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Newsletter

Daily Newsletter, Saturday, 8/20/2011

Table of Contents

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

Market Wrap

Nasdaq New Low

by Jim Brown

Click here to email Jim Brown

The Nasdaq closed at a new 10-month low at 2341 after weakness in the chip sector and Hewlett Packard's earnings warning. Google lost $14 to close under $500.

Market Statistics

The market reporters were going out of their way to describe the damage done in the last four weeks. Statisticians pointed out it was the second worst four week period for the S&P since 1950. It was the third worst week in a year for the Dow and second worst for the Nasdaq. It is hard to believe we started the week with a triple digit rally that was testing new short-term highs on Wednesday.

Friday was actually better than I expected after watching the Dow futures fall to -200 overnight Thursday night. When the indexes rallied into positive territory at Friday's open I was shocked to some extent but pretty much realized it was just another selling opportunity for the bears and those longs who were hoping to exit before the weekend event risk.

Option expiration was one reason for the opening spike. The S&P options expire at the opening print on the S&P. This always causes some Friday volatility at the open on expiration days.

There was little to move the market in terms of geopolitical news or economics but Hewlett Packard was doing a good job all by itself. Hewlett dropped -$6 or -20% and was responsible for the loss of more than 45 Dow points. Actually since February 18th Hewlett has been responsible for a decline of more than 200 Dow points or -13% of the Dow's decline.

The actual Dow performance on Friday was not as bad as it appeared. Three stocks, IBM, CAT and HPQ, were responsible for -124 points (-72%) of the -172 point decline. Seven Dow stocks were actually positive. Those were CVX, CSCO, PG, AXP, MRK, WMT and MCD. However, regardless of how it got there a close at 10,800 is still ugly.

There were only a couple of economic reports on Friday. The Regional and State Employment report showed nonfarm payroll employment rose in 31 states in July. New York added +29,400, Texas +29,300 and Michigan +23,000 were the states with the best gains. Illinois -24,900 and Florida -22,100 the biggest losses. The data in this report is old news but it supplies detail we did not have in the Nonfarm Payroll report earlier this month. The market ignored this news.

The Risk of Recession report for July rose to 31% from 26% in June. This is also a lagging report to some extent and it is predicting economic conditions six months from now. This is the third consecutive month of increases and the 31% is the highest level since September 2010. This report is produced by analyzing all the other economic reports based on historical ranges to predict the direction of the economy. This report was also ignored.

The calendar for next week is peppered with regional Fed surveys with each taking on more importance after the Philly Fed report imploded last week. The next GDP revision is Friday and it will be a challenge to remain over +1% growth for Q2. There have been several recent reports that should have pushed the Q2 GDP revision lower. Some estimates see it close to zero. A dip into negative territory, not expected this time around, would be very detrimental to market sentiment.

The biggest event will be the Bernanke speech at the Federal Reserve conference at Jackson Hole on Friday. A year ago this week the markets were bouncing along the bottom with the Dow at 10,000, S&P 1050 and Nasdaq 2100. Bernanke took to the podium in Jackson Hole and suggested the Fed was about to launch into a major quantitative-easing program known today as QE2. The markets caught fire and a six-month rally appeared.

It would be silly to think traders are not expecting Bernanke to take the podium and pump up the markets again. In fact the majority of the market conversation, other than Hewlett Packard, revolves around what Bernanke could say or do for an encore performance.

Nobody really expects a QE3 announcement but they do expect some guidance on what to expect from the Fed. They expect that guidance to move the markets. Whether that movement is going to be a small ripple or a major tsunami is of course unknown.

With the rise in inflation in the PPI/CPI reports last week the Fed may be between a rock and a hard place with their available options. A QE3 program is not politically acceptable today. Candidate Rick Perry said it would be treasonous for Bernanke to print more money with a QE3 program. Maybe Perry needs a quick economics 101 lesson before he hits the campaign trail again.

Bernanke will probably outline the methods the Fed could use and try to talk the markets away from the cliff. How successful he is will probably determine what kind of September we will have in the market. Remember, September is historically the worst month of the year. It would have to be really ugly to be worse than the August performance to date.

Whatever happens in the market early in the week we should see some improvement on Wednesday and Thursday as traders position themselves for a Bernanke bounce. In the August 2010 speech he said, "We will do anything to prevent a second recession." Traders want to hear what "anything" means today. Beware a sell the news event if his speech is found lacking.

Economic Calendar

There was no earth shaking news out of Europe. No new bank worries and no major earnings reports. It was a summer Friday but volume at 9.7 billion was about twice that of a normal August Friday.

The big news on Friday was Hewlett Packard's astonishing earnings report and announcements. The various announcements made by HPQ caused some serious consternation among investors. HP said it was considering spinning off or selling its PC business. Since they are the largest PC maker that would be a huge breakup representing half of their $50 billion market cap. Not many companies will want to spend $25 billion for a low margin commoditized business. That suggests few bidders and a small price. By announcing it in advance of actually doing it they just hung a huge black cloud over future PC sales. How many consumers will want to buy an HP PC when the business is up for sale? Bad move by HP.

Previously CEO Leo Apotheker had publicly resisted calls for a PC spin-off saying the equipment helped HP provide a full suite of offerings to large business customers. I guess large business customers switched to buying Dell instead of HP.

Secondly they said they were closing the tablet division and getting out of the consumer devices space. With more than a million TouchPads in the channel (in retail store inventories) that was probably not a smooth move. How many consumers will want to buy a tablet from a maker that is shutting down the business? What if I need service or software upgrades? Oh, we are dropping the WebOS operating system as well. What manager would announce the cancellation of a product with 1.5 million still unsold? Sell the inventory then announce the cancellation.

Saturday evening update: HP slashed the price of the TouchPads to $99 for a 16GB model and $149 for the 32GB model and all available inventory in the U.S. was instantly purchased by frantic consumers. Even the HP website is out of stock but they will probably have some additional units when the previously announced store returns hit their distribution centers. When I heard the price cut news early Saturday afternoon I raced to call every local retailer and every one was out of stock. I called Best Buy, Costco, Staples, Office Max, Wal-Mart and Sam's Club. I quizzed several stores and they said it was panic buying after the announcement. Buyers were lined up at the registers with people buying not just one but multiples of the soon to be obsolete tablets. An Office Max worker told me they had to bring in an extra employee just to answer the phone. Google said "TouchPad" was the number one search term on Saturday. I guess you can sell anything if you give it away. That is one way for HP to avoid eating 1.5 million tablets.

Hewlett shares fell -20% to $23.59 and based on the analyst comments and expected downgrades this could be just the first dip. The obvious errors in execution by HP management does not bode well investor confidence. HP shares have declined -52% in the last six months. I wonder what kind of performance bonus Apotheker will get for 2011?

John Paulson had 23.5 million shares of HPQ on his last SEC filing. If he still owns those shares today he lost -$212 million on Thr/Fri. That has got to hurt!

Hewlett Packard Chart

With the TouchPad tablet going extinct before it ever really matured the market would seem to favor Apple. Hewlett was the deep pockets, PC relatable, big brand that was slated to give Apple some serious competition. You can bet Steve Jobs and Apple management were dumbfounded when the news broke and adult beverages were being consumed in volume all over Cupertino on Thursday night.

This narrows the field to two main competitors between Android and Apple. Android has developed some serious momentum but Apple is not conceding the fight. News leaked last week that Apple has ordered parts to construct 1.5 million iPad 3s in the fourth quarter for delivery in Q1-2012. The new iPad 3 will have a 9.7-inch screen with a 2048x1526 resolution compared to the current 1024x768 screen. There is no moss growing on Apple and they should continue to be the leader in terms of tablet technology but they can't afford to rest with Android on their heels.

Apple Chart

If Google can quickly digest Motorola the tablet wars could really heat up with a true Google tablet a couple years from now. Giving Google a manufacturing and marketing arm for computing devices could setup the eventual birth of Skynet. Let's hope their mission statement of "Do no evil" remains in force.

Google Chart

On Friday we saw a continuation of the theme for the month and that theme was to sell financials. The KBW Banking Index ($BKX) lost another -3% to close at a two year low. There was actually some good press on the U.S. banking system on Friday that stressed their higher capital levels, rising loan volumes and low exposure to Europe but nobody was listening.

Banking Index Chart

The good news was drowned out by news from Bank of America of another 10,000 workers to be cut with 3,500 in Q3. They currently employ 287,839 people and the largest of any U.S. bank. Citigroup has 260,000 and JPM has 250,000 employees. The 50 largest banks have announced cuts of more than 60,000 workers so far in 2011. HSBC announced a cut of 30,000 workers. BAC is trying to cut costs by -20% in their consumer division, which had about $30 billion in expenses in 2010. The bank has posted about $30 billion in mortgage losses since Brian Moynihan took over the CEO office in 2010. BAC shares slipped back under $7 with some analyst targets at $5. I would be a buyer of BAC once they can get their mortgage problem solved.

Bank America Chart

There was no specific news on the economy but analysts were racing each other to see how low they could go with growth estimates. Goldman cut 2011 GDP estimates to 1.7% and 2012 to 2.1%. Citi cut 2011 to 1.6% from 1.7% and 2012 to 2.1% from 2.7%.

JP Morgan cut Q4 GDP growth estimates to 1% from a prior projection of 2.5%. Even worse they slashed 2012-Q1 to 0.5% from 1.5%. JPM warned that recession risks are "clearly elevated."

Goldman also cut growth estimates on the EU to 1.9% for 2011, UK 1.5%, Japan -0.8% and China 9.3%. The downgrade virus has clearly infected the analyst community and this will not be lost on the Bernanke when he speaks next Friday.

Cutting growth estimates had a seriously negative impact on oil prices on Thursday night with U.S. WTI crude falling to $79 overnight. However, the Friday morning rally pushed it back to $83.50 before easing slightly to $82.70 at the close. The U.S. WTI contract expires at the close on Monday so expiration pressures could also have been responsible. Support at $80 should be strong. Note the stronger showing in Brent with a +2.07 gain. That contract expired last week so there is no expiration pressure there and light crude inventories are still declining in Europe and Asia.

Tropical storm Harvey made landfall in Guatemala on Saturday and that will eliminate it as a threat to the Gulf of Mexico installations. There is another storm forming south east of Puerto Rico, now called Irene and could be a challenge for the Gulf by next weekend.

WTI Crude Oil Chart

Brent Crude Chart

Another trading day is in the books and another record for gold was seen. Gold prices hit $1881 for a new intraday high and finished with a $33 gain at 1855 for a new closing high. Analysts continue to upgrade expectations with Goldman now saying $2500 with several analysts now predicting $2000 by year end with one saying $2K by Thanksgiving. Gold is up +226 over just the last three weeks so $2000 by Thanksgiving should be a snap even with a couple pauses for profit taking.

The move by Hugo Chavez to bring all Venezuela's gold back to Venezuela could be the first signs of a run on the physical metal. Venezuela has $11 billion in gold on deposit around the world. The Bank of England said it had received a request from Venezuela to transfer all the gold on deposit, currently 99 tons, back to Venezuela. JP Morgan and the Bank of Nova Scotia also received redemption requests. It is unknown how much gold Venezuela has on deposit with JPM but the bank only has 338,303 ounces of registered gold in storage or roughly 10.65 tons. Here is the key point. The gold on deposit is pledged to cover derivatives contracts and it is leveraged. If JPM has 10 tons they have probably used it to back 50 tons or more of paper pledges. Rarely does anyone ever actually redeem gold so banks can comfortably use it as a hedge and should a redemption occur they can replace it on the open market. Unfortunately there is very little physical gold on the open market today. Some analysts are worried a short squeeze on gold may be just around the corner if other major holders suddenly decide to reclaim their gold. The gold chart may look severely overbought today but a run on physical gold could quickly push it to much higher levels.

I have posted the following info before but it bears repeating. Standard Chartered PLC, a major international bank with a 150-year history and 1,700 offices, is predicting gold prices could rise to $5,000 an ounce over the next five years. Read the full report here: In Gold We Trust

Gold Chart

Actually, despite the big gains in gold the real hero for 2011 has been silver. Silver is up +39% and gold only +30%. Silver broke out over resistance on Friday to nearly $43 and the trend appears to be headed for at least $45 in the near future.

The Silver Institute recently released a report titled The Future of Silver Industrial Demand and predicted demand for industrial use would increase to 665.9 million ounces by 2015 for a 36% increase from the 487 million used in 2010. Mine production only rose +2.5% in 2010 to 735.9 million ounces. Silver investments like the SLV ETF saw a +40% increase in the amount of silver owned by 279.3 million ounces in 2010 to 582.6 million. Coins and metal demand rose +28% to 101.3 million and there were 55.6 million ounces of bullion produced. The SLV ETF increased its holdings by 1,428.6 tons in 2010 and has already added another 280 tones in 2011.

China said its net imports of silver rose nearly 400% in 2010 to more than 3,500 metric tons. They exported 1,575 MT, 58% less than 2009 and imported 5,159 MT, +15% more than 2009. China had been a next exporter of silver in the past but became a net importer in 2009 and those imports are soaring.

Silver Chart

The recession question is sure to bounce around in the markets for the next several weeks. Many firms are claiming we are already in a recession and others are warning we are headed there. Many noted analysts are critical of the idea. Abby Cohen was dismissing the idea on Friday by quoting a long list of economic facts that prove we are not in a recession. "This is not 2008" is a phrase getting plenty of headlines.

The Philly Fed Survey last week was supposed to come in at +2.0 and instead declined unexpectedly to -30. I explained on Thursday night why I thought the report was flawed. The next material report other than Friday's GDP revision is the ISM Manufacturing on Sept 1st. The July reading came in at 50.9 and only a fraction over contraction territory. Analysts warn that a reading under 48 means a recession is likely and a reading under 42 means a recession is inevitable. It is going to be a long two weeks while we tick off the days until that report.

Bottoming is a process. I have said it before but we need to constantly reiterate that truth. Bottoms are not normally made where they are expected. Actual bottoms are unexpected. They appear after everyone throws in the towel and pledges never to buy stocks again. We can see where a bottom might be forming but it will be several weeks before we know if it was the real deal.

When the market corrects there is said to be five stages of grief. Those are denial, anger, bargaining, depression and finally acceptance. Where are we on that scale?

There is another scale that has been floating around for years. The graphic below came from Barry Ritholtz. Despite the big moves in the market I don't think we have moved much past desperation or maybe panic. Obviously 400-500 point market drops are ugly and the high volume would suggest some degree of panic but I don't think we have seen capitulation even though there has been five 90% days in the last 10 trading days. I think there needs to be another big day that could qualify as capitulation and then despondency. The despondency stage is when you quit turning on the TV or logging into your computer to see what your positions are doing. You have mentally checked out of the market. The urge to buy the dip has turned into disgust that you bought the dip and were crushed by the continuing decline.

Market Cycles

The S&P closed at 1122 and the low of the day. This is only a couple points away from the August 11th low where the rebound began. That rebound has been erased and the index is threatening to make a new low. The August 9th low was 1101 so that would become the immediate target if 1120 breaks. If 1101 breaks that sets up 1050 for a complete return to the August 2010 Fed meeting support lows at 1050.

I am not predicting any specific number for next week because we are in a news driven market and there is bound to be plenty of news next week. Personally, although painful, I would love to see a retest of 1100 on Mon/Tue and then a minor rebound into the Bernanke speech.

With the S&P down the most in a four week period since March 2009 I see no future in buying puts. We are back in the oversold column and the next move to play is hopefully a bounce. The S&P is down -18% since April 29th so bear market territory is just around the corner. I would prefer to pass on that experience. Touch bear market territory? Yes. Live there for six more weeks? No.

There are analysts who believe the yield on the ten-year note will decline to 1.25% by year-end. It is 2.07% today. At less than 2% the only real opportunity to grow your money faster than inflation is in equities. That is where Bernanke will probably try to lead investors on Friday. If he can make the case for abnormally low rates for the next two years then eventually the money that would normally go into bonds will find its way to the equity market instead.

On the S&P I would buy 1120 and 1100 as short-term trades and short a break below 1100 with 1050 as the target.

S&P-500 Chart

The Dow crashed back to 10,800 thanks to the implosion in Hewlett Packard, Caterpillar and IBM. This is just above the support from the early August dip at 10,700. If sentiment does not improve and 10,700 breaks we could easily see a dip back to the August 2010 QE2 support at 10,000. While I don't believe the market fundamentals support a decline of this magnitude it does not matter what we believe. The markets sometimes develop a negative feedback loop where the declines feed on themselves rather than on the fundamentals.

I would be a buyer for a trade at 10,700 before the Bernanke speech but I would become a seller under 10,700 after the speech.

Dow Chart

The Nasdaq has returned to the early August levels and sentiment is declining. Chip companies are lowering guidance and new orders are declining. The PC sector was shaken by the Hewlett Packard news they were considering a spin-off of the PC business because the margins were so low. Lowered guidance is never good and the tech sector suffers through this problem at the beginning of every Q3. This year the advance orders for the holiday season are either lower than normal or nonexistent. This could continue to pressure tech stocks for the weeks ahead. A test of 2300 is virtually assured and a lackluster Bernanke speech could allow a dip to 2100.

Nasdaq Chart

The Russell has declined to the early August support lows but sentiment for small caps is deteriorating. Weak economics and weak earnings guidance is a one-two punch for small caps. Investors tend to put money in highly liquid blue chips with large dividends in times of market stress.

The Russell has the potential to break below 650 and could target 590 and the QE2 support low if sentiment does not change quickly. The Russell is down -24.3% from the 860 high on July 7th. The Russell is firmly in a bear market and that negative feedback loop could easily push it much lower given the weak sentiment.

Russell 2000 Chart

The Dow Transports closed at a new 52-week low but the fundamentals behind the sector are not that bad. Freight loadings are higher than in 2010 and fuel prices are declining. Coal, oil, construction materials and lumber are still strong with coal and oil rising sharply. Airlines are flying at capacity on most routes and trucking companies are reporting steady business. Obviously shipments would improve with a rebound in the economy but we have not seen a sharp decline as is indicated by the chart. This is a sentiment decline not a fundamental decline. It is however, still a decline.

Support is 4,000 and hopefully calmer heads will prevail when that level is reached.

Dow Transports Chart

For next week I expect Monday and Tuesday to be choppy. I think Friday was a "go home flat" day where everyone who bought the bounce last week gave up in disgust. Shorts were confident the downtrend was resuming and saw only negative event risk ahead.

This thought process could continue on Monday and Tuesday if there is not a sudden change in status in Europe. With nobody even close to coming up with an acceptable plan I doubt that will change but you never know. On Wed/Thr we could see some buying as shorts cover and buyers position themselves in anticipation of Bernanke rescuing the markets once again.

Volatility should continue but normally we see a decline in trading volume as we approach Labor Day. Eventually the sellers will run out of stock to sell and fundamentals will take over. Earnings for Q3 are expected to increase by +17% so no earnings recession there. The guidance may have been weaker but it still indicates decent profit growth. Eventually there will be a resolution of the current uncertainty but it may take a few more weeks before the volatility returns to normal.

Jim Brown

Send Jim an email

"I find that the harder I work, the more luck I seem to have."
Thomas Jefferson


Index Wrap

The Market on a Precipice

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The weekly close on its lows was definitely bearish technically as was the retreat from the 1200 in the S&P 500 (SPX). Tech is not putting a floor under the overall market this time and if SPX pierces 1100 it looks headed to the low-1000 area in a retest of the early-July lows of last summer.

I don't have any overarching vision of where the market is headed as investors have gone a bit crazy in panic and fear, making any rational predictions difficult. Irrational fear is as nuts as 'irrational exuberance'. The key level to watch in SPX is the pivotal 1100 level. The CBOE S&P Volatility Index (VIX) hasn't spiked as high as it did before, at 43 at week's end versus a daily prior peak at 48. I can't say that this is a bullish omen or anything, like suggesting a possible turnaround, but it's better than a kick in the head.

Investors seem to have also finally thrown in the towel on the prospects for tech stocks on this latest free fall and the Nasdaq Composite (COMP) has Closed at a new low for this move. Next pivotal support in COMP below 2350 is down in the 2100-2060 area where the index bottomed in July of last year. Near support in the big cap Nas 100 (NDX), below its 2038 weekly Close, is in the 1980-1945 zone; major support is more likely around 1750-1700.

In terms of the long-term trend, Dow Theory which can have some varying interpretations would suggest that we're in a major bear market on a weekly Close in the Dow 30 (INDU) below 9686 (versus Friday's 10817 Close) AND a weekly Dow Transportation Average (TRAN) Close below 3932; TRAN finished the week at 4221.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The chart is bearish and no longer has what looked like a 'V' type bottom from the prior week. The most the bulls can hope for is that SPX holds 1100 again and sets up a minor double bottom. The inability to get back above 1200 was the key bearish chart event. The fact that prices only rebounded back to the area of my LOWER envelope line (at 4% below the 21-day 'centered' moving average) also suggested a weak rebound only.

As written above in my initial 'bottom line' comments, the weekly close on the SPX weekly low was definitely bearish as was the retreat from the 1200. Those even-1000 numbers are key levels usually; bullish if penetrated on the upside, bearish on the downside. Tech stocks are not lending overall market support on this latest sell off and putting a floor under the overall market on this decline.

If SPX pierces 1100 it looks headed to the low-1000 area in a retest of the early-July 2010 lows. 1100 represented a 75% retracement of the prior major advance. A move to below a 3/4ths retracement suggests a round turn 100% move back to where the last rally began.

As noted last week, with my anticipation of resistance coming in at 1200, the same level is key resistance this week, extending to 1125, the current intersection of the 21-day moving average.

OVERBOUGHT/OVERSOLD AND BULLISH/BEARISH 'SENTIMENT'

Not much to say here either as RSI is back in the oversold zone as seen above. What will be interesting and possible insightful is if RSI does not 'confirm' prices going to a new low by doing the same.

My sentiment model, based on the daily CBOE equities call to put volume ratio, is again retreated to an oversold 'extreme-bearishness' area. Once again the overriding technical consideration is to see if price action suggests any upside turnaround. Any upside chart reversal would be 'supported' by the fact of a very oversold market.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bearish and looks headed to another test of the 500 area at a minimum. It's hard to predict where the index will bottom. What I would predict is that if 500 gives way, there's a 30-40 point further downside potential.

Key resistance is in the 540-542 area, extending to 552. The 580 area looks like major resistance.

Near support comes in around 505, extending to 500-499. Major support is assumed to substantially lower, in the 460 area, where OEX bottomed in July of last year. There was secondary support that developed on a pullback to 471-472 during late-August of last year that should be mentioned as support although I didn't highlight that area on my chart.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) has resumed it's seemingly relentless decline and is back to the price zone where support developed between 10873 to 10716, although the intraday low got to nearly 10600 on a downward thrust to the lowest intraday low to date for the current INDU decline.

Major support looks like 10000 and that area may get retested if 10600 is pierced. The lowest lows made last summer, before the rally that took us all the way to the recent double top around 12750, was in the 9615 to 9660 area. I suspect that if there's a sizable new down leg such as to 10000 again, that will be enough to bring in buyers again. Fear and panic have taken over and the market has become the punching bag for every bout of bearish news out of Europe or here.

The market decline may have become a self-fulfilling prophecy for a bearish stance on the economy, but tend to reflect fear and uncertainty and not the current reality. This isn't too surprising actually as price levels tend to reflect forecasts out about 6 months. The uncertainty of those forecasts makes for the yo-yo market.

Resistance comes in around 11500, extending to 11642 or at the shifting 21-day moving average. I continue to use the same simple moving average envelope indicator (reflecting 4% values above and below the 21-day moving average) to give some perspective of our current price movements relative to what's been true for many months prior.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) got only to the 2550 area and began to churn there over 3 days, giving a good indication that COMP wasn't going to make further headway. It barely got to the lower envelope line, whereas in previous months 5% under the 21-day moving average had marked tradable lows.

A break of the recent low in the 2330 area suggests to me a next target to around 2250. Major support probably begins around 2100, extending to around 2060, a low from which the index rallied beginning just over a year ago.

Pivotal resistance is at 2550, extending to 2600. Closer by resistance implied by the top end of the recent downside price gap could also be noted at 2488.

Investors first dumped the most economically sensitive stocks that predominate in the S&P indexes and when the panic to go to cash (or gold or Treasuries) got strong enough they started dumping what was left, often stocks of tech-related businesses.

OVERBOUGHT/OVERSOLD AND BULLISH/BEARISH 'SENTIMENT'

This commentary today is the same as for the S&P 500, the other major market index where I feature my Trader Sentiment model.

The COMP RSI is back in its oversold zone as seen above. What will be interesting and possible insightful is if RSI does not 'confirm' prices going to a new low by also going to a new relative low.

My sentiment model, based on the daily CBOE equities call to put volume ratio, is again retreated to an oversold 'extreme-bearishness' area. Once again the overriding technical consideration is to see if price action ahead suggests any upside turnaround. Any upside reversal would be 'supported' by the fact of this being a very oversold market.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) index has finally cracked and is looking nearly as weak as the rest of the market. Not quite (as weak) in that NDX has to date retraced less of its prior 13-month advance than the other major indices. Specifically, NDX hasn't yet retraced a Fibonacci 62% retracement of its prior year long run up; or, reached a 2/3rds retracement level, which would happen if NDX reached 1980.

It appears that the prior low at 2035 may not hold up on this latest decline and the Nas 100 may be headed to the aforementioned 1945-1980 price zone. Major support is expected at 1750-1700, where the index bottomed last summer.

Resistance was apparent on the last limited rebound to just over 2200. I anticipate resistance then extends to the area of NDX's 21-day moving average, currently at 2250.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is bearish; especially so as the last rally attempt fell apart. It's interesting to note that volume hasn't spiked quite as much on this recent decline as on the last time QQQ reached the 50 area.

If the 50 level is pierced, I anticipate that a next downside target is to the 48.6 to 47.7 area, representing the same 62 to 66% retracements in QQQ as discussed as with the underlying Nasdaq 100 index. Major support is expected if the Q's get back to last summer's lows in the 43.1 to 41.8 price zone.

Resistance/selling pressure came in over a 3-day period and 3-day highs in the 54.4 area definitely point to strong selling pressures and/or a lack of buying interest. Resistance extends to 55.0

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) has now retraced just over 80% of the rally from the early-July/late-August double bottom low to the recent 860 top. This much of a retracement often suggests that an index or stock will retrace ALL of that distance for a 100% round-turn back to retest that low. A further decline of that amount would put RUT back in the 587-590 area. 600 is probably the general support area where buying interest might come back in again.

However, I'm a little ahead of myself as there may be support/buying interest in the 650 area extending to 640, that could still come in here. However the chart looks quite bearish and the index couldn't even make it back up to my lower envelope line at 5% under the 21-day average. Stay tuned on what happens on any test of the prior intraday low at 640. I think I can forecast the outcome on the street of dreams that is Wall Street, as 600 or so looks like the next downside target for RUT.

Resistance begins just under and around 700, extending to 715 and then on up to the current 21-day moving average currently at 738.



GOOD TRADING SUCCESS!


New Option Plays

Energy & Shipping

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Cabot Oil & Gas - COG - close: 66.59 change: -1.38

Stop Loss: 57.00
Target(s): 69.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
We were very successful trading COG's mid August bounce. We want to be ready to do it again if this pull in energy stocks continues. Friday saw COG fall -2% and close under technical support at the 50-dma. We suspect COG will see a dip back toward the mid-July lows in the $63-62 zone.

I am suggesting we use a buy-the-dip entry point at $63.00 to buy calls. If triggered we'll use a stop loss at $57.00. Cautious traders may want to wait for a dip into the $61.50-60.00 zone instead as their entry point. COG bounced near its 100-dma two weeks ago. The 100-dma has risen to $60.62.

We'll set our first target at $69.50.

Buy-the-Dip @ $63.00

- Suggested Positions -

buy the OCT $70 call (COG1122J70)

Annotated Chart:

Entry on August xx at $ xx.xx
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 2.22 million
Listed on August 20, 2011


Energy XXI Ltd. - EXXI - close: 23.50 change: -1.66

Stop Loss: 19.90
Target(s): 27.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The sell-off in EXXI is extremely overdone. The company's recent earnings report was nothing but good news. The bottom line was in line with estimates at 48 cents a share but revenues were up almost +103%. Reserves were up +54% while production was up +66%. Plus, their recent joint ventures with MMR look like they will be extremely successful wells.

If the market is going to test its recent lows then we want to be ready to take advantage of the weakness in EXXI. The August 9th low was $21.04. We are suggesting a buy-the-dip entry point at $22.00. If triggered we'll use a stop loss at $19.90. Our first multi-month target is $27.50.

Buy-the-dip @ $22.00

- Suggested Positions -

buy the DEC $25 call (EXXI1117L25)

Annotated Chart:

Entry on August xx at $ xx.xx
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on August 20, 2011


NEW DIRECTIONAL PUT PLAYS

Alexander & Baldwin, Inc. - ALEX - close: 37.36 change: -0.73

Stop Loss: 40.75
Target(s): 32.50
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shipping stocks are getting hammered and investors have a right to be worried. A few years ago when shipping rates were soaring (they reached more than $220,000 a day back in the 2007-2008 period) the industry accelerated their orders for new double-hulled freighters. Shipping companies have been replacing old ships with new double-hulled ships ever since the Exxon Valdez spill. The combination of a slowing global economy and new ships coming online has killed the shipping rates. There is too much supply for demand and rates have fallen to less than $20,000 a day and for some of the busiest routes rates are essentially negative. Some of this shipping companies, like Frontline, need rates at $30,000 a day just to breakeven. Right now demand continues to look weak and new ships continue to come online. The group is likely to fall for weeks and months to come.

We like ALEX as a potential put play in the group. However, ALEX is not a pure shipping company. They also have a terminal services business, a railway, and truck shipping division. Plus, ALEX has its hands in the agriculture industry focused on sugars and molasses. Yet these extra businesses has not saved the stock price from a crushing August sell-off. Now the oversold bounce has failed and ALEX closed the week at a new multi-month low.

I am suggesting put option positions now. We'll start the play with a stop loss at $40.75. More conservative traders may want to consider a stop a little bit closer to the 10-dma (currently at $39.12). We'll set our target at $32.50.

- Suggested Positions -

buy the SEP $35 PUT (ALEX1117U35) current ask $1.20

- or -

buy the DEC $30 PUT (ALEX1117X30) current ask $1.45

Annotated Chart:

Entry on August 22 at $ xx.xx
Earnings Date 11/10/11 (unconfirmed)
Average Daily Volume = 279 thousand
Listed on August 20, 2011


Teekay Corp. - TK - close: 22.92 change: -0.06

Stop Loss: 24.55
Target(s): 20.25, 17.50
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
TK is another example of the over supply problem in shipping. The company focuses primarily on transporting crude oil. I discuss the shipping industry's troubles in the ALEX trade (above) tonight.

The oversold bounce in TK is failing. I am suggesting bearish put positions now. We'll use a stop loss at $24.55. Our targets are $20.25 and $17.50.

- Suggested Positions -

buy the SEP $22.50 PUT (TK1117U22.5) current ask $1.20

- or -

buy the OCT $20.00 PUT (TK1122V20) current ask $1.00

Annotated Chart:

Entry on August 22 at $ xx.xx
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 531 thousand
Listed on August 20, 2011



In Play Updates and Reviews

Europe Woes Kill the Bounce (Again)

by James Brown

Click here to email James Brown

Editor's Note:

Concerns over Europe continue to plague the markets. Recent U.S. economic data hasn't helped. Now the bounce is failing. Stocks look poised to retest their lows.

Our DIA trade is now open. The MJN trade has been stopped out. We've added some stop losses and pulled the buy-the-dip trigger for adding SPY positions.

-James

Current Portfolio:


CALL Play Updates

Deckers Outdoor - DECK - close: 75.02 change: -8.35

Stop Loss: n/a
Target(s): 93.50, 97.00
Current Option Gain/Loss: -85.1%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
08/20 update: DECK has been a HUGE underperformer this past week with a $20 drop. I warned readers about the bearish reversal on Tuesday but was unprepared for the viciousness of the decline. Shares look poised to drop toward the January lows near $71-72. Friday morning saw an oversold bounce from $74 to $80 that faded away to new losses by the closing bell.

The bid on our Sep. $90 calls has vanished and is trading at 70 cents. There is no guarantee that DECK will bounce and volume has been very big on the sell-off. We will probably need to plan on exiting this position on a bounce back toward resistance instead of hoping for a rally to new relative highs. By not exiting now we're taking the risk that DECK does not bounce for the "reward" of recouping some of our capital on another big oversold bounce.

Nimble traders may want to focus on the January lows near $72-71. If we get a dip near this area, or better yet a bounce, then aggressive traders might want to consider buying calls but I would use a stop loss just under the $70.00 mark!

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 SEP $90 call (DECK1117I90) Entry $4.70

08/20 Remainder of our August $90 call position expires at $0.00 (-100%), We took profits on these on the 12th at +232%
08/18 DECK is down nearly 20 points in three days
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


Dow Jones Industrial (ETF) - DIA - close: 107.91 change: -2.16

Stop Loss: 105.70
Target(s): 114.50,
Current Option Gain/Loss: - 9.8% & -13.1%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/20 update: Our buy-the-dip trigger was hit at $108.00 late Friday afternoon. I'll repeat my comments from Thursday night. Cautious traders may want to wait for a dip to $107.00 or even towards $106.00 before initiating new bullish positions. Given the market's performance on Friday it certainly seems like we could see the DIA trade closer to $106 soon.

Considering the market's tendency for volatility we will add a stop loss at $105.70 but aggressive traders may want to play without a stop and use a very small position size to limit your risk instead.

Earlier Comments:
We will need to use our position size to limit risk.

- Suggested (small) Positions -

Long SEP $110 call (DIA1117I110) Entry $3.15

- or -

Long SEP $112 call (DIA1117I112) Entry $2.20

08/20 add a stop loss at $105.70

chart:

Entry on August 19 at $108.00
Earnings Date --/--/--
Average Daily Volume = 15 million
Listed on August 18, 2011


Green Mountain Coffee Roasters - GMCR - close: 84.08 change: - 3.61

Stop Loss: n/a
Target(s): 99.50, 107.50
Current Option Gain/Loss: ---.-- & (-64.3%)
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/20 update: It was a brutal week for GMCR. The stock fell 19 points (-18.4%). Thursday's decline actually broke key support at its 50-dma. Friday saw a breakdown under its July lows. Friday also saw an intraday rebound and failed rally at $90.00 followed by a $6 sell-off Friday afternoon. Our September $100 calls currently have a bid of $1.30. Given the failed rally intraday on Friday and the new relative low in GMCR and the fact that the S&P500 and DJIA have yet to test their lows from last week, they are all plenty of reasons to exit early from this trade.

I am also concerned that the up trend in GMCR appears to be broken. Instead of expecting a huge rebound that will see our calls turn profitable we probably need to look at the next big rebound as a chance to exit early and recoup some of our capital instead. On a positive the rebound from Friday morning seems to be at potential support near the late May highs. Although I would expect GMCR to dip to the 100-dma if the S&P500 and DJIA continue to sink on Monday.

I am not suggesting new positions at this time.

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 SEP $100 call (GMCR1117I100) Entry $3.65

08/18 if you're bearish on the market, then exit now! Sep.bid @$2.29
08/15 exit August $95 calls immediately. Bid @ $7.95 (+190.1%)
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: 61.07 change: -0.29

Stop Loss: 57.80
Target(s): 63.75, 66.00
Current Option Gain/Loss: + 26.3%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/20 update: After a week of showing some decent relative strength it looks like ORLY may have just produced a short-term top. Friday saw a morning rally and a temporary breakout above resistance at $62 and its 50-dma. Yet the rally didn't last and ORLY's gains faded into a decline of -0.4%. Granted that's better than the NASDAQ's -1.6%. The stock should have support in the $60-58 area with technical support at the 200-dma near $59.

I am adjusting our strategy and adding a stop loss at $57.80. More conservative traders may want to use a stop closer to $59 instead. There is the possibility that ORLY is forming a bear-flag pattern (see chart). I'm not suggesting new positions at this time but readers can keep their eyes open for another bounce from the 200-dma as a potential entry point.

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

- Suggested (small) Positions -

Long SEP $60 call (ORLY1117I60) entry $1.90

08/20 new stop loss @ 57.80
08/15 trade opened
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 15 at $60.37
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on August 6, 2011


SPDR S&P500 ETF - SPY - close: 112.64 change: -1.87

Stop Loss: n/a
Target(s): 119.75, 122.50
Current Option Gain/Loss: Sep.$120call (-50.1%)
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/20 update: On Thursday night we were expecting a dip to $112.00 and planned to use it as a new entry point to buy calls (I suggested the Sep. $118 calls). The SPY fell to $112.50 at its low on Friday afternoon after the morning rally attempt failed. Upon further review we do not want to buy the dip on Monday. There is a growing chance that we'll see the SPY retest the $110 (or 1100 on the S&P500 index). Nimble traders may want to consider buying calls again in the $110.50-110.00 zone on the SPY but the newsletter is not adding new positions at this time.

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

- Suggested (SMALL) Positions -

Long SEP $120 call (SPY1117I120) Entry $2.55

08/20 Trigger to add positions at $112.00 was NOT hit. We are removing the entry point. Do not add to positions at this time.
08/18 adding a new entry point to buy the Sep.$118call at $112.00
08/16 exit Aug. $118 call now. bid $2.26 (+5.1%)
08/15 1st target hit @ 119.75
bid on the Aug. $118 call @ $2.15 (+0.0%)
bid on the Sep. $120 call @ $3.32 (+30.1%)
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: 32.12 change: +0.40

Stop Loss: n/a
Target(s): $37.50, 40.00
Current Option Gain/Loss: - 2.9%
Time Frame: 2 to 3 months
New Positions: see below

Comments:
08/20 update: Crude oil managed a rebound on Friday and the USO added +1.2%. Gains faded late in the day. We will add to our position if we see the USO hit $30.50. The low on August 9th was $30.31. Please see below for further details on this new entry point.

Earlier Comments:
We're not using a stop loss on our original trade (Nov. $34 call entered on Aug. 9th) so keep your position size small!

This is a lottery-ticket style of play.

- Suggested Positions -

Long NOV $34 call (USO1119K34) Entry $2.05

New Entry Point: Buy calls if USO hits $30.50 (again)

Buy the NOV $34 call (USO1119K34)
If triggered, use a stop at $29.00 for this position.

08/20 Adding a new buy-the-dip entry at $30.50, stop @ 29.00

chart:

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


United Technologies Corp. - UTX - close: 67.45 change: -0.67

Stop Loss: n/a
Target(s): 76.40, 79.75
Current Option Gain/Loss: (Sep. - 71.5% & Aug. - 100%)
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/20 update: The sell-off has slowed as UTX flirts with support from last week's lows. Our aggressive, higher-risk trade using August options has expired. Further declines from here would look bearish but UTX should have decent support at $65.00. I am suggesting a new entry point to buy calls at the $65.00 level. We still want to keep our position size very small to limit our risk.

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

- Suggested Positions -

Long SEP $75 call (UTX1117I75) Entry $1.83

Buy the dip at $65.00

buy the SEP $67.50 call (UTX1117I67.5)

08/20 New entry point to buy calls on dip at $65.00
08/20 Our aggressive, higher-risk trade with August options has expired. Entry price on Aug. $75 call (UTX1120H75) was $0.29. exit 0.00 (-100%)

chart:

Entry on August 15 at $73.21
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on August 13, 2011


Whole Foods Market, Inc. - WFM - close: 56.83 change: -2.01

Stop Loss: n/a
Target(s): 63.50
Current Option Gain/Loss: - 17.9%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/20 update: WFM is down over five points in the last two days. The close under technical support at the 200-dma is worrisome but I have been suggesting readers wait for a dip into the $56-54 zone before initiating new positions. Cautious traders may not want to risk that much so you'll need to consider a stop loss, maybe under $56 or under $54. We are not using a stop at this time. I'd probably wait for a dip into the $55-54 zone before buying calls again.

I will point out that bears could make a case against WFM. You could argue that the peaks in April and July are a bearish double top. Plus the oversold bounce failed near resistance at the 61.8% Fib retracement of the August sell-off. Readers may want to wait for a bounce from the $55-54 zone before initiating bullish positions.

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

- Suggested Positions -

Long SEP $60 call (WFM1117I60) Entry $2.45

chart:

Entry on August 15 at $58.68
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on August 13, 2011


PUT Play Updates

CBOE Volatility Index - VIX - close: 43.05 change: + 0.38

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -92.5%
Second Position Gain/Loss: - 88.0%
Third Position Gain/Loss: -69.2%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/20 update: The VIX spiked toward the 45 level for the second day in a row but closed off its highs. There could be another spike on Monday if the S&P500 dips toward the lows near 1100. The VIX might actually see a new relative high over 48 if the S&P500 trades below the 1100 level. I would be tempted to buy puts again on a spike into the 48-50 area but I would keep positions very small.

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.

- Suggested Positions -

Long SEP $25.00 PUT (VIX1121U25) Entry $4.00

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

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

08/17 August VIX options expire
1st position Aug. $25 put @ $0.00 (-100%)
2nd position Aug. $25 put @ $0.00 (-100%)
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


CLOSED BULLISH PLAYS

Mead Johnson Nutrition Co. - MJN - close: 66.73 change: -3.23

Stop Loss: 66.99
Target(s): 74.50
Current Option Gain/Loss: -52.4% & -46.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/20 update: MJN held up well on Thursday's market decline but then collapsed on Friday. I couldn't find any news behind the relative weakness in MJN on Friday. Shares fell -4.6% and dropped below potential support at $68 and its 50-dma. Our stop loss was hit at $66.99 Friday afternoon.

- Suggested Positions -

SEP $70 call (MJN1117I70) Entry $2.63, exit $1.25 (- 52.4%)

- or -

SEP $75 call (MJN1117I75) Entry $0.75, exit $0.40 (- 46.6%)

08/19 stopped out @ 66.99

chart:

Entry on August 17 at $71.11
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on August 16, 2011