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Newsletter

Daily Newsletter, Saturday, 7/30/2011

Table of Contents

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

Market Wrap

Debt Clock Ticking

by Jim Brown

Click here to email Jim Brown

The markets continued their losing ways as the debt debacle drones on. However, the economy is about to become the main headline once the debt deal is done.

Market Statistics

Late Friday night a new chapter began in the political theater in Washington. The House passed a modified form of the Boehner bill and sent it to the Senate for a vote. The Senate and the President had said the bill would be dead on arrival because it forces a repeat of this process in 2012 after a committee suggests some new spending cuts. Secondly the bill requires the passage of a balanced budget amendment to the constitution to be approved and sent to the states for ratification. That has a zero chance of happening in the Senate.

The Senate tabled the Boehner bill two hours after it passed in the House. Reid then formally submitted his plan to the Senate for debate. House members returned the favor and voted down the Reid bill.

Nothing can pass unless it has bipartisan support and that seems to be impossible to achieve today. The president, Harry Reid and Nancy Pelosi met at the White House on Saturday and nothing was resolved. Reid said there is no progress and no deal.

On Thursday night I wrote about the governments dwindling cash balance of less than $80 billion as of Monday. We saw some more specificity Friday with the Treasury disclosing what payments would be made over the next week. The Treasury burns through about $9 billion a day but there are some big payments several times a month.

To put that $80 billion in perspective these are some S&P-500 companies with cash on Thursday.

Goldman Sachs $805 billion
JP Morgan $764 billion
GE $136 billion
Apple $76 billion
U.S. Treasury $55 billion (Friday)

Subtracting -$9 billion through Tuesday would put the balance at $19 billion next Tuesday. The Social Security checks will be paid on Wednesday and that would put the balance $13 billion into the negative column on Wednesday and it would continue to decline by $9 billion a day if no deal is signed into law except that writing checks with no money in the bank constitutes a debt to pay and the debt limit currently prevents those checks from being written. There is also a big debt sale planned for Wednesday that would have to be canceled if the limit is not raised.

Once the artificial debt limit crisis is resolved the focus for investors will immediately return to economics, earnings and Europe. On the economic front we got some bad news on Friday. The first reading on the Q2 GDP came in at +1.28% growth. That was well under consensus estimates of +1.80% but that was not the real problem. The GDP for Q1 was revised down from +1.9% to ONLY +0.4% and just fractionally away from a return to recession levels. This was so shocking that reporters actually did double takes to confirm the number was correct before reporting it on air.

Here is the really bad news. Remember, the economic reports didn't really start diving until April with significant drops in May. That means the economy was actually stronger in Q1 than Q2 and that suggests we are going to see a major revision to Q2 GDP and it could be ugly. The early estimates are usually optimistic and we saw conditions worsen significantly in May and June. Corporations are telling us with their earnings guidance that conditions sharply declined just in the last 2-3 weeks as the debt debacle ruled the news.

GDP Chart

The biggest booster to Q2 GDP was a +5.9% increase in fixed nonresidential expenditures. That added +0.7% to the Q2 GDP. This was likely a one-quarter boost that will not continue in Q3 but we can always hope. However, Q2 was also hit by the sharp slowdown in auto manufacturing due to the earthquake in Japan.

The Q1 numbers were seriously impacted by a slowdown in government spending that subtracted -1.2 points from the GDP. (In the current version of the Senate bill the spending cuts are expected to reduce GDP by 0.5 per quarter through 2015.)

The consensus estimates for Q3 and Q4 are still in the range of +3.5% growth but individual analysts are slashing predictions after Friday's report. Deutsche Bank cuts its Q3 estimate from 3.5% to 2.5% and Q4 from 4.3% to 3.0%. The banks said the country was facing a protracted period of slow growth and high unemployment. IHS Global said Q3 GDP would likely be less than 2% and possibly less than 1% compared to its prior estimate of +3.4%. Capital Economics is now expecting 2% or below for Q3 and they were already low at 2.5% before the report.

Another weak report was the Chicago ISM (PMI), which fell to 58.58 for July from 61.1 in June. Analysts blamed the drag on auto production since this is for the Chicago region and it is very dependent on auto manufacturing. In the table below I highlighted the cycle highs in green and lows in orange. Note that the cycle highs were mostly in Q1.

However, only two lows were in July. Most of the components rose in July with the exception of deliveries and employment. The employment component came very close to falling under 50 and back into contraction territory. This is not encouraging for the nonfarm payroll report next week.

ISM Chicago Table

ISM Chicago Chart

The New York ISM was also released on Friday and it continued its climb to new highs. The index was nearly flat in June rising only 1.1 point to 535.1 but it added +3.7 points in July to 538.8. The index has been rising about 8 points a month for the prior six months so +3.7 is good but not back to its prior form. The recovery in New York since the recession has been spectacular.

Moody's NY-ISM Chart

The final reading on July Consumer Sentiment was flat with only a -0.1 point decline to 63.7 from 63.8 in the initial reading. However, that is a -7.8 point decline from June at 71.5 and the lowest level since March 2009. Once the debt debacle is over that should improve as long as the stock market is not crashing because of all the lowered guidance.

Consumer Sentiment Chart

The economic calendar next week has some high interest events. The national ISM Manufacturing on Monday was expected to be flat but after last week's unexpected decline in the GDP and Chicago ISM the whisper numbers are dropping. Some are now speculating the ISM could fall into contraction territory and that would not be market friendly.

Wednesday is the ADP employment report, ISM Services and Factory Orders. All have the potential to be market negative.

Lastly the Nonfarm Payrolls on Friday could be a real market mover. The consensus estimate is for a gain of +85,000 jobs (wink, wink) but the odds are a lot higher that we will see job losses instead. In June the economy only added +18,000 jobs and the estimate was for a +125,000 gain. Given the sharp decline in economic conditions in July I think expecting a gain of 85,000 jobs is extremely optimistic.

If the jobs go negative analysts will immediately start talking up QE3 again. However, four different Fed presidents were interviewed on Friday and all said the bar was set very high for approving QE3. They really don't want to add any further accommodation unless the economy weakens significantly. The Fed's newly adjusted view is for 2.0% to 3.0% growth for the rest of the year. The Fed has two mandates. The first is price stability and low inflation. The second is full employment. If jobs went negative again the inflation worries would decline and the Fed could come back into the market even with the negative sentiment towards the QE1 and QE2 programs.

Economic Calendar

The equity market was not the only market seeing selling last week. Investors withdrew $37.5 billion from money market funds. That was the largest one-week withdrawal since Dec-15th 2010. Reportedly it was institutions pulling money out of U.S. bond funds ahead of an expected ratings downgrade. Gold funds gained +$1 billion and German stock funds saw inflows of $3 billion. That was the most since 2008. Money market funds total $2.6 trillion. The potential downgrade of the AAA rating has caused significant agitation for institutions. Fidelity was forced to issue a note saying they would not be required to liquidate U.S. debt if the rating changed from AAA to AA. However, the note said they had taken steps to ensure the safety of its funds even in the event of a "severe disruption" in the markets.

Surprisingly the yield on the ten-year note fell to the lowest level since November 30th at 2.80%. Apparently quite a few investors still believe the U.S. Treasuries are a safe haven given the suddenly declining economic picture.

Ten-Year Note Yield

Late Friday Moody's softened its downgrade comments saying the likely outcome of its current review would leave the U.S. with a AAA rating but keep the negative outlook. You have to wonder if somebody in the administration leaned on them or they just decided on their own that the U.S. remained the best credit in a global sea of sovereign weakness.

Cyprus was cut by S&P on Friday to BBB+ or three notches above junk status and warned the country would not meet its austerity targets for the next two years. Debt is expected to rise to 80% of GDP in 2011, a +19% rise over 2010. Bailout comments are increasing.

Spain was warned of a possible downgrade by Moody's by one notch from its current Aa2. They also put five of Spain's top banks on review as well. The pressure on Spain is increasing the risk of a future bailout for Spain and that would be a major problem for the Eurozone.

Italy sold debt on Tuesday but they were forced to pay the highest interest rate since November 2008. Spain also sold debt for yields that hit three-year highs. The rising rates show that the relief from the new bailout package was short lived and the pressure on these countries is returning. Italy is going to try and sell another 10 billion euros in debt on Tuesday and Wednesday so you can bet their rates are going higher.

The European debt tensions, U.S. debt debacle, falling dollar and negative economics combined to push gold to another record close at $1631.50. The chart below shows 1623 but that includes some after hours activity. A new nominal high was also reached intraday at $1637. The Newmont Mining CEO was interviewed on Friday and said inflationary pressures and continued uncertainty in U.S. and European economies would combine to push gold prices to $1750 in 2012. Given Friday's close at $1631 that target is not very far away. After rising +$160 over the last month is another $119 gain to $1750 too much to expect?

Gold Chart

There were only a few earnings reports of note on Friday. Chevron (NYSE:CVX) posted record earnings of $7.73 billion or $3.85 per share. That was +23 cents higher than analyst estimates. Chevron received an average of $107 per barrel of oil sold outside the USA compared to $71 in the year ago quarter. Chevron is forecasting $111 for a full year average on crude oil. Chevron produces 74% of its oil in countries outside the USA.

Production declined -1.9% to 2.69 mbpd and they lowered their forecast for the full year to 2.73 mbpd. When oil prices are higher some host countries have contracts that allow them to keep more of their oil. Chevron is planning on spending $26 billion in 2011 on exploration and construction of production facilities. Chevron is building two mammoth gas projects and LNG terminals in Australia called Gorgon (40 TCF) and Wheatstone (5 TCF) with a total of seven LNG trains. This will increase their global production by 4% to 5% starting in 2015. The upfront costs are huge but Chevron is going to be printing money when these projects go into operation. Chevron is a long term buy in my book.

Chevron Chart

Drug giant Merck (NYSE:MRK) reported earnings of $2.02 billion or 65-cents a share but the outlook was not good. Merck has a lot of drugs going off patent soon and the company said it was planning on cutting an additional 13,000 workers or 13% of its workforce. Last year MRK said it was cutting 17% of its staff after it acquired Schering Plough for $41 billion. The company said the additional cuts would trim another $1.5 billion in costs. Merck said up to 40% of the savings would come from cuts in the U.S. and those workers would be replaced by lower cost workers in other countries. The moves by Merck are not unusual with drug companies in the U.S. cutting 61,109 workers in 2009 and 53,636 in 2010.

Merck Chart

The earnings cycle is almost over with the majority of major companies already reported. Last week was the biggest week of the cycle and the volume will only decrease from here. The big names for next week are MasterCard, NYSE and AIG.

Earnings Calendar

The guidance for Q3 has been less than exciting with dozens upon dozens of companies lowering guidance and warning of sharply declining economic conditions. Personally I believe it is due to the debt debacle that has filled the headlines and airwaves with negative news for the last six weeks. Consumer confidence has fallen sharply and consumers and businesses have been hoarding cash. That was the constant comment from businesses interviewed about the declining economy and debt worries. "We are increasing our cash position and postponing our hiring and expansion." Corporations have never been through this type of disaster in recent memory and coming so soon after the Great Recession they are being extremely cautious.

I wrote last week that perception is a dangerous thing. If enough people perceive a thing to be true then it can be self-fulfilling. If enough people believe we are about to fall into an economic crisis and respond by halting spending and raising cash then they will create that economic crisis they feared. I believe that is what we are seeing today. There has been so much negative press that consumer and business confidence has been severely damaged.

In theory a resolution of the debt debacle would end the crisis in confidence but a new problem has appeared. That is the potential credit rating downgrade and its impact on interest rates. If we can get through next week without a default and lawmakers pass enough spending cuts to at least satisfy the ratings agencies in the short term then the crisis may pass. Moody's has already said they will likely leave the rating at AAA so that will provide political cover for S&P to do the same. They don't want to downgrade the rating because it would cause them significant grief and condemnation from investors as well as the public. It would not be a popular move. It would cause the associated downgrade of hundreds of other states, local governments, government institutions and corporations. It would be very messy and create some serious financial ripples. I don't believe the ratings agencies want to take that step so they will find an excuse to put it off as long as possible.

Much has been said about the damage to the economy from the spending cuts. While I am sure there will be some collateral damage you have to remember we are talking about pocket change. The plan that will probably be passed will include about $2.5 trillion in cuts over the next ten years. That is $250 billion a year and many of the cuts are symbolic like cutting a budget increase for XYZ agency from $20 billion in 2012 to an increase of only $19 billion. A billion is a lot of money to us as individuals but to these big agencies it is pocket change. The amount of money they would receive would still increase but by a smaller amount.

Assuming they were really going to cut $250 billion a year out of existing spending, not future budget increases, it would be about $20 billion a month. Since we are currently running a deficit of $125 billion a month that just means the debt will increase by $105 billion a month instead of $125 billion.

Lastly, the current Senate plan includes $1.1 trillion for cessation of the Iraq and Afghanistan wars. How exactly is that a "new" spending cut? The president has already put a schedule into motion to end both of those conflicts. This is not "new" spending cuts. It is a decline in spending that has already been scheduled.

Both the House and the Senate are relying heavily on accounting gimmicks like the cut in war spending as the basis for their total cuts. I don't see a major hit to the U.S. economy from spending cuts related to accounting tricks.

It will take a few weeks for the headlines to disappear and consumers shifting back into football mode, back to school schedules and what new is on the fall TV lineup but it will happen.

The problem for us as investors is how to get past Halloween without a major market crash. August is not normally a good month for the markets and September has been the worst month of the year since 1950. The one-two punch of August-September always leaves the market reeling but ready for a major rebound in October. The month of October has seen some of the biggest crashes but those drops are normally capitulation events leading to an even bigger end of month rebound.

Monthly Market Movement Chart

The markets have seen some serious volatility in 2011 but it remains to be seen if that volatility will continue after the debt debacle is solved. We did just see two attempts at new highs in July so there is (was) some bullish optimism present.

The challenge is three fold. Corporation earnings for Q3 could be weak as a result of the halt in spending by businesses and consumers. Secondly, the economy could post another month of declining activity until the debt crisis is a distant memory. Lastly the European debt crisis appears to be worsening rather than getting better. Just like Jason in the Friday the 13th movies the EU/IMF keeps killing the sovereign debt crisis but it keeps coming back to life.

Those three problems could combine to give us a weak August and September. With analysts and the Fed slashing economic forecasts for the rest of the year we don't have that "growth will rebound in the second half" scenario to power the market higher. We may have just moved into a period where investors will wait for the economy to show signs of life before returning to investing as usual.

The S&P dipped to support at the 200-day average at the open on Friday at 1284. That is as close as we want to come to a bearish breakdown. That is our line in the sand we do NOT want to cross. Breaking below the 200-day is a normal sell signal for funds and indicates a new bearish trend. The 200-day was support in June at 1265.

The S&P and Dow declined -4% last week, Nasdaq -3.6% and Russell -5.3%. That was the largest weekly losses for the indexes since last summer. With the earnings cycle losing momentum and more negative economic and political headlines than positive ones it will take a brave investor to venture back into the market. Richard Bove told investors last week to go to cash. That will either turn out to be the pivotal point in the market where the rebound began or an outstanding call that will make him famous. We won't know which for 6-8 weeks.

There is usually some end of month buying as funds adjust allocations and put monthly cash to work. Unfortunately there was no sign of buyers at month end for July and the month ended up being historically perfect. Highs for the month in the first ten days and the lows for the month at month end. That is the normal July pattern and I thought we were going to break the trend around the 25th when the Nasdaq 100 was making new highs. How quickly things can change.

I would like to think the long-term fundamentals of owning stocks at this level will provide enough buyers to keep us afloat but without some positive economic news that could be a false hope. If the S&P breaks below 1284 the storm warning will sound. A break below 1265 would be a signal to abandon ship.

That is true for the weekly chart as well. The longer term trend since the March 2009 rebound is in danger of failing. A break to 1265 would dent the trend but a move below 1265 would be a material failure.

S&P Chart

S&P Chart - Weekly

Traders were selling everything in sight on Friday and big caps on the Dow were no exception. The drop in oil prices pushed Exxon and Chevron into the top three Dow losers with Hewlett Packard rounding out the list. MRK, CAT, DD and KO were next in line on the losers list.

The Dow broke though the 12,200 support level without even a minor pause. The next material support is round number support at 12,000 and Fib support at the lows for June at 11,925. The 200-day average at 11,977 is not expected to be an issue. The Dow is not very respectful of moving averages because of its thin 30-issue composition. Changes in only one or two stocks can cause significant moves in the Dow. However a break below the 200-day will still be a psychologically negative event.

Dow Chart - Daily

Dow Chart - Weekly

The Nasdaq Composite actually held up better than the non-tech indexes thanks mostly to minimal selling in Apple, Google, Priceline, etc. Those big caps showed amazing relative strength and suggest any future rally could be led by tech stocks.

The Nasdaq 100 was especially strong with only a -2.7% decline and the smallest loss of any of the other indexes with the exception of the Oil Service Index at -2.2%. The NDX set a new high on Monday and Tuesday with the selling in only the last three days.

The NDX has support at the 50/100 day (2317-2325) and I would be surprised to see that level break without a complete washout in the market.

Nasdaq Chart - Daily

Nasdaq Chart - Weekly

Nasdaq 100 ($NDX) Chart - Weekly

The Russell broke below the 200-day on Friday but quickly rebounded to close back above it. I have no confidence this is going to hold but very strong support at 775 should not break unless the entire market implodes.

On the weekly chart I believe it is significant that the Russell can decline to strong support at 775 without breaking the longer uptrend. The other indexes are in danger of breaking below their long term trends to reach horizontal support.

The Russell is encouraging despite the -5.3% decline last week. Most of that decline came on Wednesday with lighter selling towards the end of the week. The Russell only lost -2 points on Friday when the Dow lost -97. That means it has good relative strength and fund managers or bargain hunters were buying the dip in expectations of a rebound next week.

Russell 2000 Chart - Daily

Russell 2000 Chart - Weekly

To say the market direction next week is dependent on the resolution of the debt debacle would be a gross understatement. The indexes are very oversold after the biggest weekly decline in nearly a year. If lawmakers can avoid a disaster on Tuesday I believe we will see a significant rebound. How long that rebound lasts given the new set of economic numbers is a different story. Conversely a technical default on Wednesday could be extremely ugly.

The potential for some further negative economics with the ISM on Monday and Nonfarm Payrolls on Friday is pretty good. Should those reports surprise to the upside amid a resolution in Washington the results in the market could be dramatic. However, I am not holding my breath on the hope for a positive surprise.

I believe we are entering a new phase in the recovery. A phase that will be led by slower growth and higher unemployment. I am not in the double dip recession camp but I do see at least another month of weak economics and then a slow rebound as consumers and businesses regain their confidence.

I would watch the S&P 200 day at 1284 as a directional indicator and then the Russell 2000 as a relative strength indicator for making play decisions. As of 10:PM Saturday night there is no progress in Washington and the debt clock is ticking down to expiration. Monday should be exciting.

Please click like, thank you!

Jim Brown

Send Jim an email

"Not everything that can be counted counts, and not everything that counts can be counted."
Albert Einstein


Index Wrap

WHIPPY

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

As I've been saying, in summer trading range markets especially, the major indexes (with big cap tech a current exception) can get whipsawed as they say. Nimble traders can do OK in this environment but its also good to be able to do a price check every hour or so, especially at times of potential trend reversals. This is a lot easier with today's smart phones!

The Nasdaq 100 (NDX) has not resisted declining of course, but hasn't has seen (again) as much of a percentage loss as the S&P during the past week. It's a two-segment market with the S&P being weaker technically in the current cycle.

I favor executing bullish strategies on declines to the 1270-1260 area in the S&P 500 (SPX) as the index could have significant bounce back potential from this area.

If there was 'one' tip off this past week to the recent downside reversal, it was with the exact double tops made with the S&P 100 (OEX) and in the Dow 30 (INDU). Watching all the major indices will pay off in that one or more will 'set up' a strong technical signal; high downside reversal potential suggested by the double tops in OEX and the Dow.

In the Dow, the number of stocks that look to be in a position to mount a technical rebound are fewer in number this week, dropping from 18 to 13 or under half the 30 blue chips going into this week.

If the market continues to drop into the August 2nd 'doomsday' event, there should be a buying opportunity; there is nothing like impending catastrophe to create a solution for this debt ceiling political-impasse problem. The resistance of tech to significant further declines is a likely harbinger that a level is coming up where there's perceived value in popular big name stocks as they get cheaper again.

We'll muddle through this current impasse and if we DON'T the market is currently saying it won't be Armageddon. There's also less places to put major money to work with real estate in the skids; even less so if you are not inclined to play the commodities card with gold, silver, etc. I myself tend to like ideas of the mind rather than things of the earth.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart was at the top of its likely broad trading range a week ago then dashed toward the bottom of that same range. Old trader's saying: "They 'slide' faster than they glide".

In a trading range market, the major indexes often don't get right to their prior highs before coming down again; the OEX and INDU did in this case, but not SPX. The downside reversal 'trigger' event was the plunge through the 21-day moving average.

As indicated in my initial 'bottom line' comments above, I favor bullish strategies if SPX gets back to the low end of its prior range again, in the 1270 to 1260 area. When making a trade where I 'assume' that the low end of a range will hold I absolutely set up a 'stop out' point. This may or may not be a resting order, but should be adhered to. My rule of thumb on SPX call purchases on what I think is the low end of a trading range is to exit if the index closes below prior lows by 5-7 points. Prices in a favored area is one factor; I also like to see the RSI around 30 and my CPRATIO dip to at or under 1.1 on at least 1 day.

Resistance is assumed for the area of the 21-day moving average, currently at 1325, with next technical resistance at the recent 1347 intraday high. Technical support is at 1280-1277, with pivotal next support at 1260.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index has resumed its mixed trading range pattern with the plunge below its 21-day moving average. From OEX's potential double top at 603 there's been a rapid break of 26 points (intraday peak to trough) so far. I'm anticipating wanting to buy calls if OEX dips to 570-565 again. If I got into that trade, my exit point becomes an OEX Close below 560.

I noted last time (7/23) that "I currently don't anticipate another major up leg without prices working sideways to lower again beforehand." The lower levels came with fast and furious selling rather than an easy glide, as is becoming more common with computer programs coming in with heavy selling when the bulls stop buying and there's not much to stem the slide.

Key technical support looks like 575-577, extending to 570 and lower, if a retest of the lows in the 562-560 area developed. Technical resistance is at 592, extending to the prior 603 high.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) chart continues to be consistent in that INDU is acting predictably for a broad trading range market. Once prices get at or NEAR prior highs, buying collapses and selling rapidly takes the Average lower. It's not surprising to see lower lows than the last downswing as is typical of an a-b-c or down-up-down correction as the 'c' down leg is longer than the first 'a' leg decline; often the point decline in the second down leg is 1.5 to 1.6 times more than the first downswing. The psychology of this is fear overcoming greed after a key rally fails at a prior high; buyers retreat if they're less sure of the ground they're on, less sure of a sustained bull market.

I was a buyer of DJX puts on the double top formation and would be a buyer of calls at the lower end of the current 12750-11900 broad trading range. Better to watch hourly charts along with the daily to see the formation of potential index tops. Such tops don't appear out of the blue when seen on a 60-minute basis.

Support is at 12083, extending to 12065 to 11978; major support should be found on dips below 11900.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) chart is now mixed, although on a Closing basis, the prior low has only been exceeded slightly. However the chart is mixed to bearish in the sense that COMP formed at least a minor recent double top. While I saw some further bullish potential last week, the odds of decline was also high in that the top end of the prior range was near to at hand.

My current worst case downside outlook is for COMP to again sink to the 2600 area, but in the near-term don't have objectives lower than to around 2700-2680 support. Technical resistance looks like 2808, extending to 2830.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) index chart is the only major index still having a bullish chart pattern. While there has been no extension of the up leg that began from the last decline to 2318 beyond its subsequent 100+ point rebound, the prior lows also haven't been pierced either on the subsequent reaction to an intraday low so far of 3242. It wouldn't be surprising to see support in the low-2300 area retested. I've highlighted support at 2318, then at 2265. There's also technical support around 2250, so would call key support as being 2250-2265.

NDX may finally succumb to substantially more selling if the debt crisis gets worse. However, I don't currently anticipate another decline to as low as the 2200-2180 support zone. I would see 2250 as an area to exit puts and buy calls. I'd rather buy good-sized pullbacks in NDX rather than trying to play the short side. There was an excellent short/put play the last time NDX got above 2400, but I don't see the same potential yet with the current chart. For those who initiated bearish strategies above 2400, I suggest exiting on dips below 2300, especially if NDX gets to 2282-2270, or into the 62-66% retracement zone relative to the mid-June to late-July advance.

I've highlighted resistance beginning at 2400 and extending to 2420. Initial technical support is assumed to lie at 2318-2320, with lower support at 2265, at my lower 4% moving average (21-day) envelope line. I use the concept of technical 'support' loosely here; my lower envelope line can more accurately be described as a possible maximum extension of the current trading range and a PRICE zone where NDX would be oversold.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock has the same technical/chart considerations as the underlying NDX chart and is showing a recent slow down in upside momentum. The short-term trend is lower, but there's no intermediate trend reversal. There would be such a downside reversal if QQQ sinks to below 57.

Near resistance is at 58.8, extending to 59.3. Near support is seen in the 57.1 to 56.9 price zone. More major support could be found on dips to the 55.6-55.5 area.

Daily trading volume picked up on the last dips to and under 58. On Balance Volume (OBV) is pointed lower as the Q's trade below their 21-day average. Volume activity leans bearish slightly.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart turned bearish on the break below 830, and remains consistent in its broad prior price range; i.e., between 855-865 on the upside and to 773-776 on the downside. The recent 843 intraday high for RUT was a secondary top and part of a down-up-down corrective downswing. I've highlighted current resistance at 824-820.

My downside objective for RUT is now mostly fulfilled. I could see a further dip into the 776-772 zone which would seem like an 'ideal' buy point and in the way of the indexes, may or may not happen.



GOOD TRADING SUCCESS!


New Option Plays

Relative Strength

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidates, these stocks caught my eye as potential bullish trades: ESL, TSCO, NEOG and SOHU. One warning, SOHU reports earnings on August 1st.

- James


NEW DIRECTIONAL CALL PLAYS

Noble Energy, Inc. - NBL - close: 99.68 change: +0.67

Stop Loss: 94.25
Target(s): 104.50, 109.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
This is a relative strength trade. NBL has been outperforming the market the last couple of days with above average gains and above average volume on those gains. If the market had not been in such a sour mood on Friday then NBL probably would have closed over round-number resistance at $100. Cautious traders may want to wait but I am suggesting we go ahead and buy calls now but only if shares of NBL and the S&P 500 open in positive territory on Monday. If there is a debt ceiling deal come Monday morning the market and NBL may actually gap open higher.

If our trade is opened we'll set our stop at $94.25, which is just under Thursday's low. That's a little wide so more conservative traders may want to use a higher stop loss. NBL has all-time highs near $105. I'm setting our first target to take profits at $104.50. Our secondary, more aggressive target is $109.00. FYI: The Point & Figure chart for NBL is bullish with a $111 target.

NOTE: August options expire in three weeks.

buy calls if NBL & S&P500 open positive on Monday

- Suggested Positions -

buy the AUG $105 call (NBL1120H105) current ask $1.00

- or -

buy the SEP $105 call (NBL1117I105) current ask $2.25

Annotated Chart:

Entry on August xx at $ xx.xx
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on July 30, 2011


Quality Systems, Inc. - QSII - close: 91.36 change: +1.49

Stop Loss: 87.40
Target(s): 99.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
QSII is another relative strength trade. The stock has been in rally mode the last couple of days thanks to a better than expected earnings report and some bullish analyst comments. Volume has surged on the rally as well, which is a good sign. Shares are still trading under resistance near $92.00 but I am suggesting we go ahead and buy calls now with the condition that we only launch positions if both QSII and the S&P 500 are both positive at the open on Monday morning. Obviously if there is a debt ceiling deal before the market opens then both the market and QSII will probably gap open higher.

If QSII can rally past resistance at $92.00 there is a very good chance the stock will see a short squeeze. Traders will be interested to note that the most recent data listed short interest at 22.5% of the very small 19.4 million-share float.

If triggered I'm suggesting a target at $99.50. More aggressive trades may want to aim higher. FYI: The Point & Figure chart for QSII is bullish with a $123 target.

NOTE: August options expire in three weeks.

buy calls if QSII & the S&P 500 are positive on Monday morning

- Suggested Positions -

buy the AUG $95 call (QSII1120H95) current ask $1.25

- or -

buy the SEP $95 call (QSII1117I95) current ask $2.35

Annotated Chart:

Entry on August xx at $ xx.xx
Earnings Date 10/31/11 (unconfirmed)
Average Daily Volume = 235 thousand
Listed on July 30, 2011


In Play Updates and Reviews

S&P 500 Falls to the 200-dma

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index fell to its simple 200-dma on Friday as investors fret over the debt ceiling deadline.

AGU was stopped out. I have removed OTEX as candidate. CAT and QQQ have been opened. I am not suggesting new positions on the market neutral plays. Our TTC put play hit our final target.

-James

Current Portfolio:


CALL Play Updates

Alliance Data Systems - ADS - close: 98.34 change: -0.26

Stop Loss: 95.75
Target(s): 104.50. 107.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/30 update: Our trade on ADS is not open. Both the stock and the S&P 500 opened lower Friday morning. Our plan was to buy calls if they both opened higher. Shares of ADS spiked lower at the open on Friday, like many stocks did, and ADS tested support near $96.00 and rebounded. Volume was pretty light as investors wait for a resolution to the debt ceiling issue.

Shares of ADS are still outperforming the market. I am suggesting we try again. If ADS and the market open higher on Monday morning then we want to buy calls. Of course if there is a debt deal by lawmakers then the market and ADS could gap open higher. If there is not a deal then expect a gap open lower.

- Suggested Positions - If ADS & S&P 500 open higher on Monday.

buy the AUG $105 call (ADS1120H105)

- or -

buy the SEP $105 call (ADS1117I105)

07/30 Try again.
07/27 Try again. buy calls if ADS and S&P 500 open positive on Friday. New stop loss at $95.75
07/27 Our trade was not opened. I am removing our entry point (no trade) until Thursday night and we'll re-evaluate.

chart:

Entry on July xx at $ xx.xx
Earnings Date 07/21/11
Average Daily Volume = 825 thousand
Listed on July 26, 2011


Caterpillar Inc. - CAT - close: 98.79 change: -0.85

Stop Loss: 96.45
Target(s): 104.00, 109.00
Current Option Gain/Loss: - 1.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/30 update: Our aggressive trader on CAT is now open. Shares gapped open lower and dipped to $97.28 intraday. The stock almost closed under its simple 200-dma. The plan was to buy calls at the closing bell. We're expecting lawmakers to have a deal by Monday morning, which should send the markets higher on Monday.

I am setting our stop loss pretty close at $96.45. Aggressive traders will probably want their stop under $95.00 or under the June lows.

- Suggested (SMALL) Positions -

Long AUG $100 call (CAT1120H100) entry @ $2.90

chart:

Entry on July 29 at $98.79
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 8.7 million
Listed on July 28, 2011


PowerShares QQQ - QQQ - close: 58.00 change: -0.19

Stop Loss: 57.75
Target(s): 62.50, 64.75
Current Option Gain/Loss: - 9.6% & -30.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/30 update: Our new plan was to buy calls on the QQQ on Friday at the closing bell. Now all we need is for lawmakers to get their act together and come up with a deal that can pass before Monday morning. I am setting our stop loss at $56.75, just under the simple 50-dma. However, if there is no deal on Monday the Qs could gap open below our stop.

Earlier Comments:
This is an aggressive entry point. We wanted to keep our position size small to limit our risk.

- Suggested Positions - (SMALL POSITIONS)

Long AUG $60 call (QQQ1120H60) entry @ $0.52

- or -

Long AUG $62 call (QQQ1120H62) entry @ $0.13

07/29 Trade opened with QQQ closing at $58.00
07/28 New strategy: buy calls on Friday at the closing bell
07/27 We are removing our entry point for Thursday. We'll re-evaluate our strategy on Thursday night.

chart:

Entry on July 29 at $58.00
Earnings Date --/--/--
Average Daily Volume = 61.7 million
Listed on July 23, 2011


Market Neutral Play Updates

SPDR Dow Jones Industrial Average (ETF) - DIA - cls: 121.13 chg: -1.15

Stop Loss: n/a
Target(s): -----
Option Straddle Gain/Loss: + 2.6%
Option Strangle Gain/Loss: -12.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/30 update: The stock market plunged at the open on Friday morning and the DIA gapped open lower at $121.08. Shares danced around all day but after filling the morning gap the DIA settled near its opening price. I am not suggesting new positions at this time. The market is likely to gap open up or down come Monday morning depending if there is a debt ceiling deal or not.

Earlier Comments:
I'm listing both a straddle and a strangle. We're using August options that expire in less than four weeks. Readers may want to consider September options instead.

Trade #1. Option Straddle (cost: $4.49, current: $4.61)

Long AUG $123 call (DIA1120H123) Entry @ $2.33, current bid $1.46
- and also buy -
Long AUG $122 put (DIA1120T122) Entry @ $2.16, current bid $3.15

- or -

Trade #2. Option Strangle (cost: $1.64, current: $1.41)

Long AUG $127 call (DIA1120H127) Entry @ $0.64, current bid $0.33
- and also buy -
Long AUG $117 PUT (DIA1120T117) Entry @ $1.00*, current bid $1.10

07/30 No new positions at this time
07/28 we got much better prices than expected on the entry this morning.
07/28 *entry price is an estimate. option did not trade today
07/27 NOTE: you may want to buy three calls for every two puts if you're trading the strangle due to the price difference.

chart:

Entry on July 28 at $122.82
Earnings Date --/--/--
Average Daily Volume = 6.6 million
Listed on July 27, 2011


iShares Russell 2000 Index - IWM - close: 79.74 change: -0.10

Stop Loss: n/a
Target(s): --
Option Straddle Gain/Loss: - 8.8%
Option Strangle Gain/Loss: - 8.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/30 update: Friday was certainly a volatile day for small cap stocks but the IWM managed to recoup most of its losses. Shares saw an intraday decline under the simple and exponential 200-dma.

NOTE: There are two sets of August options on the CBOE website. One set expires on August 5th. The normal set that we want expires August 20th. I've always listed the Aug. 20th option symbols but on Thursday I listed the wrong values for our entry price, which have now been corrected.

I am not suggesting new positions at this time. The market is likely to gap open up or down come Monday morning depending if there is a debt ceiling deal or not.

Trade #1. Option Straddle (cost: $4.43, current: $4.04)

Long AUG $80 call (IWM1120H80) Entry @ $2.17, current bid $1.91
- and also buy -
Long AUG $80 put (IWM1120T80) Entry @ $2.26, current bid $2.13

- or -

Trade #2. Option Strangle (cost: $1.50, current: $1.38)

Long AUG $84 call (IWM1120H84) Entry @ $0.52, current bid $0.45
- and also buy -
Long AUG $76 PUT (IWM1120T76) Entry @ $0.98, current bid $0.93

07/30 no new positions at this time
07/30 corrected the entry price to reflect the correct Aug. options
07/27 NOTE: you may want to buy three calls for every two puts if you're trading the strangle due to the price difference.

chart:

Entry on July 28 at $79.96
Earnings Date --/--/--
Average Daily Volume = 60 million
Listed on July 27, 2011


SPDR S&P 500 ETF - SPY - close: 129.33 change: -0.89

Stop Loss: n/a
Target(s): --
Option Straddle Gain/Loss: - 1.5%
Option Strangle Gain/Loss: + 4.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/30 update: The SPY experienced a similar move with a sharp drop at the open, an intraday dip under the 200-dma, and then a bounce back. Unfortunately after filling the morning gap the ETF faded lower. The SPY is testing technical support at the 200-dma.

I am not suggesting new positions at this time. The market is likely to gap open up or down come Monday morning depending if there is a debt ceiling deal or not.

NOTE: There are two sets of August options on the CBOE website. One set expires on August 5th. The normal set that we want expires August 20th. I've always listed the Aug. 20th option symbols but on Thursday I listed the wrong values for our entry price, which have now been corrected.

Trade #1. Option Straddle (cost: $5.61, current: $5.37)

Long AUG $130 call (SPY1120H130) Entry @ $3.10 current bid $2.57
- and also buy -
Long AUG $130 put (SPY1120T130) Entry @ $2.51, current bid $2.80

- or -

Trade #2. Option Strangle (cost: $2.69, current: $2.67)

Long AUG $134 call (SPY1120H134) Entry @ $1.14, current bid $0.86
- and also buy -
Long AUG $127 PUT (SPY1120T127) Entry @ $1.55, current bid $1.81

07/30 no new positions at this time
07/30 corrected the entry price for August options
07/28 NOTE: you may want to buy three calls for every two puts if you're trading the strangle due to the price difference.

chart:

Entry on July 28 at $130.60
Earnings Date --/--/--
Average Daily Volume = xxx million
Listed on July 27, 2011


PUT Play Updates

FactSet Research - FDS - close: 92.09 change: -0.70

Stop Loss: 97.05
Target(s): 90.50, 86.00
Current Option Gain/Loss: + 5.7% & + 0.0%
2nd Position Gain/Loss: +27.5% Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
07/30 update: Hmm... the downward momentum in FDS is slowing. Shares only dipped to $91.18 on Friday morning while the rest of the market was plunging. Friday's widespread market weakness would have been a great excuse to sell FDS, at least down toward the $90 level. That did not happen. on top of that volume has been strong two days in a row without any serious movement in the stock. Elsewhere in the market volumes are down because traders are waiting for a resolution to the debt deal.

More conservative traders may want to consider an early exit based on the lack of movement. However, Monday morning is going to be a volatile one. The market and FDS is likely to gap open, up or down. Cautious traders may want to lower their stop loss instead. I am not suggesting new positions at this time.

Earlier Comments:
Our targets are $90.50 and $86.00 but the $90.00 level is support and FDS will probably see a bounce from this level. The Point & Figure chart for FDS is bearish with a $64 target.

- Suggested (SMALL) Positions -

Long AUG $95 PUT (FDS1120T95) Entry @ $3.50

- or -

Long SEP $90 PUT (FDS1117U90) Entry @ $2.40

- 2nd Position, listed 7/26 -

Long Aug $95 PUT (FDS1120T95) Entry @ $2.90*

07/27 new stop loss @ 97.05
07/27 entry on the 2nd position (Aug.95 put) is an estimate
07/26 New stop loss @ 98.25, Adding positions

chart:

Entry on July 18 at $94.48
Earnings Date 09/21/11 (unconfirmed)
Average Daily Volume = 363 thousand
Listed on July 16, 2011


CLOSED BULLISH PLAYS

Agrium Inc. - AGU - close: 87.38 change: -1.21

Stop Loss: 87.75
Target(s): 94.00, 98.00
Current Option Gain/Loss: -57.4% & -62.7%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
07/30 update: Shares of AGU were weaker than expected on Friday morning. The market's opening weakness prompted AGU to gap open lower at $87.37 and then plunged to $85.02 Friday morning. Shares eventually trimmed their losses. Our stop loss was at $87.75 so the gap open under our stop immediately closed this trade.

- Suggested Positions -

AUG $90 call (AGU1120H90) Entry @ $2.70, Exit $1.15 (-57.4%)

- or -

AUG $95 call (AGU1120H95) Entry @ $0.94, Exit $0.35 (-62.7%)

07/29 Stopped out on gap open lower @ 87.37
07/21 New stop @ 87.75
07/19 Breakout past $90.00 is a new entry point.
07/19 new stop @ 86.90

chart:

Entry on July 11 at $88.54
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on July 9, 2011


Open Text Corp. - OTEX - close: 67.56 change: -0.66

Stop Loss: 67.45
Target(s): 74.50
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
07/30 update: I am dropping OTEX as a bullish candidate tonight. I still think shares may offer some opportunity but not at current levels. Shares closed under the bottom of its recent trading range, which would suggest further downside ahead. We can put OTEX on our watch list and wait for a dip or a bounce in the $66-64 area or wait for a close above resistance at $70.00 as alternative entry points.

Our Trade Never Opened.

07/30 Our trade never opened. OTEX removed from the newsletter.
07/28 We are in a wait and see mode with OTEX
07/27 trade is still not open. We are temporarily removing our entry point for tomorrow. We will re-evaluate this play on Thursday night.

chart:

Entry on July xx at $ xx.xx
Earnings Date 08/10/11 (unconfirmed)
Average Daily Volume = 300 thousand
Listed on July 23, 2011


CLOSED BEARISH PLAYS

Toro Co. - TTC - close: 53.83 change: -0.24

Stop Loss: 58.55
Target(s): --.--, 52.50
Current Option Gain/Loss: +71.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/30 update: Target achieved. TTC opened at $53.20 but quickly fell to an intraday low of $51.86. Our final target to exit was hit at $52.05 early Friday morning before the stock rebounded back toward the $54 level.

NOTE: We will not be trading TTC again unless the option volume and spreads improve.

- Suggested Positions -

SEP $55 PUT (TTC1117U55) Entry @ $1.90*, exit $3.25*

07/29 2nd target hit @ 52.50, option @ $3.25 (+71.0%), exit price is an estimate. option did not trade on Friday
07/27 1st Target Hit @ 55.25, Option @ $2.00 (+5%)
07/27 entry price is an estimate. Option did not trade today

chart:

Entry on July 27 at $56.82
Earnings Date 08/18/11 (unconfirmed)
Average Daily Volume = 167 thousand
Listed on July 26, 2011