle suit begins showing up everywhere. Oracle claims it is seeking $6.1 billion in a patent and copyright infringement suit against Google. Oracle claims the Android software uses technology related to the Java programming language. Oracle filed a motion in a San Francisco Federal court seeking to prevent Google from filing its response documents "under seal." Oracle said its claims were based on both accepted methodology and a wealth of concrete evidence. They should not be hidden from public view." Google said Oracle's own damage expert had estimated Google would owe Oracle between $1.4 billion and $6.1 billion. Oracle seems to have latched onto that $6.1 billion claim.

Google responded saying the $6.1 billion was "a breathtaking figure that is out of proportion to any meaningful measure of the intellectual property at issue." Google said even at the low end of $1.4 billion that was ten times what Sun Microsystems made each year for the entirety of its Java licensing and 20 times what Sun made for Java based mobile licensing.

Oracle got Java when it bought Sun Microsystems in January 2010. They filed the suit against Google in August seeking a court ruling that would ban all further use of its intellectual property and force the destruction of all products that violate Java-related copyrights on the code, documentation and specifications.

Oracle claims Google's Android operating system uses a virtual machine software called Dalvik that infringes on Oracle's patents and Google did not obtain a license to use Java in its products.

Obviously this is a battle between a pair of 800-pound gorillas but Oracle shares rose 40-cents on Friday while Google shares fell -$15.

Another problem for Google is the Dept. of Justice review of the $400 million acquisition of AdMeld. Google claims it is just a formality but others believe the acquisition could give Google a lock on buying and selling of display advertising through AdMeld's Invite Media advertising platform.

Google suddenly found itself up against a flurry of bidders as it tried to buy the 6,000 plus wireless patents from Nortel. The patents were supposed to be auctioned off in a bankruptcy last week but the court postponed the auction due to a "significant level of interest" by new bidders. Those bidders now include Apple, Intel, Ericsson and patent solutions provider RPX. Google had bid $900 million for the patents but with the sudden increase in competition the final price could be over $1.5 billion according to analysts. Google went from a position as the sole "Stalking Horse" bidder recommended by Nortel to a real competitive situation. A stalking horse bidder is selected by the bankrupt company to make the first bid based on a level of expressed interest. Once the stalking horse bidder makes an offer the rest of the bidders can submit competing bids. This allows the bankrupt company to prevent a low ball bid for their assets by picking somebody with deep pockets to initiate the bidding.

Google initially entertained the idea to buy the patents to prevent others from attempting to sue them for infringement. With a portfolio of 6,000 additional patents for wireless devices they could make life tough for anyone attempting to sue them over a wireless issue. Call it suit insurance. If they owned the Nortel portfolio there are probably some patents in the portfolio, which would allow them to sue a company like Oracle for some form of infringement. The two giants would then have to weigh the cost of offsetting patent fights against the potential outcome and decide if it is worth the effort. This is a kind of corporate "mutual assured destruction" threat. You sue me and I will sue you and we will see who has the best lawyers and the most money.

Google is also suffering from a loss of business from the slowing economy. Raymond James said checks with search-engine marketers showed paid-search spending has been less than expected due to weakness in Europe and the USA. Raymond James said retail, auto, consumer electronics and technology ads were weaker than expected. According to their research U.S. paid search was up in the high single digits year over year and well below Google's expectations of 15-20%. Those expectations are well below 30% growth rates in prior years. There are growing worries that Google will disappoint on Q2 earnings.

Google Chart

Another Nasdaq big cap was also declining on Friday. NetFlix (NFLX) said Sony (SNE) had pulled its movies off the NetFlix distribution system. Starz, the company that actually has the distribution agreement with Sony and Disney said the halt was temporary and due to a technical problem with the Sony contract. Starz said the number of downloads had exceeded those specified in the contract and Sony had removed its movies until a new contract could be negotiated. The Starz contract with NetFlix is up in 2012. However, the $30 million a year contract is expected to be renewed at something more than $200 million thanks to the explosive growth at NetFlix. The availability of the Sony and Disney movies from Starz has been a valuable asset for NetFlix.

NetFlix Chart

The growing worries over the potential for another recession are weighing on the energy sector and commodities in general. Gold and silver are flat due to their value as an inflation/recession hedge idea but other commodities are weak. Corn declined sharply over the last week as lawmakers discussed canceling the ethanol subsidies. On Thursday the Senate voted to end three decades of ethanol subsidies costing $6 billion a year. They were scheduled to expire at the end of 2011 anyway but by voting to cancel them six months early the lawmakers can claim they were saving money and cutting spending. The subsidy provided 45-cents per gallon for every gallon that was mixed with gasoline.

Pacific Ethanol (PEIXD) said it would not hurt their business since ethanol was now so ingrained in the fuel process but Pacific is already tanking. They had to do a 1:7 reverse split in May in order to remain listed on the Nasdaq and that only got them back to $1.50. The consolidation in the ethanol space has been extreme plus a lot of outright failures.

You may remember just a week ago Morgan Stanley was predicting corn at $10 a bushel because of the bearish crop report saying 1.5 million acres previously planned for corn were too wet to plant. With 44% of the corn crop going to ethanol you have to wonder how that will impact corn production without that 45-cent per gallon subsidy.

Corn Chart

Crude oil declined on what the TV reporters claimed was lowered expectations for demand due to the declining economy. They were reporting on WTI crude and its drop to $92 intraday. They were gushing on how this would push gasoline prices lower. Unfortunately they were wrong. The drop in WTI is technical not fundamental. WTI futures expire on Tuesday and there is limited storage space at Cushing to physically deliver the oil.

Secondly, this was a quadruple option expiration and long fund positions in the commodity indexes/baskets had to be closed. Quarterly expirations always produce volatility in the physical commodities.

Look at the Brent futures at $113. That is the true price of oil today. That is why the price of gasoline will not decline much. Coastal refineries buy oil based on Brent prices not WTI. Only Midwest refineries can benefit from the cheap WTI. There are a few exceptions but that is generally the case. Gasoline only declined a penny to $3.69 nationwide because the coasts are still high and will remain high.

Granted, slower economic growth would push oil prices lower but that slow growth would have to be in Europe and Asia. The problems in Greece and austerity programs in the PIIGS could dampen demand but Asia is growing at a +10% rate and they have a lot more people consuming oil products.

Bottom line don't believe everything you read about energy in the news.

Brent Oil Chart

WTI Crude Chart

The Dow and S&P may have saved themselves from a seventh week of losses with a fractional gain but it was not material. Having the S&P close up half a point for the week was simply a result of expiration pressures slowing the volatility. The volume was a lot stronger at 8.2 billion shares but still weaker than a normal quadruple witching Friday. Volume over the prior two days was also elevated at 7.6 billion shares. Higher volume on days with declines is never a positive sign.

There has been no capitulation day. The Dow is only down -6.1% and the S&P -6.6% from the recent highs. This may look and feel like a horrible sell off but in reality it has been rather tame. Since the decline began seven weeks ago the economics have gotten progressively worse with the Philly Fed and New York surveys the sign of a sharp deterioration in an already slowing economy.

We can blame it on Japan, the Greek crisis, Libya or the Middle East but the end result is a suddenly slowing economy. The markets reacted to the worsening data AND to the calendar. We had a solid sell in May event and when they occur they normally last until mid July or longer.

Analysts will tell you the S&P is going to earn $100 this year but now they are starting to question that number. Guidance cuts are starting to become more frequent and we are heading into the busiest three weeks of earnings warning season beginning next week. Odds are good we are going to see some companies confessing problems.

Add in the FOMC meeting and Greek drama and the volatility cloud should continue to linger over the markets.

If the Greek can gets kicked down the road over the weekend we could see another bounce on Monday. However, remember the pictures of 20,000 rioters in Athens last week? They have not gone away. They are still mad and they will continue to vent. Any agreement by the EU this weekend is only temporary. The real crunch comes in July when the bigger problem is tackled by the full EU committee. That means unless we have an extra ordinary deal cut this weekend the problem will be back several weeks from now.

Once past the FOMC meeting we can start setting up for the end of quarter window dressing and the earnings cycle. It depends on how many warnings we get this week on how excited investors will be over the earnings cycle so it would be hard to predict it today.

The last five years have seen declines in early June followed by a bounce into month end and then another decline in mid July. If the pattern repeats I would look for a rebound to begin after the FOMC meeting assuming uncle Ben does not spoil the party with a bearish outlook.

The S&P found solid resistance at 1280 and closed -9 points off its highs and only +3 points off its lows. Is that a bullish day? The half point gain for the week was only a technical anomaly and not a bullish event other than it relieved the strain of keeping a heavily reported streak alive.

The S&P came within one point of the 200-day average on Thursday before rebounding from the 1258 level. Analysts were targeting the 200-day at 1257 as a potential bounce point so a rebound there was not unexpected. One rebound day does not make a trend. We were oversold and at critical support. No surprise there. However, the rebound from 1258 lacked any decent follow on confirmation on Friday.

That 1250-1257 level remains real support followed by 1175. This should be our support range to watch next week. A break below 1250 could get ugly very quickly but a dip to 1250 and a rebound could be bought ahead of the quarter end window dressing.

S&P Chart - 60 Min

S&P Chart - Daily

The Dow fell out of its downtrend channel on June 2nd and the lower channel support has now turned into solid resistance. Friday's opening spike to +111 was quickly sold but the Dow fought off an end of day bout of selling to cling to 12,000 for the close. That was a minor victory but definitely not bullish. The Dow would have to move back over 12,200 before anyone could have any confidence in the rebound.

The short-term chart below shows very clearly the resistance battle now in progress. With the quadruple witching volume behind us and weak economics ahead the most likely direction is down. However, the markets remain oversold and a short covering bounce is a daily possibility. Having spent much of the week under 12,000 the Dow is already telegraphing another dip.

Dow Chart - 60 Min

Dow Chart - Daily

The Nasdaq made a new three-month closing low on Friday thanks to the severe weakness in the big cap techs like Apple and Google. Neither of those stocks appear to have found a bottom so the Nasdaq is likely to continue lower.

Friday's close at 2616 is the upper edge of the 2600-2615 support from March. The March closing low was 2616.82 compared to Friday's close at 2616.48. On an intraday basis the Nasdaq tested 2600 in March and again on Thursday. This makes 2600 a critical level to watch for next week. A break below that level could be serious. The Nasdaq is down -8.9% from the May highs and definitely approaching normal correction levels. A break below 2600 would begin to suggest a bear market rather than a normal correction event.

Nasdaq Chart - 60 Min

Nasdaq Chart - Daily

The Russell 2000 small cap index is -9.6% off its May highs. The support at 775 and the roughly 10% correction level is holding firm but the last three days have not seen a resistance test. That suggests investors don't yet have any confidence for the future. Bargain hunting has not yet begun and that is troublesome. A break below 775 could get ugly fast.

Russell Chart - 60 Min

Russell 2000 Chart - Daily

The Nasdaq is not going to rebound until the semiconductor index ($SOX) quits sinking. Normally the SOX leads the Nasdaq and in June that has been almost straight down. The SOX is below all recognizable support levels until 370 and that one is very light. Warnings from chip companies have been common and research firms are slashing estimates for PC sales.

Semiconductor Index Chart

In the broadest measure of the market the TSM Index has held just above support for a week. The 200-day average was tested on Thursday and held. With the SOX and Nasdaq already below their 200-day averages this is a pivotal test for the TSMI. A break here might not find support until 12,400 and 1,000 points lower.

The current support level would also be an ideal spot for a rebound if news events cooperated. This week will be critical for the markets and the Fed economic outlook a key to market direction.

Wilshire 5000, Total Stock Market Index Chart

I don't believe the markets are giving us any bullish signals. The slight gain for the week in the Dow and S&P to prevent a seventh week of losses was just a technical fluctuation and not a signal the decline was over. Markets rarely go straight up or down for six weeks in a row so a pause was in order. Obviously a half point gain for the week on the S&P had no technical significance after declining nearly -7% over the prior six weeks.

Europe, the FOMC and earnings warnings will be the major focus for the week. Of the three the best chance of a positive market boost could come from the FOMC if Bernanke performs his best imitation of a cheerleader without any foot-in-mouth errors.

This is going to be a critical week for market direction with the broader market holding right at support. A break there could further sour sentiment but fortunately we have the end of quarter window dressing that may boost the market after the FOMC meeting.

I would continue to be very cautious. Enter passively, exit aggressively.

Jim Brown

Send Jim an email

"Try to learn something about everything and everything about something."
Thomas Henry Huxley


Index Wrap

Short-term Bottom Probably; End of Correction Only Possibly

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Some technical aspects of the market suggest that we are at or near a short-term bottom. Whether this is only a pause on the way lower is not clear yet but some signs are encouraging. If you are extremely bearish now, remember how bullish the pundits tended to be just 6 weeks ago. It wasn't warranted to be so bullish then and is probably not warranted to get extremely bearish now.

Suggestions that the market has reached a bottom is most strongly suggested by the possible double bottoms that have set up in the Nasdaq Composite (COMP) and Nas 100 (NDX) as highlighted in those daily charts below.

The S&P 500 (SPX) could yet retest a key prior low at 1250 (relative to Friday's 1271 close) or the lower end of its broad weekly uptrend channel (not shown) in the 1232 area. However, the weekly Dow (INDU) chart suggests that INDU's recent low may have reached support at the low end of ITS weekly chart uptrend channel. This is a slight bullish plus for a possible end of the current correction. When I see a 'strong' pattern like a double bottom in Nasdaq I look at the S&P and Dow charts for any 'confirmation' of a possible bottom there. For this coming week, 11870 in INDU is the key trendline support on the weekly chart as seen in my first chart. A decisive break below 11870 in INDU would suggest a new down leg was underway or a possible retest of its prior 11555 weekly low.

Another way of looking at the extent of the recent correction is to compare it to the first down leg. It often happens that the second down leg in an intermediate correction is # 1, longer than the first and # 2, often is longer by certain amounts; i.e., the second down leg often runs from 1.25 to a Fibonacci 1.5 to 1.618 (1.62) times the point decline of the first downswing. I'm still assuming that the recent correction is part of an intermediate downside reversal, but NOT a reversal of the long-term uptrend.

Based on the length of the second down leg relative to the first, yields the following: the Dow's second decline to date is 1.25 times its first. SPX's second downswing is 1.5 times its first decline. COMP's second decline is so far 1.59 times the first sell off. The Nas 100 (NDX) second decline, peak to trough, is to date an exact 1.62 times its first down leg.

What these aforementioned calculations suggest to me is that the recent decline has fallen 'enough' to fulfill a 'typical' corrective scenario. However, this reasoning on a possible end to our current correction is more speculative than more definitive chart patterns like a possible double bottom in the case of Nasdaq or finding support at a major up trendline as is seen, at least initially, with the INDU weekly chart seen above.

Looking at the Russell 2000 Index (RUT), a Head & Shoulder' top formation suggest a possible further downside object to around 751. Meanwhile, RUT has formed a potential double bottom in the 773-776 area. The double bottom, if it holds, 'trumps', so to speak, the 'measuring' objective of the Head & Shoulder's. The H&S objective becomes something to watch for if 773 is pierced.

In terms of technical indicators I rely on generally, upside reversal potential is apparent in the oversold extremes seen with the 13-day Relative Strength Index (RSI) on the following chart PLUS another type of 'oversold' extreme implied by a big jump in bearish sentiment or, in another way of looking at this, a major drop in bullishness. Option market participants are trading many more equity puts AFTER a major decline has already occurred; this shows the fairly typical 'shutting the barn door after the horse has escaped'! It tends to be fairly predictable that investors get bearish more at or near the tail end of a big decline.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart remains bearish but there's the possibility that the index has reached support in the 1260 area. As seen on my next chart, the cluster of prior lows at the March bottom ranged from 1260 to 1249. Certainly the RSI and my CPRATIO numbers are low enough to suggest at least an interim bottom.

As I noted in my initial ('bottom line') comments, the second down leg has to date equaled a Fibonacci 1.5 times the extent of the first downswing (from 1370 to 1312, peak to trough). The second down leg in a 'typical' a-b-c or down-up-down correction will see the second 'b' leg of this length or a little more; e.g., 1.62 of downleg 'a'. At a minimum, the extent of the recent decline fulfills a common pattern, so it wouldn't be surprising to see a rebound develop soon.

Other strong technical considerations pointing to at least an interim (upside) reversal coming soon, relates to the extreme oversold levels seen in the RSI and my CPRATIO sentiment indicators. We have to go back to November 2008 and January 2009 to see my sentiment indicator AS low on a single day and 5-day moving average basis. These prior indicator lows were well ahead of the final March '09 bottom and represents one of the few instances of extreme bearishness ahead of still further declines.

I've noted support in the 1260 to 1249 zone, with next lower support in the 1230 area. Tough overhead resistance begins around 1300, extending to 1320-1325.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) remains bearish, but the index has not yet pierced the prior March 559 intraday low and is showing signs of support in 562-563 area. You can look at a 60-minute OEX chart (now shown here) to better see this. If this index and the others were not so 'oversold', the chances of another down leg later on would be greater than appears to be the case currently.

An initial rebound could carry up toward 580 resistance and perhaps to 590. Near support is at 560, with next key support down in the 540 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU), in its second down leg, found buying interest/support this past week in the 11876-11900 area. I suggested last week an initial downside objective to around 11837. The lowest intraday low turned out to be 11862. If the most recent low holds, I'm happy to have had a forecast that might end up being within 25 Dow points of the low!

The Dow is the most bullish of the indexes in the sense that it might form a next bottom well above ITS March lows which, in the case of INDU, was in the 11600-11555 area. Irrespective of a potential rebound, INDU's short and intermediate-term trends are down. The long-term remains up.

10 of the Dow 30 stocks are trading below their 200-day moving averages, some just recently. Relative to this widely followed longer-term moving average, some key Dow stocks are seeing buying coming in on dips to the 200-day average. There are enough of the 30 stocks that could have oversold type rebounds to lift INDU higher. I'm no longer placing bearish bets on the Dow.

I've noted resistance in the 12200 area, then around 12400. Technical support as I noted was seen in the 11876-11900 area; next lower support is down in the 11600-11555 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Last week, I rated the chances of a retest of a retest of the prior Nasdaq Composite (COMP) bottom as quite high and that's just how it unfolded. When in a bit of a free-fall the only brave buying (including short-covering) that will tend to come in is AT a prior low. The question is whether the current pattern is setting up a possible double bottom.

If at least a short-term bounce doesn't happen it will be surprising given how oversold this market is in terms of both the RSI indicator and my CBOE equities call to put daily volume ratio line (CPRATIO). Traders still have gotten super bearish.

I know there are plenty of bearish negatives out there and it IS the whippy summer and all, but I never bet on much further downside when there are initial signs of support at a prior important low AND the market is quite oversold. I should also note that the market isn't yet at a major 'oversold' extreme in terms of long-term overbought/oversold indicators such as the 8 to 13-week RSI and the weekly MACD indicator.

I've highlighted support in the 2600 area, an obvious choice, with next lower support at 2550. Near resistance comes in at 2700; next higher resistance looks like 2760 currently.

RSI and TRADER 'SENTIMENT'

As already noted with my S&P 500 commentary above:

Other strong technical considerations pointing to at least an interim (upside) reversal coming soon, relates to the extreme oversold levels seen in the RSI and my CPRATIO sentiment indicators seen above. We have to go back to November 2008 and January 2009 to see my sentiment indicator AS low as it got recently on a single day and 5-day moving average basis. These prior indicator lows were well ahead of the final March '09 bottom and represents one of the few instances of extreme bearishness ahead of still further declines, although after that final low it was up, up and away for many months.

NASDAQ 100 (NDX) DAILY CHART:

I'll say just a bit more on a point I made last week that the Nasdaq 100 (NDX) chart has been bearish since forming an 'island top' in late-April to mid-May. I wrote about this type pattern in a recent Trader's Corner article on chart 'gaps' and this article can be seen by clicking HERE.

Island patterns are formed by overnight chart gaps or spaces between one day's high and the next day's low (upside gaps) and gaps between one day's low and the next day's high (downside gaps). Actually, the bottom of the aforementioned article has examples of island bottoms but you'll see that the island TOP is just the reverse formation. Identifying this top pattern could have gotten you into an excellent put play.

However, now we have the possibility of a double bottom formation. It's too soon to tell if recent lows will hold but given the extremely oversold RSI on the daily chart as well as very low bullishness/high bearishness, I am suggesting it's time to take at least partial put profits.

My take is that there's potential for at least a short-term bounce in NDX. If you want to hang in with bearish positions looking for a next down leg ahead (in line with all the bearishness out there in the news and with pundits), I suggest at least taking some profits on multiple positions.

I indicated last week that if NDX were to fall below 2189 it would like 2150 was a next downside target. The lowest NDX close so far as been 2192, so we'll see on any further downside moves and next support as around 2150. In terms of a broad uptrend channel on the weekly NDX chart (not shown), the lower support up trendline intersects at 2153 in this coming week.

I've noted initial overhead resistance at 2250 with next key resistance in the 2300 area.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) has a bearish looking chart but it has met my downside objective for a move to retest the prior low. As I've noted with the underlying (NDX) index, I'd take some bearish bets off the table. Take the money and run. My son remembered this advice when he hit 8 in a row in roulette in Las Vegas recently. He couldn't resist giving back a little but then walked away with his trip paid for and then some. I love it.

Next lower support below recent lows is at 52.3-52.0. Resistance is at 55.5-56.0, with next key resistance in the 56.5-56.6 area.

On Balance Volume (OBV) just keeps ratcheting lower, so no change there; however, there was a bit of a volume surge in recent days probably due to short-covering and some speculative buying when prices matched, but didn't fall appreciably under, the March lows. Of course, there was also option expiration on Friday.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) is the reason why I could still be bearish in that RUT had such a clear cut Head & Shoulder's Top pattern. When prices break below the implied 'neckline' to the H&S pattern, the 'measurement' for a next downside objective is subtracting the distance from the Head to the neckline and then further subtracting THAT number from the point where the neckline was pierced. This calculation yields a 'minimum' downside objective to 751.

I'm holding dual thoughts on RUT. On the one hand is the aforementioned objective for still lower levels. On the other hand is the reality that we've seen a cluster of lows form in the area of prior lows from January and March, making for a potential double bottom. I'll go with the potential for a double bottom having set up for now.

Near resistance I've highlighted at 804, then in the 816-822 area. Near support is at 776-772, then down in the 740 area. My 751 target on the Head & Shoulder's calculation isn't what I'd call a 'support', rather a rule of thumb target that sets up on downside penetration of an H&S neckline.



GOOD TRADING SUCCESS!


New Option Plays

Consumer Electronics & Coal

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Apple Inc. - AAPL - close: 320.26 change: -4.90

Stop Loss: 325.50
Target(s): 301.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
June has been a very rough month for AAPL with a drop from $350 to support at $320. Along the way AAPL has broken down through several layers of support including its simple 200-dma. AAPL hasn't been under its 200-dma since April 2009. This technical breakdown is very bearish but the stock managed to cling to its March 2011 lows near $320, which was a level of previous resistance.

I do want to point out that AAPL is currently an active call play for OI. We waited to buy a dip near its 200-dma on the expectation AAPL would bounce from this support level. Our AAPL call play has a stop loss at $318.25, which would be a new relative low. If AAPL does hit our stop at $318.25 I want to use that spot as an entry point to buy put options. Further weakness will most likely portend a drop toward support near $300. Some analysts are predicting a drop toward $280. Currently the Point & Figure chart for AAPL is bearish with a $292 target.

AAPL is due to report earnings in late July and we do not want to hold over this announcement.

Trigger @ 318.25

- Suggested Positions -

buy the July $300 PUT (AAPL1116S300) current ask $4.00

Annotated Chart:

Entry on June xxth at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 13.7 million
Listed on June 18th, 2011


Walter Energy, Inc. - WLT - close: 108.07 change: -1.03

Stop Loss: 115.50
Target(s): 100.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see TRIGGER

Company Description

Why We Like It:
WLT is a coal mining stock that has been stuck in a bearish trend of lower highs and lower lows for a couple of months. Yet it wasn't until this past week that WLT broke down under important support near $110 and its 200-dma, currently at $113.00. This opens the stock up for a drop toward prior resistance and what will likely be support near $100.

We don't want to chase it right here. There is a good chance that the market might bounce on Monday or Tuesday. We want to be ready to use that bounce as an entry point to launch bearish positions. The 200-dma should now be resistance. I am suggesting a trigger to open bearish positions at $112.00. We'll use a stop loss at $115.50. WLT can be a volatile stock so we want to keep our position size small to limit our risk. If triggered at $112.00 our target is $100.50. We do not want to hold over the late July earnings report.

Trigger @ $112.00

- Suggested Positions -

Buy the July $105 PUT (WLT1116S105) current ask $4.10

- or -

BUy the Sept. $100 PUT (WLT1117U100) current ask $6.65

Annotated Chart:

Weekly Chart:

Entry on June xxth at $ xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on June 18th, 2011



In Play Updates and Reviews

A Few Surprises

by James Brown

Click here to email James Brown

Editor's Note:

For the most part Friday's option expiration played out as expected but there were a few surprises. Relative weakness in AAPL and DE and relative strength in SRCL and WFM were all surprises. Our GS and ANF candidates have been removed. UNP has been closed and GD was stopped out.

-James

Current Portfolio:


CALL Play Updates

Apple Inc. - AAPL - close: 320.26 change: -4.90

Stop Loss: 318.25
Target(s): 337.50, 347.50
Current Option Gain/Loss: - 12.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/18 update: Terrible news at rival RIMM should have been good news for AAPL. RIMM's struggles would suggest that AAPL's iPhone and GOOG's Android phones are gaining market share in the corporate world. Yet AAPL's spike higher this Friday quickly failed. Shares plunged toward support near $320 near its March lows and near its exponential 200-dma. Volume was above average on the drop. This move today is very bearish and clearly breaks technical support at the 200-dma. Bloomberg ran an article today suggesting that AAPL's breakdown under $325 opens the door for a correction down to the $280 area. I will point out that AAPL has not yet broken support at $320 nor has it broken support at its long-term trendline of higher lows that dates back to the March 2009 low (you can see this as the dashed blue line on the daily chart below).

I am not suggesting new call positions at this time. If AAPL does break down further it would look like a bearish entry point. We'll add AAPL as a potential put play this weekend. If the stock hits our stop on this call trade at $318.25 we'll switch directions and buy puts instead.

This has always been a very aggressive, higher-risk trade.

(SMALL POSITIONS)- Suggested Positions -

Long July $340 call (AAPL1116G340) entry @ $3.05

06/16 new stop loss @ 318.25

chart:

Entry on June 15th at $325.00
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 12.9 million
Listed on June 8th, 2011


Fossil Inc. - FOSL - close: 106.68 change: -0.85

Stop Loss: 99.39
Target(s): 109.75, 114.00
Current Option Gain/Loss: -15.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/18 update: FOSL spent this past week churning between resistance near $110 and support near $105. Short-term technicals are mixed but the long-term trend is still up. If the market continues to sink there is a good chance FOSL will retest support near $100 and its 50-dma. I am not suggesting new bullish positions at this time. More conservative traders may want to consider an early exit right now you can always jump back in if we see FOSL bounce from $100 again. Our final target is $114.00.

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

- Suggested (SMALL) Positions -

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

06/18 Cautious traders may want to exit early now.
06/14 1st target hit @ 109.75, July option @ 3.20 (+6.6%)
06/11 Exit June calls ASAP. Option @ 0.35 (-74.6%)

chart:

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: 38.68 change: +0.15

Stop Loss: 34.90
Target(s): 39.00, 42.50
Current Option Gain/Loss: + 96.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/18 update: FRX just spent the last week churning sideways in the $38.50-39.00 area. At the same time the market's major indices hit new relative lows. The relative strength in FRX is encouraging but shares remain overbought and due for some profit taking. I don't see any changes from my prior comments.

I'm expecting a dip toward $36.00 or even its 50-dma. If you don't want to endure that sort of pull back, which would significantly hurt our options then exit now! We do have August calls but we will not hold over the July earnings report. I am not suggesting new positions at this time.

- Suggested Positions -

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

06/13 1st target hit @ $39.00. August $37 call @ $2.85 (+103.5%)
06/11 New stop loss @ 34.90
06/10 Planned exit of June $37 call. exit $1.10 (+69.2%)
06/09 Prepare to exit the June calls on June 10th at the close
06/04 new stop loss @ 34.45
05/28 New stop loss @ 33.75

chart:

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


PUT Play Updates

Amazon.com Inc. - AMZN - close: 186.37 change: +2.72

Stop Loss: 192.55
Target(s): 180.25, 175.00
Current Option Gain/Loss: -12.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/18 update: AMZN bounced back above prior support at $185 on Friday, just in time for option expiration. There was not any follow through on the rebound and shares quickly drifted sideways the rest of the session. This looks like a bounce from technical support at the 100-dma but at the same time AMZN has a bearish trend of lower highs over the last few weeks. I am not suggesting new bearish positions at this time.

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 July $180 PUT (AMZN1116S180) Entry @ $4.40

06/16 planned exit, June $185 put @ -27.3%
06/11 New stop loss @ 192.55
06/07 New stop loss @ 195.15.

chart:

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


Becton, Dickinson and Company - BDX - close: 85.13 change: +0.25

Stop Loss: 87.15
Target(s): 80.50
Current Option Gain/Loss: -30.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/18 update: BDX closed near the $85.00 strike price for June expiration. Maybe now that option expiration is over the correction will continue. BDX still has a short-term trend of lower highs but readers may want to wait for a drop under $84.45 before initiating new positions. More conservative traders might want to use a lower stop loss.

Our target is $80.50. We'll try and keep our target just above the 200-dma.

- Suggested (SMALL) Positions -

Long July $80 put (BDX1116S80) Entry @ $0.50

chart:

Entry on June 13th at $84.95
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on June 11th, 2011


Deere & Co - DE - close: 78.53 change: -0.74

Stop Loss: 82.75
Target(s): 75.25, 71.00
Current Option Gain/Loss: - 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/18 update: The weakness in DE continues. I would have expected DE to close on the $80.00 level for June option expiration but that didn't happen. Shares instead closed at their lowest level in months. I would still consider new bearish positions now. Our first target is $75.25. Our second, more aggressive target would be $71. FYI: The Point & Figure chart for DE is bearish with a $71 target.

- Suggested Positions -

Long July $75 PUT (DE1116S75) Entry @ $1.52

chart:

Entry on June 16th at $79.25
Earnings Date 08/17/11 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on June 15th, 2011


Diamond Offshore Drilling, Inc. - DO - close: 67.34 change: +0.40

Stop Loss: 70.55
Target(s): 64.50, 62.50
Current Option Gain/Loss: + 6.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/18 update: DO has been short-term oversold for a few days now and shares look ready to bounce. I would wait for a bounce near resistance at $70 and its 200-dma before considering new bearish positions.

Earlier Comments:
Our targets are $64.50 and $62.50. 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

06/15 new stop loss @ 70.55
06/13 new stop loss @ 71.55

chart:

Entry on June 8th at $68.91
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 7th, 2011


Nike Inc. - NKE - close: 81.11 change: +0.82

Stop Loss: 83.05
Target(s): 75.50
Current Option Gain/Loss: +12.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
06/18 update: NKE bounced back into the middle of its $80-82 trading range. Look for another failed rally in the $82.00-82.50 zone near the 200-dma as our next entry point. Keep in mind that we only have about five trading days left. NKE is due to report earnings on June 27th and we do not want to hold over the report.

Earlier Comments:
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

06/11 New stop loss @ 83.05

chart:

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


Transocean Ltd. - RIG - close: 61.27 change: -0.48

Stop Loss: 66.15
Target(s): 58.00, 55.25
Current Option Gain/Loss: +37.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/18 update: Bearish analyst comments on Friday morning helped push RIG toward its multi-month lows set on Thursday. The trend is down but RIG is starting to look a little oversold again. I'm not suggesting new positions at this time.

More conservative traders may want to take profits early near $60.00 since the $60 level might be support but I'm setting our targets at $58.00 and $55.25.

We wanted to keep our position size small to limit our risk.

- Suggested (SMALL) Positions -

Long July $60 puts (RIG1116S60) Entry @ $1.32

chart:

Entry on June 13th at $63.32
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on June 11th, 2011


SanDisk Corp. - SNDK - close: 40.94 change: -1.30

Stop Loss: 45.05
Target(s): 40.50, 36.00
Current Option Gain/Loss: +111.8% & + 95.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/18 update: Good news! SNDK displayed relative weakness again and broke down under its March lows. Shares closed near their lows for the session on Friday, which doesn't bode well for Monday. I wouldn't be surprised to see SNDK hit our first target at $40.50 on Monday. More conservative traders may want to go ahead and plan on exiting early at the open to lock in some gains. I am adjusting our stop loss down to $45.05. More conservative traders may want to use a stop closer to $44.00 instead. I am not suggesting new positions at this time.

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

06/18 new stop loss @ 45.05
06/08 New stop loss @ 46.25

chart:

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: 86.41 change: +0.73

Stop Loss: 88.05
Target(s): 84.00, 81.00
Current Option Gain/Loss: - 6.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/18 update: Uh-oh! The bounce in SRCL on Friday was unexpected. The stock has essentially broken out above its two-week trading range in the $85-86 area. Suddenly Wednesday's drop under $85.00 looks like a potential bear-trap type of move. Friday's rally did stall at technical resistance near the 100-dma but I am not suggesting new positions at this time.

- Suggested Positions - Long July $85 PUT (SRCL1116S85) Entry @ $1.50

06/15 adjusted 2nd target to $81.00.
06/11 new stop loss @ 88.05
06/08 Exit June $85 puts. Bid @ $1.00 (+100%)
06/04 new stop loss @ 90.05

chart:

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


T.Rowe Price Associates - TROW - close: 57.23 change: +0.44

Stop Loss: 61.75
Target(s): 55.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see Trigger

Comments:
06/18 update: TROW is still hovering in the $56-58 area. Overall little has changed for us. I'm still willing to wait for TROW to bounce back toward the $60.00 level. We want to buy puts at $59.50. If triggered we'll use a stop loss at $61.75 (new stop). Our target is $55.25. FYI: The Point & Figure chart for TROW is bullish with a $51 target.

Trigger @ 59.50

- Suggested Positions -

buy the July $60 PUT (TROW1116S60)

chart:

Entry on June xxth at $ xx.xx
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on June 13th, 2011


Whole Foods Market - WFM - close: 55.69 change: +0.42

Stop Loss: 58.15
Target(s): 55.10, 52.00
Current Option Gain/Loss: + 52.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/18 update: Caution! WFM was showing some unexpected relative strength on Friday. If you're looking at the intraday chart it appears WFM may have found support near the $54.00 level. More conservative traders may want to abandon ship. I am not suggesting new positions at this time. Our final target remains $52.00 for now.

- Suggested Positions -

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

06/13 Exit June $60 puts. Bid @ $5.20 (+136.3%)
06/11 New stop loss @ 58.15.
06/11 Consider exiting our June puts early.
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


CLOSED BULLISH PLAYS

Goldman Sachs - GS - close: 137.23 change: +1.14

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:
06/18 update: I am throwing in the towel on our GS trade. The stock never hit our planned entry point at $130.25. Shares do look like they're trying to form a bottom in the $133-140 area. Aggressive traders might want to consider bullish positions if GS can close over $140. I am dropping GS as a trading candidate and we'll look elsewhere.

Our Trade Never Opened!

chart:

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: 100.01 change: +1.22

Stop Loss: n/a
Target(s): 109.00, 114.00
Current Option Gain/Loss: - 100%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/18 update: After the early June drop shares of UNP were dead money. The stock very slowly drifted lower and broke support at its 50-dma. The stock managed a bounce back to the $100 mark in time for the June options expiration. Our June $105 call has expired. The larger, long-term trend for UNP is still bullish but I would not launch positions at this time.

- Suggested Positions -

June $105 call (UNP1118F105) Entry @ $1.62, exit 0.00 (-100%)

06/18 option has expired -100%
06/11 option has deteriorated. Removing the stop loss.

chart:

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


CLOSED BEARISH PLAYS

Abercrombie & Fitch Co. - ANF - close: 65.48 change: +1.60

Stop Loss: 72.05
Target(s): 65.50, 62.75(100-dma)
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/18 update: I am removing ANF as a bearish candidate. A few days ago it looked like shares might bounce back toward what should be new resistance at $70.00. Yet the bounce never fully materialized. Now ANF is testing and bouncing from technical support near its 100-dma. I am dropping this stock as a bearish candidate. Nimble traders may want to consider buying calls on this bounce since ANF has rallied from the 100-dma multiple times in the past, although I would consider a call trade today pretty aggressive.

Our Entry Was Never Hit.

chart:

Entry on June xxth at $ xx.xx
Earnings Date 08/17/11 (unconfirmed)
Average Daily Volume = 2.8 million
Listed on June 14th, 2011


General Dynamics Corp - GD - close: 71.67 change: +0.39

Stop Loss: 72.25
Target(s): 65.50
Current Option Gain/Loss: -60.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/18 update: I warned readers that GD looked ready to rebound, especially after the close over resistance at $71.00. Sure enough GD spiked higher on Friday morning. The stock rallied past technical resistance at its 30, 40, and 50-dma and hit $72.55 before paring its gains and reversing. Our stop loss was hit at $72.25 closing this trade. I'd keep GD on your watch list. A new close under $70.00 might be another entry point to buy puts.

-Suggested Positions-

July $67.50 PUT (GD1116S67.5) Entry @ $1.25, exit $0.50 (-60.0%)

06/17 Stopped out @ 72.25. Option @ -60.0%

chart:

Entry on June 10th at $69.75
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 9th, 2011