Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/31/2011

Table of Contents

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

Market Wrap

Fourth Day Up, Fourth Month Down

by Keene Little

Click here to email Keene Little
Market Stats

This week's bounce has put the DOW back into positive territory for the year. Whew, nice to have that accomplishment for the month -- eight months and we've got zilch to show for our efforts (that would be for both bulls and bears). The only ones making out in a flat market are option premium sellers and even that's only if you didn't get run over by the wild swings in the interim. Are we having fun yet?

By the looks of the number of people dropping from trading (and from reading newsletters), the answer to the above question is an unequivocal "NO"! If you're feeling a little (lot?) frustrated by this market just know that you're not alone. The truly successful traders (the ones who last for more than a couple of years) are the ones who can tolerate times like these and still do well. Doing well means not blowing up your account (wink). Anyone can make money in a bull market (the kind where you throw a dart, buy it, hold it for 12 months and then sell it) but it takes a trader to make money in a sideways or down market. Make money in this period (or don't lose a lot and be learning) and you'll be a longer-term successful trader and that's what we're trying to teach. Hang in there during the hard times and you'll find much better times to knock the cover off the ball. The 80/20 rule probably applies to the stock market -- it trends about 20% of the time and chops sideways for the rest of the time. Learn how to make money during that 80% and the trending times will be welcome gifts.

A bear market, which I believe we're in and we've probably re-entered a cyclical bear within the larger secular bear, is the most difficult market to trade. I started trading full time in 2000 and sometimes I wonder if I'll ever truly understand this market. The answer is of course no. Anyone who tells you they understand the market means either they're lying or fabulously wealthy, in which case why are they talking to you? That leaves the rest of us. So don't despair. Just understand the social mood that affects the market (which is turning south again) and of course our own mood. And trade more carefully, which means smaller positions and quicker base hits and get out. This is not a period to buy and hold nor is it time to sell and hold. There are no home runs (congrats if you get one now and again) but only base hits so that you can build your account slowly over time. That way when the next secular bull market is about to start you'll have plenty of cash to deploy for your longer-term wealth-building investments.

Today marked the fourth day in a row for the DOW to be positive. That's the good news. The bad news is that August marked the fourth month in a row for the DOW to be negative. Unfortunately I see the potential for a fifth and maybe sixth month in a row to be down. But as I'll get into with the charts, there's some money to be made on the downside (sometimes good money in a very short period of time). And if the pattern plays out like I think it will, we'll have a good buying opportunity for a run into the end of the year once the leg down from May has completed. If you're as comfortable (and I use that word loosely) trading the short side as the long side, we have some good trading opportunities directly ahead. If you do not like the short side then hang in there for a little longer and you should be able to get back in the game shortly. Paper trade the short side so that you learn to read the "opposite" signals.

I mentioned social mood turning south again. We've seen it in the sentiment numbers. The rapid decline in consumer sentiment is not a good omen for the stock market. Consumer mood is everything when it comes to the economy and the stock market. And mood is souring -- people are worried and afraid and that's not a recipe for bullishness as they close their wallets and hunker down. Some feel all the bad news, debt debates, etc. is the cause of the drop in consumer sentiment but my contention all along is that the bad news, debt debates, etc. is because of the bad mood, not the other way around. It's what defines bear market periods. This too shall pass as these cycles run their course. But just recognize we're in a down cycle and try to remind yourself not to get pulled down with the herd mentality. In the meantime look forward to trading the short side again.

The chart below shows the relationship between the DOW priced in gold and the Michigan Consumer Confidence. First of all, it's an interesting view of the stock market priced in something other than a declining dollar value, which gives the false impression that the market has been holding up all these years. In fact it's down considerably, even after the 2007 and 2011 "highs". Secondly, Consumer Confidence has now dropped below the low last seen in 2009, as has the "price" of the stock market when measured in gold's value. Now the question is whether the DOW in nominal dollar value will do the same. I think it will (break below the March 2009 low).

DOW priced in gold vs. Consumer Confidence, chart courtesy elliotwave.com

This morning's economic reports included the ADP report, Chicago PMI (Purchasing Mangers Index) and Factory Orders. The ADP report showed 91K private sector jobs added, which was a little lower than the 100K expected and the 109K for July. Futures had been rallying all night and didn't let this little disappointment affect it during the pre-market session.

Shortly after the opening bell the Chicago PMI showed a slowing in August but not that much -- from 58.8 to 56.5, so still above 50. The market rallied further on that "not so bad" news (expectations were for 53), even though it's now at a 21-month low, but now in its 23rd month of expansion (above 50). The report showed a slowing in new orders and a shrinking of the orders in backlog so that's clearly not a good direction for future reports. This report usually is a good indication for how the ISM (Institute for Supply Management), which is the national manufacturing gauge, will look. The ISM comes out tomorrow morning.

Factory orders came in at 2.4% which was much better than June's revised -0.8% and better than the expected 1.8%. This added to the morning rally, which was unfortunately over by 10:15 AM following the 10:00 AM report.

SPX rallied to a high of 1230.71 this morning, a level that has acted as support/resistance for a long time. Looking back in time I see how SPX has found the 1220-1230 area to be an important level -- it obviously resonates with something in our collective brains. It was a level that acted as support/resistance in 1998, 1999 and 2001. The rally following the pullback into August 2004 topped at 1229 in March 2005. It then pulled back and rallied higher into early 2006 before pulling back again to find support there in June and July 2006. Once the market started back down from the 2007 highs SPX found support there in July and September 2008. It was the break of this level in September 2008 that led to the price crash into November 2008. Are we now back testing that pre-crash level?

The rally off the March 2009 low stopped at 1220 in April 2010 and again in November 2010 before finally pushing through it in December 2010. On the way back down this year it stopped just above 1230 on August 3rd for a brief one-day bounce and then dropped strongly below it on August 4th. And now it's back up to it, with a high of 1230.71 today.

What's interesting about this area now is that two equal legs up for an a-b-c bounce off the August 9th low is at 1228. The 50% retracement of the July-August decline is at 1229. The top of a parallel up-channel (bear flag) from August 9th is near 1230. The top of a parallel down-channel for the decline from May is at 1230. In other words the 1228-1230 area is significant, both from a short-term as well as longer-term perspective. It made for a great shorting opportunity today. Only time will tell how important it will be here.

The sharp decline from July either completed the pullback correction to the longer-term bull market rally from 2009 or it's the start of the next bear market decline. That is the big argument now between the bulls and bears. Based on the pattern for the 2009-2011 rally I believe the bull market completed in May (or July) and that we've started the next bear market cycle. That means the bounce off the August 9th low is a correction to the decline and Not the start of another rally to a new high. That assumption would be severely challenged with a rally above SPX 1302 (78.6% retracement) but for now the more likely scenario is the August bounce is a bear market correction and one to be shorted.

And this makes the 1228-1230 area particularly important again. Many are looking for a return to at least the 1250-1260 area and in fact there may be too many looking for that to be achieved. We all know what happens when too many expect something out of the market. The bears want a good entry up there and the bulls (who are worried the bull market has finished) want that level to liquidate their inventory. Rarely is the market so accommodating.

An a-b-c correction is one of the more common corrections and two equal legs is the most common of the a-b-c moves. Again, that's what makes the 1228-1230 area important right now, especially since it's also a 50% retracement of the decline. In hindsight this could be the gift the bears were looking for. The big question in my mind, assuming we'll see the market start back down (big assumption right now but that's the setup), is what to expect for the next leg down.

Depending on how I view the decline, I'm looking for either a test of the August low near 1100 or a more significant decline to the 950 area. Using today's high near 1230, two equal legs down from May is to 956. A 62% retracement of the 2009-2011 rally is at 935. Considering the potential financial calamity that could follow the debt issues (I'm trying to be kind) in Europe, that kind of downside projection could happen very quickly. If you're in even a small short position (a few SPY puts for example) it would make some serious money with that kind of decline (10-bagger kind of money). While it's foolish to plan for that kind of move, it's a possibility and therefore worthy of consideration in your trade plan. Even a move back down to 1100 would make good money on some puts bought here. The risk of course is a loss if the rally continues, which is why I've been recommending tight stops on short plays on the Market Monitor, such as today's short-play setup. As a recommendation when playing with options, buy at least 3 months out. If selling (naked or a credit spread) you'll want to sell no more than 4-6 weeks out.

The weekly chart below shows the current August bounce as a 4th wave correction within the decline from May. That calls for a 5th wave down, which could be simply a retest of the August 9th low, or it might drop to 1089 to close the September 2nd gap, shown on the 120-min chart further below. As a 5th wave it would leave a bullish divergence and get many traders excited about a double ('W') bottom, and rightfully so since it would lead to a strong bounce back up into the end of the year (larger degree 2nd wave correction). The dashed line is the more bearish scenario calling for another leg down to equal the May-August decline. Following that kind of decline could be a multi-month sideways correction.

S&P 500, SPX, Weekly chart

The daily chart shows more clearly the a-b-c bounce (labeled w-x-y only because of the type of internal pattern for the move) in a bear flag. There is upside potential to the March low (1249), June low (1258), 62% retracement of the decline (1259) and even to the 1300 area to retest the broken uptrend line from March 2009 - August 2010 (and 78.6% retracement). If the 2nd leg of the bounce from August 9th were to achieve 162% of the 1st leg, that gives us a 1294 target. So there's clearly some upside potential if the rally continues above 1230. But for now, the setup is for the bounce to have finished and a start back down. A drop below the August 25th high near 1191 would signal the top of the bounce is probably in. Keep an eye on MACD as well -- a rollover from the zero line would be a MACD sell signal.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- Short-term bullish above 1230 and more bullish above 1270
- bearish below 1135

Dialing in closer, the chart below shows the bounce hit the top of the bear flag pattern with only a marginal poke through the 1228 and 1229 levels. There's no proof yet that that's the high for the bounce. We could see a relatively small pullback and then continue higher, in which case the higher targets mentioned above would be in play. A drop below 1191, confirmed with a drop below the August 26th low near 1136, would signal the high is in place. Obviously I'm attempting to identify the top before giving up a lot of points to the downside.

S&P 500, SPX, 120-min chart

The DOW has the same pattern as SPX but I'm continuing to carry a slightly different wave count based on the July 21st high being so close to making a new high above the July 7th high (and NDX made a new high). This could mean the July 21st high was the completion of the 2009-2011 rally (with a truncated finish for the other indexes, including SPX). The decline from there to August 9th may be the completion of the 1st wave down and the bounce off the August 9th low is a 2nd wave correction, which might have finished today. The next move will be a 3rd wave down, the strongest in a 5-wave move. This suggests the next leg down will be greater than the July-August decline, which means the DOW would drop below 9500 and conceivably down to the 8500 area before consolidating for a few months. A 62% retracement of the 2009-2011 rally (using the July 21st high as the final high) is at 8870. If the pattern is more like the one for SPX then the first support level is at a marginal new low, around 10400.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 11,930
- bearish below 10,930

NDX, because of its new high on July 26th, is the reason I'm considering the move down to the August 9th low as the completion of the 1st wave down and the 3-wave bounce since then is a 2nd wave correction, which has now retraced between 50% and 62% of the decline, pretty typical for a 2nd wave. Today it tagged its 50-dma at 2269 (1 point shy of it), which had acted as support in July before breaking on August 2nd (followed by a quick test on August 3rd). Back up to the scene of the crime leaves a bearish setup if it fails from here. A 3rd wave down would likely take NDX quickly down to the 1700 area (the July 2010 low), if not 1600 (and into October if not September). It's possible we'll see a relatively small pullback and then a press higher next week up to the 2300 area to test the broken uptrend line from March 2009 - July 2010.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2269 and more bullish above 2320
- bearish below 2082

The RUT's pattern looks like SPX and the higher-odds scenario calls for a decline to a relatively minor new low, perhaps down to 605 for a 50% retracement of the 2009-2011 rally. If it's able to push a little higher in the coming weeks I don't think it will get through 775.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 738 and more bullish above 775
- bearish below 662

The 10-year yield, TNX, has been chopping around since its low on August 18th. It looks to be hammering out a consolidation before heading lower again. There is upside potential to about 2.5% if it can get through 2.33% but so far it looks lower rather than higher, especially if the stock market heads lower and traders run to the perceived safety of bonds.

10-year Yield, TNX, Daily chart

The chart below is from Tom McClellan and shows last year's T-Bond prices vs. this year's, both leading up to Bernanke's Jackson Hole speech. Last year was when he announced the coming of the QE2 program and coincided with a peak in bond prices (low in yield). This year, so far, we've also seen a top in price near his speech (about a week prior). If it follows the same pattern we'll see a dip in prices (higher bounce in yields) followed by a rally to a lower high to test the August high in September/October (which could coincide with a selloff in the stock market) before selling off into next year, and driving yields higher. It's an interesting analog setup and one that I'll continue to watch for the next few months to see if it tracks.

T-Bond prices, 2010 and 2011, Daily chart courtesy mcoscillator.com

The banks have had a nice bounce since the low on August 23rd. BKX has now retraced 38% of the leg down from July 7th and could press a little higher for a test of its broken trend line along the lows since March, currently near 41. It would be more bullish with a rally above that level. But the bounce pattern can be considered complete at the 38% retracement and supports the idea we'll see a turn back down from here.

KBW Bank index, BKX, Daily chart chart

The Transportation index has also retraced 38% of its July-August decline, which is typically the minimum I would expect to see for a 2nd wave correction. It also made it back up to the previous 4th wave, which is the August 15th high and is a typical retracement level. So the pieces are in place for the 3-wave bounce off the August 19th low to be the completed correction and now we'll start another, stronger, decline from here. But if the decline starts to get choppy and corrective then I'll be looking for another leg up into September before heading lower. The TRAN continues to be a good proxy for the market if only because its price pattern is so clean at the moment.

Transportation Index, TRAN, Daily chart

The dollar hasn't been able to punch its way out of wet paper bag for months now. The weekly pattern would look best with another decline to the $70 area but so far it's only been chopping its way marginally lower and that actually gives it a bullish feel to it now (chopping lower in an ending pattern). If the dollar does start to rally instead of dropping lower I think it's going to come exploding out of this pattern so be ready for that possibility (and what it would mean for other assets, which would sell off hard).

U.S. Dollar contract, DX, Weekly chart

Following gold's sharp selloff from the August 23rd high it has chopped its way back up in what looks like a correction to the decline. It should be followed by an even stronger selloff. The bounce could certainly make it higher, similar to the high bounce in silver following its high on April 25th and retest on April 28th (which can be seen in the next chart below). I wouldn't be shocked to see another new high either, in order to make it up to the trend line along the highs from 2006 and 2008, currently near $2000. But a drop back below 1778 would say the bounce has finished and look for a strong decline from there.

Gold continuous contract, GC, Daily chart

Silver is sharing the same pattern as gold since the high on August 23rd. I'm expecting the current bounce to finish soon, if it hasn't already done so, and be followed by a very strong decline, one that will take it well below 30 and potentially right down to 25.

Silver continuous contract, SI, Daily chart

I've been thinking oil will make it a little higher in its bounce off the August 9th low, and it still could, but if the stock market starts back down I think oil will follow. It's 7 cents shy of the June low at 89.61, which is at the 50% retracement of the 2008 decline (you can see in the chart below how much price has been respecting the 38%, 50% and 62% levels since May). If oil rolls back over from here it will have MACD rolling over from the zero line (for a sell signal). If it's able to press higher there's upside potential to the $95 area before rolling back over.

Oil continuous contract, CL, Daily chart

It's been a busy week for economic reports and the rest of the week has some important reports for the market to digest. Tomorrow's unemployment claims, unless they're very bad (or good, as in below 350K), should not have much of an impact. The ISM index is the big one tomorrow and a drop below 50 (indicating economic contraction) is expected. How much below 50 could have a large impact on the market. If it comes in better than 50 we could get an upside pop. Friday is of course the big day with the non-farm payrolls report. The unemployment rate is not going to be very well accepted either since it's expected to tick higher to 9.2%.

Economic reports, summary and Key Trading Levels

Friday we get the non-farm payrolls report and there have been guesstimates for the number all over the map. Shortly after the Philly Fed number came out (August 18th), which was a shocking surprise at the time (-30.7 vs. expectations for a drop from 3.2 to 1.0), I saw a chart comparing the Philly Fed numbers vs. payroll numbers and it's scary bad. The Philly Fed number is apparently a very good predictor of the payroll report and right now the significant decline is pointing to a loss of -700K jobs!! Compare that to the expectation for +75K. Needless to say, you do not want to be long the market if even a third, or a tenth, of that negative value comes to pass on Friday. The Philly Fed loss was even sharper than we saw leading up to the collapse in 2008.

Today's setup was for a reversal in the SPX 1228-1230 area and we got it (with a small throw-over). I had suggested on the Market Monitor that it was a good place to short it and once it rolled over to pull stops down to a new daily high. That's still the suggestion if we get a little pop tomorrow that fails to make a new high. If it drops lower out of the gate it will make it more difficult to get an entry since the stop level is more difficult (further away) but look to short bounces.

If the market rallies but is only able to make a minor new high, it will be another opportunity to try the short side. We need to see a rally above 1230 that holds above before I'd feel better about the long side. However, considering the risk with the payrolls report on Friday morning I would Not want to be long heading into that report. That's just me.

Today is also a Bradley Model turn date so that fits well with what I'm seeing with today's high. The next turn date is September 26th. It's also only two days beyond the new moon (Monday) and new moons this year have been common at market highs. Take that for what it's worth (many feel the moon has no effect whatsoever but it's hard to argue with the little bubbles on the chart).

S&P 500 MPTS, Daily chart

Good luck and I'll be back with you next Wednesday.

Key Levels for SPX:
- Short-term bullish above 1230 and more bullish above 1270
- bearish below 1135

Key Levels for DOW:
- bullish above 11,930
- bearish below 10,930

Key Levels for NDX:
- bullish above 2269 and more bullish above 2320
- bearish below 2082

Key Levels for RUT:
- bullish above 738 and more bullish above 775
- bearish below 662

Keene H. Little, CMT


New Option Plays

Worst August in Years

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index has extended its gains to six days out of the last seven sessions. In spite of a huge bounce off its lows the market posted a big loss for August. It was an ugly month but short-term the stock market is actually overbought.

I am concerned that stocks could see a sell-off on the jobs data this coming Friday morning. We are reluctant to add new bullish positions with stocks overbought and reluctant to open bearish positions with the market still climbing.

Here is a list of some of the stocks on our radar screen.

ANF - several retailers will report their August same-store sales data tomorrow. ANF might see a sell-off back to support near $60.00. Nimble traders could try and buy a dip or a bounce from the $60 area.

PSMT - shares are surging to new highs. I would not chase it here. Broken resistance at $62 and at $60 should both offer new support. Wait for a pull back.

TUP - the stock has broken out past resistance near $65.00 and its 50-dma. Technically could be used as a new bullish entry point. Readers may want to wait for a dip back toward its short-term trendline of higher lows.

KO - Coca-Cola has been showing relative strength. Money managers probably consider it a "safe haven" trade as a liquid, big cap name. Today's gain is a close over resistance at $70.00 and a new ten-year high. My biggest concern with KO is that it moves relatively slowly.

WLT - This coal stock can be a very volatile equity. Shares just failed at resistance near $85.00. Readers could wait for a close over $85.00 as a new bullish position.

ENR - Energizer is consolidating under resistance at $77.00. Readers could wait for a breakout past $77.00 or $77.50 as a new bullish entry point.

SINA - this is a volatile Chinese Internet stock that just hit new four-week highs. Nimble traders may want to consider buying calls on a dip or a bounce from the $100-95 area.

- James


In Play Updates and Reviews

ORLY and SRCL Hit Our Targets

by James Brown

Click here to email James Brown

Editor's Note:

Stocks surged out of the gate this morning helped by strong gains in European markets.

Our plan was to exit ORLY at the open. SRCL hit our target. Meanwhile FFIV and TSCO were opened. HANS surprised us and hit our new stop loss.

We have updated several stop losses tonight!

-James

Current Portfolio:


CALL Play Updates

CR Bard Inc. - BCR - close: 95.26 change: +1.10

Stop Loss: 91.75
Target(s): 94.75, 98.25
Current Option Gain/Loss: Sep.$85: +18.9% & Oct. $95: +23.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/31 update: BCR continues to rally. Shares added +1.1% and closed above potential round-number resistance at $95.00. BCR is up six out of the last seven days with a move from about $86.50 to $95.00 so it might be time for a pull back. We are raising our stop loss to $91.75. More conservative traders will want to consider a higher stop while aggressive traders may want to keep theirs under $90.00.

NOTE: Cautious traders may want to exit the September calls early (like tomorrow before the close) to avoid the risk of a jobs-report sell-off and the premium decline over the long weekend.

No new positions at this time.

- Suggested (small) Positions -

Long SEP $95 call (BCR1117I95) Entry $1.85*

- or -

Long OCT $95 call (BCR1122J95) Entry $3.40*

08/31 new stop loss @ 91.75
08/30 new stop loss @ 89.90
08/30 1st target hit at $94.75
Sep. $95 call bid at $2.25* (+21.6%)
Oct. $95 call bid at $4.00* (+17.6%)
*these are estimates. options did not trade today
08/29 play opened. BCR gap open entry at $92.11
* these are estimates. options did not trade today
08/27 Adjusted back to old strategy. Buy calls now if both BCR and S&P500 open positive on Monday.
08/27 move stop loss to $87.40 and adjusted strikes to $95
08/25 New strategy. Buy the dip at $86.50, new stop 84.85

Entry on August 29 at $92.11
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 1.25 million
Listed on August 23, 2011


Caterpillar Inc. - CAT - close: 91.00 change: +1.17

Stop Loss: 85.75
Target(s): --.--, 94.50
Current Option Gain/Loss: Sep.$90: +63.0% & Oct. $90: +37.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/31 update: CAT rallied to a new three-week high this morning and hit $93.82. Traders were buying the dip this afternoon near support at $90.00. The stock is up big from $81 just four trading days ago.

I am suggesting an early exit from our September calls. We will keep the October calls but raise our stop loss to $85.75.

I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small.

- Suggested Positions -

SEP $90 call (CAT1117I90) Entry $2.30, exit $3.75 (+63.0%)

- or -

Long OCT $90 call (CAT1122J90) Entry $4.35

08/31 new stop loss @ 85.75. Exit Sep. calls now!
08/31 exit early Sep. $90 call (bid) @ $3.75 (+63%)
08/30 new stop loss @ 84.75, consider taking profits early now.
08/29 trade opened. CAT gapped open at $87.11
08/27 buy-the-dip trigger not hit. We will switch back to buying calls now if both CAT and S&P500 open positive on Monday.
08/27 new stop loss at $79.49
08/24 play was not triggered. New strategy to buy the dip at $80.50 with a stop at $78.75.

Entry on August 29 at $87.11
Earnings Date 10/24/11 (unconfirmed)
Average Daily Volume = 13.9 million
Listed on August 23, 2011


Cabot Oil & Gas - COG - close: 75.86 change: -0.81

Stop Loss: 71.45
Target(s): --.--, 78.85
Current Option Gain/Loss: Sep.$75: +28.5% & Oct.$75: +27.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/31 update: Warning! COG rallied to $78.47 this morning and reversed. This could be a potential bearish double top but we can't know until it's in our rear-view mirror. Our second and final target is $78.85. Conservative traders may want to exit immediately given the intraday reversal, especially if you're holding September calls.

We will raise our stop loss to $71.45. You may want to raise yours even higher!

No new positions at this time.

- Suggested Positions -

Long SEP $75 call (COG1117I75) Entry $2.80

- or -

Long OCT $75 call (COG1122J75) Entry $4.80

08/31 new stop loss @ 71.45. Consider an early exit now!
08/30 new stop loss @ 69.75, adjust final target to $78.85
08/30 1st target hit at $75.85.
Sep. $75 call bid @ 3.70 (+32.1%)
Oct. $75 call bid @ 6.20*(+29.1%)
*option did not trade today. this is an estimate. 08/29 COG gapped open higher at $72.79

Entry on August 29 at $72.79
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on August 27, 2011


Deckers Outdoor - DECK - close: 88.96 change: +0.02

Stop Loss: 84.40
Target(s): 93.50, 97.00
Current Option Gain/Loss: -25.5%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
08/31 update: The trading action in DECK today worries me. Shares rallied to $92.66 intraday only to reverse lower and close almost unchanged on the session. The move looks like a bearish reversal and failed rally pattern. Once again I am suggesting that conservative traders consider an early exit now.

I am not suggesting new positions at this time.

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.

- Suggested (SMALL) Positions -

Long SEP $90 call (DECK1117I90) Entry $4.70

08/30 Readers may want to cut losses now (at -23.4%).
New stop loss @ $84.40
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%)

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


Energy XXI Ltd. - EXXI - close: 26.81 change: +0.42

Stop Loss: 23.90
Target(s): 27.50, 29.75
Current Option Gain/Loss: + 73.0%
Time Frame: 6 to 12 weeks
New Positions: see below

Comments:
08/31 update: EXXI displayed some relative strength with a +1.5% gain. Yet most of that came on the opening gap higher. EXXI actually spent the day moving sideways. We will move our stop loss up to $23.90. More conservative traders may want to use a stop closer to the $25.00-25.50 zone instead.

Cautious traders may want to take profits now (option +73%).

No new positions at this time.

- Suggested Positions -

Long DEC $25 call (EXXI1117L25) Entry $2.60

08/31 new stop loss @ 23.90
08/30 new stop loss @ 23.40
08/29 new stop loss @ 21.90
08/27 new stop loss @ 20.90

Entry on August 22 at $22.00
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on August 20, 2011


F5 Networks Inc - FFIV - close: 81.57 change: +2.24

Stop Loss: 76.25
Target(s): 84.50, 89.00
Current Option Gain/Loss: Sep.$85: - 0.0% & Oct.$85: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/31 update: Our aggressive trade on FFIV has been opened. The stock opened at $80.00 and rallied to $82.31 intraday. FFIV eventually settled with a +2.8% gain. The plan was to keep our position size very small to limit our risk. We're using a stop loss at $76.25. More conservative traders may want to use a stop closer to $77.50 instead.

NOTE: Any big dip is going to crush the September calls since they expire in just over two weeks. Readers may want to play the Octobers instead.

- Suggested Positions -

Long SEP $85 call (FFIV1117I85) Entry $2.16

- or -

Long OCT $85 call (FFIV1122J85) Entry $5.05

Entry on August 31 at $80.00
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 3.5 million
Listed on August 30, 2011


Lululemon Athletica - LULU - close: 54.73 change: -1.34

Stop Loss: 51.40
Target(s): 56.00, 59.50
Current Option Gain/Loss: + 6.2%
Time Frame: up to September 9th
New Positions: see below

Comments:
08/31 update: I could be wrong but I doubt the back-to-school shopping surge has the same impact for LULU as it does for other apparel retailers. That's not stopping investors from worry over how the August same-store sales results (out tomorrow) will come in. The trading action in LULU today looks bearish with a failed rally near $58 and a close back under its 50-dma and the $55.00 level.

I am turning cautious here and raising our stop loss to $51.40. Bear in mind that LULU has been very volatile over the last four weeks. Any significant market swoon will probably has LULU hitting our new stop loss.

No new positions at this time.

NOTE: This is a short-term trade. We do not want to hold over the Sept. 9th earnings report.

- Suggested Positions -

Long SEP $55 call (LULU1117I55) Entry $3.20

08/31 new stop loss @ 51.40
08/30 new stop loss at $49.75
08/30 1st target hit @ $56.00, option bid @ $4.05 (+26.5%)

Entry on August 29 at $54.05
Earnings Date 09/09/11 (confirmed)
Average Daily Volume = 4.2 million
Listed on August 27, 2011


Tractor Supply Co. - TSCO - close: 61.37 change: +0.55

Stop Loss: 58.75
Target(s): 64.75
Current Option Gain/Loss: Sep.$65: -35.7% & Oct.$65: + 2.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/31 update: Our TSCO trade is open. Shares opened at $61.15 this morning and then spent the session consolidating in a relatively narrow range. Nimble traders may want to wait and try to enter on another dip near $60.00. Cautious traders will want to wait and see how the market reacts to the jobs data on Friday before considering new positions.

Earlier Comments:
The September options expire in less than three weeks. If TSCO does not see any follow through higher these will evaporate fast. The spread is a larger percentage of the overall trade with the Septembers.

- Suggested Positions -

Long SEP $65 call (TSCO1117I65) Entry $0.70

- or -

Long OCT $65 call (TSCO1122J65) Entry $2.00

Entry on August 31 at $61.15
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 858 thousand
Listed on August 29, 2011


U.S. Oil Fund - USO - close: 34.51 change: +0.07

Stop Loss: 31.90
Target(s): $37.50, 40.00
Current Option Gain/Loss: +37.0%
Time Frame: 2 to 3 months
New Positions: see below

Comments:
08/31 update: It was a quiet day for oil prices. The USO managed to hit a new four-week high intraday. Shares traded in a relatively narrow range. This ETF could have additional resistance near $35.00. I am not suggesting new bullish positions at this time.

Earlier Comments:
Keep your position size small! This is a lottery-ticket style of play.

- Suggested Positions -

Long NOV $34 call (USO1119K34) Entry $2.05

08/27 new stop loss @ $31.90
08/27 removing 2nd trigger to add another position.
08/20 Adding a new buy-the-dip entry at $30.50, stop @ 29.00

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: 74.25 change: +0.49

Stop Loss: 71.75
Target(s): 76.40, 79.75
Current Option Gain/Loss: (Sep. - 18.0%)
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/31 update: UTX displayed some relative strength today. Shares hit a new four-week high at $75.37 this morning. The stock does look short-term overbought with a move from about $69 four days ago to $75 today. It's probably time for a dip. We have about two weeks left on September options. Cautious traders will want to seriously consider an early exit now! I would expect a dip back toward the $73-72 zone. I am raising our stop loss to $71.75.

I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small.

- Suggested Positions -

Long SEP $75 call (UTX1117I75) Entry $1.83

08/31 new stop @ 71.75, consider an early exit now (-18.0%)
08/30 consider cutting your losses now (-30%)
08/27 Adding a stop loss at $68.75
08/27 We have removed the buy-the-dip entry at $65.00
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%)

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


PUT Play Updates

CBOE Volatility Index - VIX - close: 32.28 change: - 3.31

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -93.7%
Second Position Gain/Loss: - 90.0%
Third Position Gain/Loss: -65.7%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/31 update: The VIX fell to its lowest point in almost four weeks with the morning low at 30.16. The short-term trend is down but we are not suggesting new positions at this time.

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.

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


CLOSED BULLISH PLAYS

Hansen Natural Corp. - HANS - close: 85.32 change: -4.26

Stop Loss: 83.40
Target(s): 89.75, 94.50
Current Option Gain/Loss: Sep.90: -53.6% & Oct.90: -37.5%
Time Frame: 2 to 6 weeks
New Positions: see below

Comments:
08/31 update: Ouch! HANS was a big underperformer on Wednesday. The stock collapsed from resistance near $90.00 to hit an intraday low of $81.72 (-8.7% intraday). We had just moved our stop from $80.90 to $83.40 last night thus our trade has been stopped out.

There was no explanation for the sell-off today. No news. No downgrades. Nothing. You will notice that volume was off the charts at 3.7 million compared to normal volume of 1.4 million. Maybe there was a fund manager that needed to raise cash before the month was over.

- Suggested Positions -

SEP $90 call (HANS1117I90) Entry $2.05, Exit $0.95 (-53.6%)

- or -

OCT $90 call (HANS1122J90) Entry $4.40, Exit $2.75 (-37.5%)

08/31 stopped out @ 83.40
08/30 1st target hit at $89.75
Sep $90 call bid @ $3.10 (+51.2%)
Oct $90 call bid @ $5.40 (+22.7%)
08/30 new stop loss @ 83.40
08/29 HANS gapped open at $86.00

chart:

Entry on August 29 at $86.00
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on August 27, 2011


O'Reilly Automotive - ORLY - close: 64.88 change: -0.27

Stop Loss: 61.75
Target(s): 63.75, 66.00
Current Option Gain/Loss: +163.1%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/31 update: ORLY hit our final target at $66.00 today. Shares opened higher at $65.44 and spiked to $66.02 before reversing lower. Except we can't claim an exit at $66.00. Our plan was to exit our call positions at the open this morning.

At the open this morning the bid on the September $60 call would have been about $5.00 (+163.1%). The option did not trade today and the current bid is $4.80.

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

- Suggested (small) Positions -

SEP $60 call (ORLY1117I60) entry $1.90, exit $5.00 (+163.1%)

08/31 planned exit at the open
08/30 prepare to exit tomorrow morning
08/24 new stop loss @ 61.75
08/24 1st target hit @ 63.75, option @ $4.00 (+110.5%)
08/23 new stop loss @ 59.40
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


Stericycle Inc. - SRCL - close: 87.71 change: +0.31

Stop Loss: 83.75
Target(s): --.--. 88.50
Current Option Gain/Loss: +140.0%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/31 update: Target achieved. SRCL opened at $88.00 and rallied to $88.85 before paring its gains. Our final target to exit was hit at $88.50. The stock looks short-term overbought. I would keep it on your watch list for a pull back before considering new positions.

NOTE: the option did not trade today. Our exit is an estimate.

- Suggested (small) Positions -

SEP $85 call (SRCL1117I85) Entry $1.75, exit $4.20* (+140%)

08/31 final target hit at $88.50
*option did not trade today. this is an estimate.
08/30 new stop loss @ 83.75
Consider an early exit now
08/29 consider exiting now since the option is up +105%
08/27 new stop loss @ 81.25
08/25 new stop loss @ 79.75
08/25 1st target hit @ 84.90, option @ $2.75* (+57.1%)
*this is an estimate. the option did not trade today.

chart:

Entry on August 23 at $81.29
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 858 thousand
Listed on August 22, 2011