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Daily Newsletter, Saturday, 8/13/2011

Table of Contents

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

Market Wrap

Dow Rebounds +864 Points

by Jim Brown

Click here to email Jim Brown
The Dow rebounded +864 points from the 10,605 low on Tuesday and still ended the week with a -175 point loss. Volatility for the week set records with the Dow moving over 400 points on four consecutive days.

Market Statistics

You know the market had a bad week when a +864 point Dow rebound still leaves it with a -175 point loss. However, Friday's gain of +125 points was the second consecutive daily gain and we need to celebrate those wins whenever possible. There are still plenty of sellers around and Friday's gain was more about covering shorts ahead of the weekend than buying the dip. Monday starts a whole new week and I can't wait to see what is in store.

Economics on Friday were a mixed bag with Retail Sales for July coming in at +0.5% and well above the +0.1% in June. The surprise spending increase when corporations were telling us activity had dropped and the debt debacle was in full swing is another one of those anomalies that we often see in the market. Electronics and appliance sales rose +1.4%. Autos, home furnishings, furniture, food and beverages all rose more than +0.4%. Sporting goods was a major loser with a -1.5% decline thanks to the football lockout depressing interest in fan gear.

The retail sales were an unexpected bright spot in a period that was expected to be grim. However, there was plenty of grim to go around in the Consumer Sentiment survey. The headline number for the first reading of August sentiment fell to 54.9 and a 31-year low. That headline number was an -8.8 point drop from the 63.7 in July.

The present conditions component declined -6 points from 75.8 to 69.3 the lowest since Nov 2009 but the expectations component dropped over 10 points from 56.0 to 45.7 and the lowest level since May 1980. The headline number has declined -19.4 points in just the last three months and that has only happened twice in the history of the survey, once in 1990 and once in 2005.

I warned everyone we would see a dramatic drop. The consensus as late as Thursday was for a minor decline from 63.7 to 62.5. I have no clue why they could not see the freight train headed right towards them. I guess it is true you could lock up 1,000 economists in a conference room for a week and still not get an accurate answer.

Consumers were concerned about unemployment, the debt debacle, the $14 trillion deficit soon to be $20 trillion, the downgrade of the U.S. credit rating, the falling stock market and evaporating 401Ks and probably a very few are worried about Europe. With Porter Stansberry blanketing the airwaves with his end of America in 2012 warnings I am surprised sentiment was not lower.

The three weeks surrounding the survey period contained daily press conferences by Washington politicians predicting the end of the world as we know it if the other party did not give in on the debt talks. It only takes a few gloom and doom press conferences before consumers living blissfully ignorant of the situation suddenly start wondering if they should worry. Apparently quite a few decided it was time to worry.

On the bright side these sentiment numbers should be the low for the cycle. Europe may actually be planning some steps to control their crisis. The U.S. debt debacle is going to be out of the headlines for a couple months and the market should begin to stabilize as we head into the fall and gas prices are going down. The nonfarm payroll numbers were a positive surprise and kids going back to school is always a boost to sentiment as normal routines return.

Consumer Sentiment Chart

The market dipped on the sentiment data but only briefly. Even though analysts were clearly confused and estimates off the mark I think traders were expecting the worst given the events of the last three weeks.

Historically whenever sentiment dips to levels close to this range it is normally followed by a market rally of 10% to 20% in the 3-6 months following the report low.

To further confuse you there are other studies that suggest sentiment numbers this low have been associated with a new recession in 10 of the last 12 times. Personally I believe the low sentiment was a self-inflicted wound from the debt debacle and not specifically related to the current economy. Does that mean this time does not count? We will know by year-end.

The calendar for next week begins the regional economic reports with the NY Empire Survey on Monday and Philly Fed Survey on Thursday. Hopefully they will be an improvement over July. We will also get the inflation reports in the PPI and CPI but there is no inflation in sight. The Fed confirmed that on Tuesday when they said the risk of deflation was now larger than the risk of inflation.

A big geopolitical event is the meeting by Germany's Angela Merkel and Sarkozy from France to discuss a solution to the banking problems in the EU. That meeting could be a market mover.

Economic Calendar

The earnings cycle for Q2 is really winding down with only a few reports next week. Dell, Hewlett Packard and Wal-Mart are the big reports. Wal-Mart will be a read on the health of the consumer at the low end of the income scale.

Bloomberg recently released details of an internal Wal-Mart memo showing that same store sales declined -2.6% from February to June. Wal-Mart earnings should be interesting.

Earnings Calendar

With the earnings cycle nearly over the focus will shift to the regional economic reports in hopes of seeing an uptick in economic activity. Analysts are split over whether the risk of a double dip recession is priced into the market or the recent correction was simply a reaction to the possibility of a debt default and the ratings downgrade.

Personally I think it was all of the above. I do think the market has factored in slow growth from a multitude of factors plus the turmoil over the debt. Now that the debt limit is on the back burner for a couple months and out of the headlines the market is free to focus on fundamentals.

Is the bottom behind us? Nobody knows. Bottoming is a process and can take many forms. S&P 1100-1120 is decent support but despite the +80 point bounce I would not be surprised to see it tested again.

However, the number of bargains in the market is unbelievable. With the S&P trading at a PE of 11 last week and many stocks more than 20% off their highs in just three weeks there are plenty of bargains to be bought. Value funds should be tripping all over themselves given the abundance of opportunities.

S&P may have accelerated the market decline with their downgrade but the Fed countered their downgrade with a promise of exceptionally low interest rates for the next two years. Basically by pledging to keep rates artificially low for two years it forces investors to look outside the bond market for returns. With inflation at 1.5% and short term bond yields at 2% or lower the option of just parking money for a couple years is not very attractive.

Investors can buy hundreds of dividend paying stocks at truly bargain prices today and achieve a lot better return than with fixed income investments. The Fed is driving investors out of the bond market and into equities, commodities and real estate among other things.

How long it takes for investors to become comfortable moving out of those risk free bonds and into some low risk equities is of course unknown.

What we do know is the volatility is back at highs reached only six times in the last 20 years and volume has spiked to more than double normal summer levels. Option volume over the last two weeks is 73% above normal, which should make the Nasdaq and CME a couple of good stocks to play into Q3 earnings because they are raking in the money.

Friday's market action was positively boring. After a +200 point opening bounce the Dow moved sideways the rest of the day with little volatility until the close. I was checking quotes on my smartphone at lunch and the numbers would not change. I thought there was a problem in the quote system but it turned out to be just a lack of movement and low volume intraday. When I checked the volume Friday night to create the table below I was shocked to see more than nine billion shares traded. The tape had been so lackluster after lunch I was expecting something in the 5-6 billion share range for a normal summer Friday.

Market Volume Table

I think Friday's gain was due to traders closing short positions early in order to avoid the weekend risk and then leaving for the beach with less than three weeks left in the summer. After the extreme volatility for the week the tame tape on Friday was boring.

Charles Biderman of TrimTabs.com said on Thursday that insider buying had risen to the second highest level month to date since June 2008 with only March 2009 higher. Biderman said insiders had bought more than $861 million so far in August. The CEO of Titanium Metals (TIE) bought 600,000 shares for $8.2 million. The Morgan Stanley CEO bought 100,000 shares for $2.1 million and co-president Paul Taubman spent $1 million for 50,000 shares. Ben Silverman at InsiderScore.com confirmed that corporate insiders were rushing to buy shares in their companies. Corporate buybacks were also booming. One large trading desk reported corporate buybacks were up over 100% in the last two weeks. Warren Buffet said he was thrilled with the decline saying, "The lower things go the more I buy. We are in the business of buying."

Ralph Acompora came back to haunt the markets again on Friday. Ralph was known in the trading community back in turn of the century as Ralph Make-Them-Poorer because of his many bullish forecasts that failed. He became a contrarian indicator. He has 45 years experience in technical analysis and I enjoy listening to him but I would be careful following his recommendations until his track record improves.

Ralph was calling for a new market high in the near future thanks to the spike in the VIX. The VIX has hit highs over 40 six times since 1995 and a high of 34 in 1997. In all but one of those events the spike lasted only a couple days. The 2008 Lehman high lasted for five months. Removing the Lehman event from the list and in four of the remaining six VIX highs the market set a new high within four months according to Ralph.

The VIX hit a 29-month high last week at exactly 48. You have to ask yourself "is this event a short term volatility bout or one that could last for months like the Lehman crash?" I believe the high at 48 was a short-term limited duration event but there are numerous factors in play that could keep the VIX elevated for some time. That would probably be levels in the low 30s since the panic has already begun to decline.

The VIX is a panic indicator. The VIX moves higher when investors are frantically buying puts to protect their long positions. I think the panic associated with the debt debacle and credit downgrade is over. The impact of those events will be with us for a long time but the panic has ended so the VIX should decline. I seriously doubt the markets will set new highs by year-end but stranger things have happened before.

VIX Highs

VIX Chart

The markets accomplished something last week that has only been done once before since 1940. There were four consecutive 90% trading days. A 90% day is normally seen as a reversal day for the current trend. A 90% day is when the advancing or declining volume is 90% of the total volume. This is typically seen as a capitulation event on the downside or a blow off top on the upside. According to Lowry's Technical Service there were four consecutive 90% days last week and each one was a reversal of the day before it. This is extreme uncertainty and extreme volatility.

Floyd Norris of the New York Times pointed out that there have only been three instances of four days of 4% swings in the S&P since the Great Depression. Last week was one of those three instances.

NYT Four Percent Move Chart

Morgan Stanley believes there is more pain ahead. While a GDP of 1% is now priced into the market after the 18.8% decline in S&P from the July 7th high to the August 9th low, they are expecting further declines.

Morgan Stanley has several potential scenarios they release to their clients and they range from a year-end S&P high of 1,425 to a low of 1,004. Their latest note to clients says "While there is 18% upside to the year-end bull case and 16% downside to the year-end bear case, we assign a higher probability to our bear case than bull case, preventing us from becoming increasingly optimistic."

The general consensus of opinions appears to be focused on the next crisis. The current state of economic and political dysfunction is priced into the market but there are serious concerns over the near future.

While it appears Germany and France are going to put another band-aid on the European financial crisis there is almost 100% agreement that more country downgrades are coming. Now that the U.S. has been downgraded it only makes sense that the ratings agencies would continue to downgrade other countries in Europe with weaker prospects than the USA. That is especially true with the larger and large amounts being discussed for potential bailout funds. Those countries with better economies will be forced to pay up for their weaker brethren. The talk of a Euro Bond is growing as a way to raise money and spread the risk among all EU countries. There was talk last week that the ECB itself could be downgraded. While all of these things do not directly impact the U.S. equity markets they are a psychological impact for investors because of the overall contagion factor. Greece could go under today and nobody would notice but as the contagion spreads and threatens to impact the financial health of the entire Eurozone it becomes a psychological cloud over the global markets.

In the U.S. the economic signals are also confusing. Recent reports of Business Inventories, Productivity, ISM, Trade Deficits, etc, suggest the economy is weakening and the Q2 GDP could be revised to nearly zero. However, the retail sales continue to improve and that suggests we are not going to return to a recession. However, the consumer sentiment is at levels that normally indicate a recession. In the chart below you can see how retail sales and consumer sentiment typically move in tandem but for some reason that decades old linkage is currently broken. Sentiment fell to a 30-year low last week but retail sales are at decade highs. What is wrong with this picture?

Obviously something has to change because the current move in opposing directions can't last. Sentiment must improve or retail sales will eventually crash and it could crash hard given the current spread between the indicators.

I personally believe sentiment was severely damaged by the two months of hysteria and negativity surrounding the debt limit debacle. Add in the S&P downgrade and market crash and you have a witch's brew of negative news weighing on the collective mindset. With the political news now in a dormant state until the end of August most consumers will be focused on back to school shopping rather than politicians predicting the end of our financial system. Hopefully the correction to the chart below will be a sudden improvement in sentiment rather than a massive decline in retail sales.


When Bernanke alluded to QE2 at Jackson Hole in August of 2010 the S&P-500 was 1050 and just over the 52-week low at 1010. This year's conference at Jackson Hole will again center around Bernanke's speech on the 26th. Bill Gross had predicted Bernanke would announce QE3 or a long term cap on rates in that speech but Bernanke capped rates at the FOMC meeting last Tuesday so analysts don't know what to expect in the conference speech. Pimco's El-Erian said, "The Fed knows there is a recession risk but I am not sure the Fed can act any faster given their available tools." This puts the pressure on Bernanke to say something in his speech that suggests how the Fed will continue to stimulate the economy.

The S&P was 1050 when the last Bernanke put was implemented. A year later the S&P hit 1101 after the second Bernanke put was announced with a cap on rates until 2013. Will that 1101 level hold could depend on how he backs up the FOMC decision with his comments on the 26th.

Last week the market reached the same oversold levels as we saw in the aftermath of the Flash Crash. Some are calling last week the "Flashback Crash." Despite what you call it the fact remains the markets are seriously oversold.

I look at hundreds of stock charts every week and I have been amazed by the devastation in such a short period of time. Most stocks have been crushed with some more than others depending on their prior momentum and earnings guidance.

Cliff's Chart

Ingersoll Rand Chart

These severely oversold conditions are not justified by the current economic conditions. This should prompt value funds as well as retail investors to go bargain hunting but we need the news headlines to improve before this will happen.

August and September are normally tough months for the market with October a capitulation and rebound month where funds adjust their portfolios for year-end and Q1. The current oversold conditions could advance that buying since any fund planning on liquidating unwanted positions probably did so over the last couple weeks. I reported last week that many hedge funds had cash positions as high as 50%. There is plenty of dry powder around if the buying bug begins to bite.

The S&P traded in a wide range between 1120-1175 with brief attempts to move outside those levels. In order to stimulate buying the S&P would need to move over 1205. Conversely a new move under 1120 would likely target 1050 and support from August 2010. That would mean the entire QE2 rally had been erased.

S&P-500 Chart

S&P-500 Chart - Daily

The Dow completely ignored support from November at 11,000 with broad swings above and below that level. However, in a calmer market we should see that level provide a base for future buying. There is really nothing we can predict from four days of more than 400-point swings other than extreme investor indecision and heavy short interest.

Friday was an indecision day of a different sort. With events unfolding in Europe on a daily basis and triple digit gap opens now the norm it appears nobody wanted to go into the weekend short. However, the markets still managed nearly double the volume of an ordinary August Friday. That suggests there was some buying in progress. Dow 11,200 emerged as temporary support. That was resistance last November.

Dow Chart

Dow Chart - Daily

The Nasdaq actually honored support at 2400 despite the multiple dips below it. Every dip was immediately bought. That suggests another dip in a calmer market should again find willing buyers at the 2400 level.

Nasdaq Chart

Nasdaq Chart - Daily

For those looking for bullish signals on Friday they did not find any in the Russell 2000. Where the Dow (blue chips) rallied +1.12% and +126 points the Russell only managed a +0.23% gain and +1.6 points. That suggests fund managers have no confidence in market direction and after last week I don't blame them.

The minor Russell gain was clear indecision on the part of investors. The blue chips gained because fund can store large amounts of cash there in order to benefit from a rally but still be able to extract that cash instantly if conditions change. They will not put money into the Russell until bullish sentiment improves.

Russell Chart - 15 Min

Russell Chart - Daily

I am neutral for next week. Despite the seriously oversold conditions we would still see support tested again. The abnormally high volume suggests the worst is over and the bottom may be behind us but it will take a couple days of positive gains to rebuild investor sentiment.

I would look to buy dips to the 10,800 range on the Dow, 1120 on the S&P and 2400 on the Nasdaq. I would buy breakouts over 11,500, 1215 and 2565. I would not be looking for new shorts because of the oversold conditions. We may see further dips but I would use them as buying opportunities because of the lack of negative headlines to push us lower. The S&P downgrade is history and Merkel and Sarkozy meeting on Tuesday (Monday night U.S. time) could produce positive headlines on Tuesday morning. I feel the bad news is priced in and without further unforeseen events we may chop around at these levels but the long-term outlook is currently higher.

Jim Brown

Send Jim an email

"Being wrong and losing money: that is part of the game. Being right and not making money: that is really annoying."
John Hempton


Index Wrap

The Market Survives

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Believe it or not, based on the how much the major market indexes gave back of the late-August 2010 to early May 2011 advance, the retracements into this past week were fairly 'normal'. The way the lows were made wasn't so normal as we witnessed one of those panic type sell offs and an over the cliff waterfall type decline.

I wrote a Trader's Corner article published yesterday (8/12/11) that is somewhat of a companion piece to this one in that I showed how the lead S&P and Nasdaq indices (SPX and COMP) didn't do much more than fulfill downside objectives implied by weekly chart Head & Shoulder's Top formations.

The retracements of the August 2010 to May 2011 advances have to date been mostly within the bounds of what is a normal percentage 'retracement' and NOT a major trend reversal. The intermediate-term trend did reverse lower of course. I'm sure you feel better knowing that the charts don't look like the end of the world exactly, while you probably felt the market looked like a gut wrenching train wreck.

Regarding the aforementioned (Trader's Corner) article of yesterday: if you didn't peruse it and want to, click on this LINK.

I mentioned last week that the decline in the S&P 500 (SPX) from late-April to early-July of last year, from intraday peak (1220) to intraday low (1010) ran 210 points. The SPX correction this year ran to 254 points. The difference in point terms wasn't that much more on this last sell off go round, but it came faster and the speed of these things are scary. If you can keep a level head and some perspective, don't neglect bearish strategies; those that are successfully executed result in fast and vast profits.

Following the sharp upward spikes in the CBOE S&P Volatility Index (VIX) COUPLED with price action, offered a decent guide to where lows have been made in 3 prior sell offs as highlighted in my first chart.

To recap what I said in my companion article: The first instance of a tradable bottom occurred in SPX in March per example #1. The index bottomed around 1260. There was no particular 'confirming' bottoming action except that that SPX pierced its minor down trendline. With the upward spike in VIX and prices piercing the down trendline, there was good reason to bet on a bottom.

Example #2 provided more to go on in terms of seeing a bottom form since the 1260 low formed a potential double bottom. The subsequent upside move above the minor down trendline was confirming. The peak in VIX was confirming a possible bottom as was price action; VIX peaks are not based on some absolute scale (e.g., as with RSI which has 'defined' extremes) but relative to the VIX pattern prior to the most recent upward spike.

Our most recent VIX spike (example #3) was VERY extreme of course. On and after the spike up to 48 on 8/8, there were lows made in the 1120 area that suggested bottoming type action.

Where do we go from here after the week from purgatory?

Sometimes there's a fast recovery, but other times there's a period of base building and choppy back and fort action for a period of a week or two (or three), but not usually NEW lows.

I don't suggest loading up on index calls but on a risk to reward basis, I suggest cautious buying on further bouts of weakness. You may feel that 'risk' is (OMG!) another 500 point Dow decline but I've never seen such a new down leg with stocks this oversold. The market may not spring back to life but in my opinion the further downside risk looks to be limited.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The chart is bearish but there's a possible or likely 'V' type bottom that has formed. There's a tendency for stocks to come back to their mean as they say. Just so with the major stock indexes as they don't tend to continue to trade at or under prior (moving average) envelope values UNLESS the market is in or going into a bear market and I don't see that in our current situation.

A note on my highlighted support levels: The 1128 to 1146 levels represent 62 and 66% retracements of the July 2010 to early May (2011) advance. 1120-1125 is based on support/buying interest evident on the hourly charts (not shown). 1100 represented a 75% retracement of the prior major advance. In some very volatile markets, there's more than a 2/3rds retracement and there's a retracement equal to 3/4ths of the prior advance that doesn't turn into a full blown retest of the prior low(s).

I anticipate resistance coming in at 1200, then up at the 21-day moving average, currently intersecting at 1261.

OVERBOUGHT/OVERSOLD AND BULLISH/BEARISH 'SENTIMENT'

Needless to say, the market got extremely oversold based on the 13-day Relative Strength Index (RSI) seen above. The daily chart RSI in SPX got down to a low of 14. The 8-week RSI (not shown here) closed the week at 26. It's fairly rare for the weekly model to dip under 30 and so has also gotten to what I would characterize as 'fully' oversold.

My market sentiment model finally got to an 'oversold' level of extreme bearishness this past week. Prior to this, my CPRATIO reflected what I believe was considerable complacency stemming from the many months of a rising trend. I found myself believing, prior to last week that the market was just in a 'normal' correction and support would develop again in the SPX 1250 area. NOT!

S&P 100 (OEX) INDEX; DAILY CHART

I will be repeating myself to say that the S&P 100 (OEX) chart turned bearish after the index formed a double top at 603. I pointed this out at the time but didn't expect the rout that followed. If OEX had a weekly close below 463 the long-term trend would turn bearish as well.

OEX retraced nearly 3/4ths of its last major advance but on a weekly closing basis has given back closer to one-half or 50% of the prior (July 2010 to May 2011) advance. A 50% retracement is closer to a 'normal' correction within a still-bullish trend.

I anticipate that major support is at 500 and won't get pierced again, especially not on a closing basis. Support is also noted at 505-510 which is where buying was coming in over recent days.

I've noted resistance (at the red down arrow) at 550, then in the 563-567 area. The 'centered' 21-day moving average tends to act alternatively as support or as resistance depending on the how goes the short to intermediate-term trend.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow has a bearish chart, after it too (along with OEX) formed a double top. Double tops are extremely simple, but also extremely potent as an indicator of an impending reversal. 'Confirmation' of such a top comes when the prior downswing low is penetrated. This doesn't of course predict the severity of a further correction or drop. The Head & Shoulder's Top that got traced out on the weekly OEX chart (shown in my companion Trader's Corner article), did forecast a significant decline.

The few Dow stocks still even trading above their 200-day averages are only 5 in number: IBM, JNJ, KFT, KO, and MCD. The other 25 Dow stocks are generally quite oversold, as is apparent with the INDU average reflected by its 13-day RSI dipping well below 30 early in the past week.

Near support is at 11000. I've noted lower support in the 10716 to 10873 area, where buying interest was showing up along with these levels representing the fibonacci 62 percent and 66% retracements of the major advance dating from July of last year into the May top.

I've calculated resistance as in the 11550 area, then at 11875, extending to 12000. 12000 may prove to be tough resistance for a while, assuming this level is challenged in the weeks ahead as I think it will be.

As far as any trading suggestion, such as buying Dow index calls on a dip and probing for a bottom, I'd rather buy more or less at the money (ATM) calls on the 5 Dow stocks noted above as still trading above their 200-day averages.

NASDAQ COMPOSITE (COMP) INDEX; WEEKLY AND DAILY CHARTS:

The Nasdaq Composite (COMP) weekly chart broke down after making an approximate double top in July. The index has recovered some but it may be a while before it can muster a prolonged rally again. FEAR, rather than complacency or greed has finally come into the hearts and minds of traders and investors.

Support was found in the key 62-66% retracement zone based on weekly chart considerations as highlighted on the daily chart below. Support is noted at 2374, then in the 2434 area.

Resistance is seen around 2570, then at the 21-day moving average, currently at 2680.

OVERBOUGHT/OVERSOLD AND BULLISH/BEARISH 'SENTIMENT'

COMP got extremely oversold based on the 13-day Relative Strength Index (RSI) seen above. The daily chart RSI in for COMP got to a low of 18. The 8-week RSI (not shown here) closed the week at 31 in COMP. The weekly COMP was a bit less oversold at week's end than it was at the bottom of the mid-June correction when weekly RSI hit 30. RSI is based on the Close, although the indicator is usually set to update every 'tick' AS IF the 'last' tick was the closing level. At or near 30 is 'fully' oversold on a weekly chart basis with 'length' set to 8.

My market sentiment model finally got to an 'oversold' level of extreme bearishness this past week. Prior to this, my CPRATIO reflected what I believe was considerable complacency stemming from the many months of a rising trend. I found myself believing, prior to last week that the market was just in a 'normal' correction and support would develop again in COMP around 2600.

NASDAQ 100 (NDX); DAILY CHART:

After the Nasdaq 100 (NDX) index weekly chart broke trendline support at 2380, an extension of that trendline then acted as resistance on a subsequent rebound to it. Prices accelerated to the downside from there. The other noteworthy technical feature was the bearish price/RSI divergence as RSI didn't also go to a new high and 'confirm' the higher relative high in the index. These things pointed to a decline but it was easy to think that a decline would stop at a higher low than the double bottom that formed over several months; first at 2189, then at 2181.

I highlighted what may continue to offer support in the 2070 to 2090 area. I don't anticipate the 2035 intraday low will get pierced.

NDX has rebounded to what was prior support in the 2180-2200 which may now 'act as' resistance for a time anyway. It seems unlikely that NDX is going to come roaring back, but if there's a decisive upside penetration of 2200, 2300 looks to be a target, the level of the current 21-day moving average.

While it's been a pattern for this index to have solid rallies after getting oversold and reaching the area represented by the lower 5% envelope line (i.e., 5% under the centered moving average), it may not be the case this time. Technically, there's no reason why another substantial rally wouldn't occur but fundamentally the market got pretty rattled and real people spending real money have to be willing to bid stocks up again.

NDX is in the best position to rally judging by it having the shallowest retracement to date of the major indexes. NDX, from intraday top to intraday low, retraced around 50%, while on a weekly closing basis, it only has given back (retraced) a scant 1/3 of its last major advance.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) has of course the same bearish chart pattern as the underlying Nas 100 index. QQQ found support in the 50 area, so it gave back 10 points from the top around 60 for a 16% decline from its peak.

Huge volume came out on the decline; enough so to probably represent a so-called 'selling climax'.

I've pegged near support at 52.0, then around 50.7, with major support in the 50.0 area.

Very near resistance looks to be in the prior support zone around 53.6-54 as support, once penetrated, 'becomes' subsequent resistance. The next overhead resistance area is at 56.0, extending to 56.4.

RUSSELL 2000 (RUT); WEEKLY AND DAILY CHARTS:

The Russell 2000 (RUT) index broke down badly like the rest of the market but the lows may be in and for some time to come. At 645, RUT had retraced 3/4ths of its last major advance. However, it should also be noted that if the index pierces 645-640 again, it could retest the intraday lows of last summer in the 588 area.

Near support is at 672, extending to 660. The prior 640 low should offer some good support should this area be retested.

Immediate overhead resistance comes in at 710, then at 727, and finally, most decisively for an upside turnaround, at the 21-day moving average, currently at 772.

I'd rather buy dips then sell rallies in an oversold market but I mostly want to see things settle down into a more normal market acting on stock underpinnings like earnings prospects rather than speculate on what terrible things are happening in Europe or what terrible things the Standard & Poor's Corp is suggesting about the 'full faith and credit' of the United States. Seems their downgrade of Japan back when didn't exactly hurt that country!



GOOD TRADING SUCCESS!


New Option Plays

Industrials & Grocery

by James Brown

Click here to email James Brown

Editor's Note:

Our two new candidates (UTX & WFM) look poised to rebound if the market can keep this bounce alive.

A few stocks that also caught our attention as potential bullish trades this week are: BDX, ADS, and CHKP

- James


NEW DIRECTIONAL CALL PLAYS

United Technologies Corp. - UTX - close: 72.45 change: +2.71

Stop Loss: n/a
Target(s): 76.40, 79.75
Current Option Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
From UTX's July closing high near $91.40 to its closing low this past week of $62.44 the stock saw a correction of almost 29 points. That's a -31.6% decline. You could say UTX is experiencing its own personal bear market (more than -20%). Concerns over an economic slow down and worries over a double-dip recession are the main culprit for the sell-off. I doubt that UTX's business has plunged -30% in a month. I am arguing the correction to the downside is over done and UTX is poised for a larger oversold bounce.

We want to buy calls if both UTX and the S&P500 index both open in positive territory on Monday morning. Nimble traders may want to ignore that entry and hope for a dip back toward $70.00 as your entry point instead. We'll set our first profit target at $76.40. Our final target is $79.75. More aggressive traders could aim for the 200-dma above $80.

I am suggesting September calls. However, we will list August calls but these expire in five days. Only aggressive traders will want to trade August.

We want to keep our position size small since I'm not listing a stop loss.

Just for kicks I'm posting a Point & Figure chart of UTX. You can see how the sell-off paused near its up trend line of what's supposed to be "support".

buy calls if both UTX and S&P500 are positive on Monday morning.

- Suggested Positions -

buy the SEP $75 call (UTX1117I75) current ask $1.85

- or high-risk trade with August calls -

buy the AUG $75 call (UTX1120H75) current ask $0.50

Annotated Chart:

Point & Figure Chart:

Entry on August xx at $ xx.xx
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on August 13, 2011


Whole Foods Market, Inc. - WFM - close: 58.29 change: +0.85

Stop Loss: n/a
Target(s): 63.50
Current Option Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
WFM came close to a -20% correction in just six trading days. Yet traders bought the dip near its June lows and the top of the gap from February. The fact that this support level held during the market plunge is encouraging and the oversold bounce has already lifted WFM back above its 200-dma. Now the $60.00 level could be overhead resistance. Plus the 50-dma and 100-dma could also be resistance. Yet if the market rebounds I would not be surprised to see WFM retest its highs or at least come close.

I am suggesting call positions now but only if WFM and the S&P500 both open positive on Monday morning. Nimble traders could try and buy an intraday dip near $56.00 if we see one instead. We'll set our first upside target at $63.50.

We want to keep our position size small since we're not listing a stop loss.

If both WFM and the S&P500 open positive on Monday, buy calls.

- Suggested Positions -

buy the SEP $60 call (WFM1117I60) current ask $2.38

Annotated Chart:

Entry on August xx at $ xx.xx
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on August 13, 2011



In Play Updates and Reviews

Two More Targets Hit

by James Brown

Click here to email James Brown

Editor's Note:

Don't forget: August options expire in five days!

Both ANF and DECK hit our profit targets to take some money off the table. We've have tweaked our entry point on ORLY again. The VIX is retreating but we're running out of time for August options.

-James

Current Portfolio:


CALL Play Updates

Abercrombie & Fitch Co - ANF - close: 70.10 change: +1.62

Stop Loss: n/a
Target(s): 69.75, 73.50
Current Option Gain/Loss: +33.1% & + 26.2%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
08/13 update: ANF continues to rally and shares outperformed the market on Friday with a +2.3% gain. The stock did stall at resistance near $70.00 but our first target to take profits was hit at $69.75. The bid on our options were $2.66 for the Aug. $70 call and at $5.00 for the Sept. $70 call.

Please note that we only have two days left. ANF is due to report earnings on Aug. 17th before the opening bell. We will plan on exiting this position on Tuesday at the closing bell to avoid holding over earnings. I am not suggesting new positions at this time.

Earlier Comments:
This is an aggressive, higher-risk trade. ANF is due to report earnings on August 17th. We do not want to hold over the report. I am listing both Aug. and Sept. calls. Keep in mind August calls expire in less than two weeks. We are not listing a stop loss on this trade but if you buy September calls you may want to reconsider and add a stop loss.

- Suggested (SMALL) Positions -

Long AUG $70 call (ANF1120H70) Entry $2.08

- or -

Long SEP $70 call (ANF1117I70) Entry $4.00

08/13 prepare to exit in two days at the close
08/12 1st target hit at $69.75.
bid on the Aug. $70 call $2.66 (+27.8%)
bid on the Sep. $70 call $5.00 (+25.0%)
08/11 conditions to buy calls were met. ANF opened at $66.46.

chart:

Entry on August 11 at $66.46
Earnings Date 08/17/11 (confirmed)
Average Daily Volume = 2.8 million
Listed on August 9, 2011


Core Labs - CLB - close: 106.92 change: +1.59

Stop Loss: n/a
Target(s): 104.90, 109.75
Current Option Gain/Loss: +112.0% & +125.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/13 update: CLB continued to rally even though oil posted a minor decline on Friday. The OIX index traded in line with the market but the OSX oil services index outperformed. CLB added +1.5% on Friday and is nearing potential technical resistance at the 50-dma. I am not suggesting new bullish positions at current levels. Nimble traders might consider buying calls on an intraday dip or bounce in the $104-102 area. Our final target is $109.75. Aggressive traders may want to aim higher (maybe $112 or $114). Cautious trades will want to consider an early exit soon if you're holding August options. Even with the wide spread the August call is up $112%.

Sadly the option spreads on CLB are still too wide. We will most likely not trade CLB again until these improve.

Earlier Comments:
It's an aggressive trade so keep your position size small.

- Suggested (SMALL) Positions -

Long AUG $105 call (CLB1120H105) Entry $1.25*

- or -

Long SEP $105 call (CLB1117I105) Entry $2.00
08/11 1st target hit @ $104.90.
Aug. $105 call bid @ $1.80 (+44%)
Sep. $105 call bid @ $3.90 (+95%)
08/10 no new positions at this time.
08/08 we are REMOVING the stop loss for this trade
08/05 stop loss @ 95.45, under the 200-dma
08/05 play opened.
08/05 *entry price is an estimate. option did not trade today
08/04 Adjusted our strategy for the decline. New stop loss @ 95.80. New targets are $104.90 and $109.75. Buy calls if both CLB and S&P 500 are positive at the open tomorrow.

chart:

Entry on August 5 at $100.23
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 526 thousand
Listed on August 2, 2011


Deckers Outdoor - DECK - close: 93.60 change: +6.11

Stop Loss: n/a
Target(s): 93.50, 97.00
Current Option Gain/Loss: +235.5% & +80.8%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
08/13 update: Target achieved. DECK was another big performer on Friday. The stock gapped open higher near $90 and above its 50 and 100-dma. This probably fueled some short covering. DECK closed the day +6.9%. Our first target was hit at $93.50. Shares are arguably short-term overbought here. I am not suggesting new positions at this time.

Our final target is $97.00. Cautious traders may want to add a stop loss if you're holding September calls and exit completely if you're holding August calls.

Earlier Comments:
I do consider this an aggressive trade. DECK can be a volatile normally and in this market the moves get a little crazy. We definitely want to keep our position size small. I am not listing a stop loss on this trade.

- Suggested (SMALL) Positions -

Long AUG $90 call (DECK1120H90) Entry $1.52

- or -

Long SEP $90 call (DECK1117I90) Entry $4.70

08/12 1st target hit @ 93.50
bid on Aug. $90 call @ $5.05 (+232.2%)
bid on Sep. $90 call @ $8.45 (+79.7%)

chart:

Entry on August 11 at $83.53
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on August 9, 2011


Green Mountain Coffee Roasters - GMCR - close: 103.58 change: - 0.35

Stop Loss: n/a
Target(s): 99.50, 107.50
Current Option Gain/Loss: +241.2% & +154.7%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/13 update: After a very impressive bounce this past week GMCR hit the pause button on Friday. Shares opened higher but immediately fell from almost $105 to $101.68. The stock pared its losses and traded sideways the rest of the day. You could argue GMCR is very short-term overbought. I'd probably look for some short-term support at $100. We're not suggesting new bullish positions at this time. Our final target is $107.50.

If you're holding September calls you may want to add a stop loss. If you're holding August calls you'll want to consider an early exit now.

Earlier Comments:
As a high-risk, speculative play we wanted to keep our position size very small. We are not using a stop loss on this play.

- Suggested (SMALL) Positions -

Long AUG $95 call (GMCR1120H95) Entry @ $2.74

- or -

Long SEP $100 call (GMCR1117I100) Entry $3.65
08/10 Consider exiting all August options now
08/09 adjusting 2nd target to $107.50
08/09 1st target hit at $99.50.
Aug. $95 call bid $6.30 (+129.9%), Sep. $100 call bid $6.95 (+90.4%)
08/08 we are not using a stop loss on this trade

chart:

Entry on August 8 at $91.26
Earnings Date 12/08/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on August 6, 2011


O'Reilly Automotive - ORLY - close: 60.23 change: +1.21

Stop Loss: n/a
Target(s): 63.75, 66.00
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/13 update: The fact that the market did not sell off into the weekend is encouraging. We will adjust our entry point strategy given that ORLY displayed relative strength on Friday and closed above potential resistance at $60.00 and its 100-dma. I am suggesting we buy calls now if both ORLY and the S&P500 open positive on Monday morning.

Earlier Comments:
Use a small position size to limit your risk.

buy calls if ORLY and S&P500 open positive on Monday morning.

- Suggested (small) Positions -

buy the SEP $60 call (ORLY1117I60)
08/13 adjusted entry point. removed Aug. strike
08/10 new trigger at $55.00
08/09 adjusted targets to $63.75 and $66.00.

chart:

Entry on August xx at $ xx.xx
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on August 6, 2011


SPDR S&P500 ETF - SPY - close: 118.12 change: +0.79

Stop Loss: n/a
Target(s): 119.75, 122.50
Current Option Gain/Loss: + 2.3% & +30.1%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/13 update: The S&P 500 produced its first back-to-back gain in three weeks on Friday. If you ignored the first four days of the week, Friday seemed like a typical summer Friday without much direction. The market still looks oversold given the big drop from its late July highs but I would hesitate to launch new positions here. Our first target to take profits is at $119.75. If you are holding August options I would consider an early exit now. We don't have much time left for Aug. calls.

Earlier Comments:
We are not using a stop loss on this trade.

- Suggested (SMALL) Positions -

Long AUG $118 call (SPY1120H118) Entry $2.15

- or -

Long SEP $120 call (SPY1117I120) Entry $2.55

08/08 trade opened at $115.00. We are not using a stop loss.

chart:

Entry on August 8 at $115.00
Earnings Date --/--/--
Average Daily Volume = 235 million
Listed on August 6, 2011


U.S. Oil Fund - USO - close: 33.23 change: -0.07

Stop Loss: n/a
Target(s): $37.50, 40.00
Current Option Gain/Loss: +17.5%
Time Frame: 2 to 3 months
New Positions: see below

Comments:
08/13 update: The early morning rally in oil prices fizzled and the USO failed at its simple 10-dma. Readers may want to look for another dip into the $32-30 zone before initiating new positions. Our time frame for this trade is several weeks, which is why we are using November calls. We're not using a stop loss on this trade so keep your position size small!

Earlier Comments:
This is another lottery-ticket style of play.

- Suggested Positions -

Long NOV $34 call (USO1119K34) Entry $2.05

chart:

Entry on August 9 at $31.97
Earnings Date --/--/--
Average Daily Volume = 10.7 million
Listed on August 8, 2011


PUT Play Updates

CBOE Volatility Index - VIX - close: 36.36 change: - 2.64

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -100.0% & -45.0%
Second Position Gain/Loss: -100.0% & - 12.0%
Third Position Gain/Loss: - 7.0%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/13 update: The volatility index (VIX) closed near its lows for the weak. These huge swings in the market are very unusual and should not last very long. As things normalize the VIX should plunge from these highs. The index lost -6.7% on Friday and is already down -24% from its highs of the week. Unfortunately, the VIX may not fall fast enough for our August options. August VIX options expire midweek.

I am not suggesting new positions here but nimble traders might consider buying some September puts.

Earlier Comments:
I am not listing a stop loss on this trade. We should consider this a higher-risk, speculative trade. I'm setting our targets at 26.00 and 22.50. NOTE: August VIX options expire after the 17th of the month. You may want to buy Septembers instead.

- Suggested Positions -

Long AUG $25.00 PUT (VIX1117T25) Entry $2.50

- or -

Long SEP $25.00 PUT (VIX1121U25) Entry $4.00

- Second Position, entered at the open on Monday, Aug. 8th -
(very small positions)

Long AUG $25.00 PUT (VIX1117T25) Entry $0.90

- or -

Long SEP $25.00 PUT (VIX1121U25) Entry $2.50

- 3rd Position, listed Aug. 8th, Open Aug. 9th @ open. -

Long SEP $30.00 PUT (VXI1121U30) Entry $5.70

08/08 3rd position listed to buy at the open on Aug. 9th
08/08 2nd position was filled the open.

chart:

Entry on August 5 at $28.48
Earnings Date --/--/--
Average Daily Volume = xxx
Listed on August 4, 2011