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Daily Newsletter, Saturday, 9/10/2011

Table of Contents

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

Market Wrap

Already A September To Remember

by Jim Brown

Click here to email Jim Brown

Only ten days into September and it is proving it could be one we will remember with the U.S. markets down 5 of the last 6 days.

Market Statistics

The U.S. indexes have been down 19 of the last 24 sessions and that is not something we see every year. The Dow had triple digit moves in those 19 sessions. Sentiment was definitely negative on Friday but you have to remember, just like last Friday, there is significant European event risk over the weekend as well as terror risk. With Greece one headline away from an official default there was no reason to be long the market over the weekend. I wrote last week that the assumed default of Greece was to some extent already priced in but every new headline is being treated as a new chapter in the story.

This is like one of those Saturday afternoon movie serials from the 1950s. Every week was a new cliffhanger but the hero always found a way out at the beginning of the next installment. Today we are seeing a new cliffhanger headline every Friday and then the market rebounds the following week when Greece does not disappear beneath the ocean like mythical Atlantis. Lately we have had a new cast of villains every week. Last week it was Italy and strikes against austerity along with pending votes in Germany on the constitutionality of the bail outs and bond purchases. Eventually investors are going to tire of the European shell game and focus on the U.S. fundamentals. Unfortunately that carries an entirely different set of risks.

Friday had no major economic reports to roil the market but it was already roiled from the events in Europe. The Wholesale Trade report showed inventories rose +0.8% in July compared to +0.6% in June. This is a lagging report and it was ignored.

Next week's calendar increases in intensity with both CPI and PPI as well as the Philly Fed Manufacturing Survey and NY Empire Manufacturing Survey. The most important of those is the Philly Fed Survey, which is expected to improve to -15 from -30.7 in August. Even a -15 would still be ugly since anything under zero means a contraction in business activity.

In the August report back orders were -21 and had been negative for four months. New orders fell from slightly positive to -26.8. This was a very negative report and it killed the rebound off the August 10th lows and knocked the S&P back to those lows at 1120. It has been a month now and the indexes have been range bound and we could easily revisit those lows if the Philly Fed does not show a dramatic improvement. The Philly Fed has a high correlation to the national ISM that comes out the first week in October. That makes the Philly Fed a predictor of the ISM and a sentiment indicator for the rest of September. A decent rebound in the report could go a long way towards rebuilding investor confidence.

Consumer Sentiment for September is released on Friday and we really need to see a strong rebound in sentiment. The debt limit debacle is now well behind us so that should fade as a concern for consumers. However, the Europe mess is another faceless monster under the bed. Most consumers don't understand it but they know it is killing our markets and that makes it bad. If Greece eventually defaults I believe they would understand that and the crisis of confidence would fade. You fear what you don't understand but once that fear has a face it becomes far less of a problem.

Economic Calendar

The challenge in Europe is still the future default of Greece. Everyone in Europe says it won't happen but the bond markets are giving it a 91% chance. The 10-year Greek bond has a yield of 20%. The 2-year is 65% and the 1-yr is over 80%. That represents an extreme lack of confidence in Greece and their ability to work through the problem.

As I have described before the problem is not with Greece itself but with the European banking system that owns billions in Greek debt. Now that Greece is expected to default the European banks are imploding. German banks are down -36% since early July. Italian banks are down -38% and French banks -43%. Credit default swaps are now higher than they were during the 2008 financial crisis. Nobody really knows which banks have what kind of exposure to Greece.

Secondly, if Greece defaults and life continues without the crushing debt burden and forced austerity then Italy, Ireland and Portugal might consider hitting the panic button and taking the easy way out as well. That means even more problem for European banks and it is the main reason why the IMF, ECB and the EU finance ministers can't let Greece default but they may not have the will to keep it from happening.

Despite many claims to the contrary the potential for a Greek default had Germany preparing a bailout plan for banks in case a default occurs. The emergency plan "B" involves measures to help banks and insurers recover from a possible 50% loss on their bonds if the next tranche of Greece bailout funds are withheld. That is a strong possibility after the EU team tasked with auditing the Greek compliance with agreed austerity measures went home in disgust last week after being denied access to documents. The Greek failure to adhere to the agreed upon austerity measures could result in the bailout funds being withheld and pushing Greece into default. The team is supposed to return on Monday and documents will have to be made available or "else" according to a German official.

German Chancellor Merkel said last week, "The EU won't be able to avoid treaty change" and policy makers "shouldn't be afraid of tackling the challenge." Also, euro countries will "only preserve the common currency if there is more integration in the European Union."

Nearly every speech by anybody important last week carried the implied threat of critical and formative change coming to the European Union in the months ahead. Treasury Secretary Geithner said in a interview at the G7 conference in France, "policy makers are moving but I think they are going to have to demonstrate to the world they have enough political will." In other words talk is cheap. Nobody wants the EU to fracture and have members leave but they are currently unwilling to take the steps necessary to keep it from happening. The EFSF was engineered with a face value of €440 billion ($620 billion) and analysts believe it needs to be raised to €1.0 trillion in order to head off problems with Italy and Spain. That many zeros is producing a severe case of sticker shock for most of the EU nations.

On Friday the big news that threw the markets into a tailspin was the unexpected resignation of the top German official on the board of the European Central Bank. Jurgen Stark resigned for "personal reasons" but he was strongly opposed to the bank buying €50 billion to purchase Spanish and Italian sovereign bonds last month. He still had three years remaining on his term on the board. Another board member, Axel Weber, the assumed successor to Jean-Claude Trichet whose term expires next month, abruptly resigned in April in protest over the purchase of Greek, Irish and Portuguese bonds. Several other board members also oppose the bond purchases so the sudden resignation of Stark suggested the ECB's resolve was also weakening.

Analysts are worried that continued buying of weak sovereign debt could put the ECB in jeopardy of needing a bailout or recapitalization. Who rescues the rescuer?

The ECB is also under fire for not cutting rates last week. They are currently at 1.5% but the real rate in Europe is more like .75% and analysts thought the ECB should relax policy to head off a recession after all the major players slashed GDP forecasts for the euro zone earlier in the week. Analysts were astonished by the lack of action. Personally I am afraid the same lack of action by the Federal Reserve on the 20th could cause a serious market upset in the USA.

The deadline for the Private Sector Involvement (PSI) in rolling over the existing Greek debt into new bonds at a different value was Friday Sept 9th. However there was some confusion over the Asian roadshow promoting the conversion so we really don't know if the Friday deadline was real or has been pushed back. This should be clear on Monday. The plan requires 90% participation in the soft restructuring scheme in order to make it happen. The latest numbers only show about a 70% acceptance of the proposal. If the PSI fails then the second bailout for Greece fails and given the rapidly worsening mood in Europe towards Greece the odds of further funds for Greece appear very slim.

That means Monday in Europe could be a very event filled day and that is precisely one reason why U.S. traders wanted to go home flat or short.

What they did not short was treasuries. The flight to safety pushed the 10-year note yields to new 60-year lows at 1.896% intraday. I was sitting next to a table of retirees at lunch on Friday and they were complaining about not making enough interest off their retirement funds to live on. One elderly gentlemen claimed he had $550,000 spread across several accounts and he was only getting 0.7% in interest. He was openly hostile and I was quietly listening in to their conversation (research) until the gentleman started off a loud sentence with "Obama has got to fix this. He is going to force me to go back and live with my kids!" I think somebody noticed the expression on my face and they promptly lowered their voices. Later the discussion heated up again but I quit listening after the topic changed to how Exxon and Chevron were cutting production on purpose to keep the price of gasoline high so they could pocket big profits. I guess the evil oil company message is also finding a home in the social consciousness.

I find that level of political and economic comprehension fairly standard for the majority of consumers. Unfortunately they are the ones who are being hurt the worst by the current economic environment.

Ten year note yield chart

The Euro fell off a cliff last week with a -5% drop from highs of the prior week. This is a monumental move in a currency. It suggests there is a high degree of expectation for a crisis event in the euro nations. The dollar soared to a five month high in a flight to quality response.

Euro Trust Chart

Dollar Index Chart

The spike in the dollar kept gold from retesting its highs despite the high drama in Europe. Gold closed slightly positive at $1861 but relatively tame for the day. There were rumors of a possible margin hike but nobody really took them seriously or there would have been a big sell off. Those rumors could have been a secondary reason for the decline on Thursday to $1793.

Gold Chart

The rising dollar and GDP cuts in Europe did weigh on crude prices. U.S. WTI crude declined -$2 to $87 on fears an austerity fueled European recession would spread to other regions and depress demand. With oil holding at $90 on Thursday and very near a breakout on hurricane worries it was time to take profits when tropical storm Nate turned west for an apparent landfall in southern Mexico. Producers and explorers in the Gulf breathed a big sigh of relief and went back to work. Conditions could still change but the threat has eased.

Tropical storm Maria now appears it will turn north and miss the east coast completely as it blows by Bermuda. Both storms declined in intensity.

Tropical Storm Maria

Crude Oil Chart - Daily

Research firm Wood Mackenzie issued a report on Libya and the anticipated return to production. While they said it was possible to boost production to 600,000 bpd in 3-6 months "once hostilities cease" the speed of the recovery would depend on the National Transitional Council and help by the international community with infrastructure repair. Wood Mackenzie estimated it would take 36 months to resume full production of 1.6 mbpd once the conflict ended, all the governmental problems were resolved, removal of international sanctions, return of tens of thousands of international workers and available funds for the repairs. The longer production is offline the longer it will take to recover because of deterioration in fields, equipment and infrastructure. Until Gaddafi is captured there is always the potential for sabotage and the delay of returning workers. Don't expect any sudden drop in the price of Brent crude as a result of Libyan production resuming.

You know it was a slow news Friday when the big story was a possible merger between AOL and Yahoo. Reportedly AOL CEO Tim Armstrong approached private equity firms to gauge interest in a deal with Yahoo that would put Armstrong in as head of the combined company. Tim, back away from the bar and get a grip on reality.

Yahoo is many things but I certainly hope they are not that stupid. AOL is in terminal decline as dialup Internet goes the way of 8-track tape. Yahoo is having enough trouble staying afloat in the Google sea without taking on an anchor the size of AOL. Shares of AOL declined -5% after CNBC reported a Yahoo source said they had no interest in AOL. One reporter headlined his piece, "Two dogs don't make a right." Armstrong probably thought the leadership vacuum at Yahoo was an opportunity to improve his fortunes rather than go down with the AOL catastrophe as the last position on his resume.

AOL Chart

YHOO Chart

Despite issuing an earnings warning on Thursday night Texas Instruments posted a gain on Friday with the Dow down -300 points. If you want logic don't look in the stock market. The reason for the gain? Analysts said the warning was not as bad as they expected. I guess the key here remains to under promise and over deliver. Unofficially you talk down expectations and then only lower them slightly in the official release.

SanDisk (SNDK) and Micron (MU) were also up fractionally on Friday on positive comments from analysts. Baird Research predicted SanDisk would gain market share as it gears up to produce more chips for Apple's iPhone. The analyst believes inventories of flash chips have fallen more in line with current demand and that should strengthen pricing for the rest of the year.

If your retirement account is not doing so well this year don't feel like the Lone Ranger. A study last week reported more than 47% of fund managers are underperforming the market. Since the S&P is down more than 8% for the year that means 47% of funds are down more than 8%. Volatility has been so high over the last month many funds have increased their trading in order to capture 2-3% moves and go back to cash. This will eventually bite them when a real rally appears. They will get caught in cash on the sidelines with a 2% gain from the last move and end up chasing stocks higher. Unfortunately once you develop a trading mentality every 2-3% gain looks like a selling point and you end up jumping in and out on the long rallies and never capturing the real move. I believe we will see a real rally by year end, only 3.5 months left, and it could be strong because all these fund managers will be chasing it.

Obviously that assumes we don't fall back into recession. Yes, I know what "assume" means. I keep hearing all these analysts claiming a 50:50, 55:45, 51:49% chance of falling back into a recession. That is an exercise in political correctness. We don't really know so we are going to pick some neutral ground so we can be correct regardless of the outcome. Come back to the microphone when you actually have an opinion!

At present I don't think we are going into recession. Profits are still strong. Consumer spending is holding up even with the high unemployment. The Fed will add some form of stimulus at the meeting on the 20th. Some provisions of the jobs proposal will become law. Every minor improvement in overall conditions is microscopic today but in the end the economy is still growing. The debt limit debacle is behind us and interest rates will be near zero for the next 18 months. As long as we are not struck by a meteor while we wait those factors will eventually produce growth. Greece may default but the European economy will not self destruct. Unemployment will remain high for the foreseeable future but it is priced into the market. There is plenty of bad news if you want to focus on the negative.

When I sat down to write this commentary I was negative for next week. After about eight hours of research and writing my outlook has improved. I believe Friday's decline was yet another fear of the weekend darkness trade. Nobody wanted to be long if there was a possibility of a Greek default and terrorist attack. Volume was higher than I would have liked at 8.9 billion shares but it was the Friday before option expiration. This is when volatility should be its highest as institutions roll positions forward or exit completely. There was no urgency to exit and no panic selling. We gapped down -200 points to 11,100 on the Jurgen Stark news and held that level for 90-minutes. At 11:AM a new sell program hit to knock us temporarily below support at 11,000 by noon but that is where the selling ended. We traded sideways the rest of the day on steady volume. There was no plunge into the close and support at 11,000 held. That support dates back to November.

Can we go lower? Absolutely! We could easily test 10,700 again on some event in Europe or a worsening of the Philly Fed Survey. S&P 1120 is calling our name and with the right set of circumstances we could see 1100. This is September and the economic and political storms are swirling.

I believe the markets are scared. They are scared about Greece. We have found that Greece is the new Freddie Kruger and the crisis that can't be killed. Eventually the crisis will pass into oblivion just like Freddie Kruger but until then there is a default behind every door and a recession under every bed. The bears are coming out in force and while they could be right in the short term they will eventually be proven wrong. We just need to bide our time and watch for signs of relative strength returning.

The S&P chart has built a nice bear flag that is in danger of breaking to the downside to confirm but it still has to break below 1120 to cause any real damage. That has been strong support since early August. Technically 1101 was the August low so any dip to that level is just a retest. A dip below 1101 would be a confirming breakdown. It would take a strong move over 1225 to attract reluctant buyers. That gives us a huge range to play in while we wait for Greece to cut their lifeline to the EU.

S&P Chart

The Dow is a weaker chart than the S&P. The Dow broke important uptrend support from early August and the top on Thursday is a lower high. It would appear the Dow is setting up for a critical test of 10,800. That is a critical level and a break there could cause a breakdown in sentiment that leads to a retest of Dow 10,000. We don't want to go there so next week is very important. I believe fund managers will buy 10,800 because they don't believe we are entering a bear market.

Dow Chart

The Nasdaq traded in line with the broader market and ended the week right in the middle of its recent range. The lower high from Thursday gives it a negative bias but I think the additional circumstances have to be taken into consideration. Support at 2400 should be decent followed by 2335.

Nasdaq Chart

Russell Chart

Fundamentals used to matter. In the current market environment every move is based on a macro event like the Greek crisis, debt debacle or the terror warnings. The fundamentals based on corporate earnings are still strong. S&P earnings for 2011 are expected to be in the range of $100 and 2012 around $107. Apply a PE of 15 and you get an S&P at 1500 and 1605. The case for a rising market can easily be made using those numbers.

However, if the country falls back into recession those estimates decline to $75-$85 for forward earnings and the market is closer to fully valued at 1125-1275. Guess what? That low range is exactly where we are today. The market is already pricing in the potential for another recession or at least a few more months of very slow growth.

Whether we get that growth or not is the $64 question. Even if we did see a dip in GDP it does not mean we are in a crisis. The impact of the great recession of 2008 is still with us. The rebound faded because of the high unemployment and this could be a lasting problem that takes years to solve. That does not mean the economy can't muddle through even with the high unemployment. Time will tell.

What was the difference between Thursday and Friday? Why were they so dramatically different? I believe it boils down to only a couple of points. It was the Friday before expiration and volatility is normally higher as institutions close and roll positions forward. There were repeated rumors Greece would default over the weekend. I seriously doubt anyone really believes Greece will not default. According to John Mauldin and others it is mathematically impossible to avoid a Greek default simply because their debt is so high.

The key is how that default occurs and how the euro zone, ECB and IMF deal with it. The news of a default will create volatility but if you check the history books countries default all the time. What makes this different is because Greece is part of the euro zone and their default will damage banks all across Europe. Finance ministers know this and they will have to solve the problem or we will have another Lehman type event only on a sovereign level. Unlike Lehman and Bear Stearns we have had two years to prepare for Greece to fail and only two weeks for the Lehman events to transpire. A Greek default is priced into the market. There will still be volatility but it will be manageable.

I believe the decline on Friday was due in part to Greece, Germany's plan B, Stark's resignation from the ECB and a lowering of economic projections for Europe and Japan. However, all those events were just cloud cover for the real problem. On Thursday night the government announced there was credible evidence of another Al-Qaeda plot to attack Washington and New York on the anniversary of 9/11. Since it is a proven fact Al-Qaeda likes to attack on anniversaries and the government was mobilizing tens of thousands of police and security forces most traders saw the perfect storm of all those factors above as an excuse to exit the market. After all would anybody actually want to be long the market on the anniversary with the government reporting credible threats?

Whatever the reasons for the downdraft, Monday will be a new day. On Saturday Greek prime minister George Papandreou delivered his annual keynote speech on the Greek economy. He promised Greece will meet the ambitious targets for austerity despite the deepening recession in Greece. He said it was necessary to secure the continued flow of international rescue loans keeping the country from a catastrophic bankruptcy. "We will push through all the major changes our country has needed for years and we will take whatever other decisions are needed and we will do whatever is necessary to keep the country on its feet." The speech appeared to calm nerves in Europe but we all know talk is cheap.

If we make it to Monday without any attack and without a Greek default I believe the markets will breathe a sigh of relief and the selling will ease if not disappear. I would be a buyer at S&P 1120 because traders should buy stocks in anticipation of additional Fed action on the 20th. I see the current events as a buying opportunity unless conditions in the U.S. worsen. The Philly Fed this week will be critical for market direction although bad news would make it more likely the Fed will act more aggressively.

Jim Brown

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" People demand freedom of speech to make up for the freedom of thought which they avoid."
Soren Aabye Kierkegaard


Index Wrap

Volatility Blues

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Market continues to be in a whippy indecision pattern that could be a bottoming process or one that's setting up for another down leg. Bottoming potential looks iffy if the S&P 500 plunges through 1150 and the Nasdaq Composite pierces 2400.

If the major indices are in a broad trading range that is setting up a bottom, then the S&P 500 (SPX) will eventually break out above 1220, retest likely strong resistance at 1260 and recover to perhaps the low-1300 area. If the Nasdaq Composite achieves a decisive upside penetration of tough resistance at 2600, it could recover to 2750.

On a technical basis, the most bearish looking formation is seen with SPX and COMP weekly charts as forming bear flags in recent weeks, after the sharp plunge of the week ending 8/5; the weekly SPX chart is my first chart. The possible bear flag pattern is highlighted on the chart.

If there is a decisive closing downside penetration of 1150, it could set up a new down leg that could carry as much as 200 points lower, to the 950 area. Assuming COMP plunges below 2400, there's potential to as low as the 2060 area in a retest of the early-July low of last year. If this kind of sell off occurs, it would get traders and investors extremely bearish and probably set up a good sized recovery rally.

The big cap Nas 100 (NDX) index has been holding up fairly well compared to the rest of the market, but it has been hitting resistance the past two weeks. How so? You'll see on NDX's weekly chart that recent weekly highs have come up to, but not been able to penetrate, resistance implied by the previously broken up trendline; a trendline an early Wall Street mentor of mine called the "kiss of death" trendline. We'll see on that score but I've noted 2268 as the key upside resistance in NDX in the coming week. A weekly close above this level would suggest further recovery potential for big cap tech stocks like Apple, Cisco and the like.

I'll move on to an examination of the daily charts of the major market indexes.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) has had the most whipsaw action as the index appears to recover, then plunges on bearish news and perceptions related to the big banks and the financial sector in general lead to renewed selling and yet another sharp 1-day plunge. We see on the SPX daily chart my highlights of the stair step higher lows that have been made in SPX to date. However, this pattern may not continue and the ability for SPX to hold its 1140 to 1120 support is a key to whether SPX will retest 1100 support. A plunge below 1100 would be suggest the possibility of a next downside leg that could carry to as low as the 950.

I was thinking of what would get traders and investors REALLY bearish again and any eventual 1-day close below 1000 would do so. That speculation on my part relates to the fact that a sustained rally might not come until after there is an extreme bearish outlook for stocks.

Near resistance is at 1180-1200, then at 1220-1230. Near support is 1140 to 1120, then at 1100. Next 'support' below 1100 in SPX is probably around 1040.

Each time the 13-day RSI has gotten back up to a 'neutral' 50 reading, the index has sold off again. SPX may have to get to an oversold extreme again before there's a recovery rally that has as much upside potential as the 130 points the index regained after plunging to 1100 early last month.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart has a mixed pattern. On one hand the index remains bearish on an intermediate-term basis as long as the index is below tough resistance in the 560 area; on the other hand, OEX could remain in its current 500-550 trading range as part of a possible basing formation.

If OEX has formed the same weekly chart (not shown, but see the SPX weekly chart in my initial 'bottom line' comments above) bear flag pattern as SPX, a plunge below 510-500 suggests a possible next down leg that could carry the index to as low as 440.

Last week I wrote that I would "anticipate more weakness ahead so would short rallies..." The kind of downside I was anticipating was back to the 500 area again. Key support continues to be the 508-500 area, but key near resistance is lower this week, at 540, down from the 550-560 price zone.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) has a continued bearish chart as long as the Average can't climb back above strong overhanging resistance in the 11500 to 11700 price zone. Bullish longer range possibilities are seen if the Industrials continue to trade in its current broad 10800 to 11700 price range which could be basing action; this range could be extended down to 10600 again however.

The 10600 area as the last intraday low still looks like must hold support for the bulls and 10000 the start of major support. Last summer's INDU bottom made in the low-9600 area is another important milestone. A weekly close below 9600 would turn the long-term trend down.

INDU resistance begins around 11400 and extends to 11600 to 11700.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart remains bearish as long as the index can't climb back above the supply overhang at 2600, where COMP bottomed twice previously several months apart. This had looked like strong support and now appears (not surprisingly) as strong resistance as we saw this past week.

Key near resistance looks now to start at 2550 and extends to 2600. A decisive upside penetration of 2600 that was more than a single day affair would activate further upside recovery potential to around 2750 to 2800.

2330 to 2350 on the downside and 2600 on the upside is the current broad trading range for COMP. A break below 2400 activates bearish potential (as noted in my initial 'bottom line' commentary) to as low as 2060 in a retest of last summer's low.

I wrote last week that it "Looks to me like 2400 will be tested (again)"... not surprisingly this looks increasingly likely. Below 2400, next support is in the 2350 to 2330 area. Major support below this area looks to be substantially lower, at 2100.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) index chart remains bearish overall as the recovery rally has not done more than retrace half of its prior decline, after which the index continued to see weakness as potential buyers largely stepped aside. Key near resistance is at 2250-2270, extending to around 2300, at my upper trading 'band' or envelope.

I wrote last week that "2215 may offer initial resistance when the (price) gap is 'closed'." NDX got to 2245 and then plunged over the next two days.

I also noted last time that 2100 looked like a downside target again, and if current volatility continues (and it increased this past week), we could see NDX drop below 2100 and go on to retest prior support in the 2035-2050 area. Below this area, a next significant support looks like 2265, with major support implied by last summer's lows in the 2100 to 2065 area.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) which last week looked headed lower, did manage a recovery rally to just above 55, but then turned lower again on bearish news out of Europe. When indexes hit resistance, so often bearish news comes out after that. Makes you wonder if the market sees 'all' ahead.

The high end of QQQ's price range is 55.2-55.7, with near support at 52, extending down to more major support around 50 and it looks like the Q's might be headed down to this area again. Below 50, I anticipate next support to lie in the 48.6 to 47.7 area, which represents a 62 to 66% retracement of the July (2010) to July (2011) advance.

Trading volume in the NDX tracking stock has been low and suggests that those holding long positions are in for the longer haul. Trader types appear to have exited. A volume spike would next occur I believe if the 50 level is pierced. Then I think we would see more sellers come out of the woodwork so to speak.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart is back to trading within its 5% price bands or moving average envelope lines. Key near resistance is at 712, extending to 737. 772-773 is probably the beginning of current major resistance.

Support is seen in the 650-640 area. If there is a daily close below 650, this could be the start of a new down leg, with potential to reach the 600-588 support that developed during July-August of last year.

I wrote last week that 650 looked like a downside target and that still is on the table, but with the possibility of slippage below this area. The most bullish outlook is suggested by the possibility that this whippy price action between the 730 area on the upside to 650-640 on the downside is basing action for an eventual rally that is more steady and sustained. Stay tuned on whether this market ever rises again!



GOOD TRADING SUCCESS!


New Option Plays

ETFs, Banks, & Industrial Goods

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidates, here are a few stocks that caught my eye:

TSCO is showing relative strength. Friday's breakout past the 50-dma looks like it could be a bullish entry point.

SHLD is trading near its lows for the year. A breakdown under $52.00 could be used as an entry point to buy puts.

BDX has fallen toward support in the $76-75 area. Readers could use a breakdown under $75.00 as a trigger to buy puts and target a move toward $70.

JLL has broken down under key support near $60.00. Shares look like a put candidate right here. Consider targets near $55 or $50.

- James


NEW DIRECTIONAL CALL PLAYS

SPDR S&P500 ETF - SPY - close: 115.92 change: -3.12

Stop Loss: 109.90
Target(s): 119.00, 122.00
Current Option Gain/Loss: Unopened
Time Frame: 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The stock market looks like it will retest its August lows. We suspect the market will bounce again but that's assuming Greece doesn't default next week. I will point out that technically it looks like the S&P 500 index (and the SPY) has formed a bearish head-and-shoulders pattern over the last three weeks. If the SPY breaks down under the neckline it would forecast a target toward $107.

This trade tonight is a bet that investors are willing to buy the dip near the August lows (ignoring the H&S pattern) instead of selling stocks toward the August 2010 lows. We are suggesting readers use a trigger to buy calls on the SPY at $112.50 (just above the 1120 lows on the S&P500 index). More conservative traders could wait for a dip closer to the 1100 level on the index, which is $111.00 on the SPY.

If we are triggered at $112.50 on the SPY we'll use a stop loss at $109.90. Our upside targets are $119.00 and $122.00.

Buy-The-Dip Trigger @ $112.50

- Suggested Positions -

buy the OCT $118 call (SPY1122J118)

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 293 million
Listed on September 10, 2011


NEW DIRECTIONAL PUT PLAYS

Credit Suisse Group - CS - close: 22.86 change: -1.49

Stop Loss: n/a
Target(s): 19.00, 16.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 10 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Based in Zurich, Switzerland, CS is a large European bank. Odds are that if Greece defaults then shares of CS will be swept up (or down) in the turmoil afterwards. To make matters even worse CS is one of 17 banks that the FHFA just named in a lawsuit a week ago regarding misrepresentation of mortgage backed securities.

You could certainly argue that the drop from $46 to $23 in the last four months has already priced in a Greek default. I suspect that CS will drop toward the 2009 lows near $19.00 or possibly breakdown even further.

The credit markets are telling investors that a Greek default is almost guaranteed but no one knows the actual date. It could be this month or it could be six months from now. Therefore, we need to label this CS put play as a speculative, aggressive bet. Greece and the EU do not want the country to default so CS could see a lot of volatility with sharp rebounds on positive headlines but these will be temporary.

With so much potential for volatility I am not listing a stop loss on this trade. Limit your risk by using small positions. I am suggesting we open small bearish put positions now. If we see CS bounce back and fail near its 10-dma or the $25-26 area then we might double down and add more to our put positions.

*Small Positions*

- Suggested Positions -

buy the DEC $20 PUT (CS1117X20) current ask $2.00

Annotated Chart:

Entry on September 12 at $xx.xx
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume = 2.3 million
Listed on September 10, 2011


Stanley Black & Decker - SWK - close: 54.91 change: -2.29

Stop Loss: 58.05
Target(s): 50.25, 46.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The chart is looking pretty ugly for SWK. Shares just broke down from their $63-56 trading range. I'm not sure what the story is that is producing this relative weakness. It seems like the company's recent acquisition of Niscayah, a Swedish electronic security services company, will be good for SWK's bottom line. Yet investors have pushed SWK to new 2011 lows.

I am suggesting we open bearish put positions now. We'll start with a stop loss at $58.05. Aggressive traders could put their stop above the Wednesday high. Conservative traders could use a stop closer to $56.50ish instead. Our first target is $50.25. The $50-49 area might be support. Yet I'm setting a secondary target at $46.00.

FYI: SWK just produced a new quadruple bottom breakdown sell signal on its Point & Figure chart, which currently points to a $46 target.

Buy Puts Now

- Suggested Positions -

buy the OCT $50 put (SWK1122V50) current ask $2.00

- or -

buy the OCT $55 put (SWK1122V55) current ask $3.80

Annotated Chart:

Entry on September 12 at $ xx.xx
Earnings Date 10/18/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on September 10, 2011



In Play Updates and Reviews

Adjusted Entry Points

by James Brown

Click here to email James Brown

Editor's Note:

We are adjusting entry points on our recent additions to the newsletter.

Meanwhile COG was stopped out.

-James

Current Portfolio:


CALL Play Updates

Dollar Tree, Inc. - DLTR - close: 70.31 change: -0.89

Stop Loss: 68.95
Target(s): 76.00, 79.00
Current Option Gain/Loss: Sep$75: -80.0% & Oct$75: -42.5%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
09/10 update: DLTR has pulled back toward support near the $70.00 level. Shares held there most of the afternoon. Previously I suggested we use a dip in the $70-69 area as a new entry point to buy calls. This is it. More conservative traders may want to wait and buy a bounce instead. I am concerned that the major indices look poised for more declines so readers may want to wait on launching new call trades.

- Suggested Positions -

Long SEP $75 call (DLTR1117I75) Entry $0.50

- or -

Long OCT $75 call (DLTR1122J75) Entry $2.35

09/07 trade is open. DLTR gapped open at $72.97
09/06 trade not open. Adjusted entry point strategy, stop loss, and targets.

chart:

Entry on September 7 at $72.97
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on September 3, 2011


Energy XXI Ltd. - EXXI - close: 23.88 change: -1.44

Stop Loss: 23.49
Target(s): 27.90, 29.75
Current Option Gain/Loss: Oct$27: -45.9% & Dec$30: -40.5%
Time Frame: 6 to 12 weeks
New Positions: see below

Comments:
09/10 update: Uh-oh! EXXI broke down to new two-week lows. Shares hit $23.50 on Friday. Our stop loss is at $23.49. The entire week (Tuesday-Friday) looks like a failed rally under the 30-dma now. While we're long-term bullish on EXXI the short-term outlook doesn't look so hot. EXXI might be poised for a drop toward the August lows near $22.00 or $21.00. I am not suggesting new positions at this time.

Earlier Comments:
Readers may want to keep their position size small because EXXI can be a volatile stock! Plus, I want to point out that technically EXXI is in a neutral trading pattern of higher lows and lower highs (pennant formation).

- Suggested Positions -

Long OCT $27 call (EXXI1122J27) Entry $1.85*

- or -

Long DEC $30 call (EXXI1117L30) Entry $1.85*

09/09 EXXI almost hit our stop loss at $23.49
09/07 trade open. EXXI opened at $25.67
*prices are estimates. options did not trade today
09/06 original trade stopped out. Try again tomorrow with new stop and targets

chart:

Entry on September 7 at $25.67
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on September 6, 2011


Ingersoll-Rand Plc. - IR - close: 32.27 change: -0.96

Stop Loss: 31.25
Target(s): 34.75, 36.75
Current Option Gain/Loss: Sep$33: -51.8% & Oct$35: -40.5%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
09/10 update: IR underperformed the major indices on Friday with a -2.88% drop. The stock is down -6.3% from its close on Wednesday. IR seemed to find some support near the $32 level on Friday afternoon. If the market opens higher on Monday then I would buy calls on IR right here.

Cautious traders might want to tighten their stops but keep in mind that IR bounced twice from $31.43 in the last two weeks.

- Suggested Positions -

Long SEP $33 call (IR1117I33) Entry $1.35*

- or -

Long OCT $35 call (IR1122J35) Entry $1.85

09/07 trade opened. IR gapped higher at $33.39
*price is an estimate. option did not trade today
09/06 play not open. try again. new stop loss $31.25

chart:

Entry on September 7 at $33.39
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 8.0 million
Listed on September 3, 2011


Range Resources Corp. - RRC - close: 62.80 change: -2.59

Stop Loss: 59.90
Target(s): 72.25, 74.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/10 update: The market's widespread declines on Friday short circuited our plan to buy a breakout in RRC. Yet I had suggested that nimble traders could look to buy a dip instead. RRC produced a -3.9% plunge toward short-term support near $62 and its rising 40-dma. I am suggesting we take advantage of this dip.

We'll buy calls on RRC now but only if both RRC and the S&P 500 index both open positive on Monday morning. We'll adjust our stop loss to $59.90 and adjust our first target to $69.75 and our second target to $72.50. Cautious traders may want to keep their stop closer to the $62 are instead. Plus, conservative traders may want to take profits near $66.50 instead.

*See play details for entry strategy*

- Suggested Positions -

buy the OCT $65 call (RRC1122J65) current ask $3.80

- or -

buy the OCT $70 call (RRC1122J70) current ask $2.00

chart:

Entry on September xx at $ xx.xx
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on September 8, 2011


Sina Corp. - SINA - close: 104.67 change: -4.07

Target(s): 124.00
Entry #1) Current Option Gain/Loss: Unopened
Stop Loss: 102.00
Entry #2) Current Option Gain/Loss: Unopened
Stop Loss: 99.75
Time Frame: 4 to 6 weeks
New Positions: see trigger

Comments:
09/10 update: Our new trade in SINA is not open yet. The stock opened lower at $107.50 and then dropped to $102.22 intraday.

We are adjusting our entry point strategy. Actually we're listing two different entry points. First, we will keep the breakout trigger to buy calls at $112.55. For this entry point we'll use a stop at $102.00. That's a wide stop so be sure to keep position size small.

Second, we are adding a new entry point to buy calls right now but we only want to open positions if both SINA and the S&P 500 index open positive on Monday morning. This is a much more aggressive entry point since SINA remains under its trendline of resistance. If this position is opened we'll use a stop loss at $99.75. Plus, we'll use the Oct. $120 call.

Earlier Comments:
We do want to keep our position size small because SINA can be a volatile stock and we have a wide stop loss. I am setting our target at $124.00. More aggressive traders could aim higher. The inverse H&S pattern would suggest a target in the $150 area.

FYI: The Point & Figure chart for SINA has just broken through resistance and is bullish with a $146 target.

Entry #1) Trigger @ 112.55 (SMALL positions!)

- Suggested Positions -

buy the OCT $125 call (SINA1122J125)

Entry #2) buy calls now if SINA and S&P500 index open positive on Monday. (SMALL positions!)

- Suggested Positions -

buy the OCT $120 call (SINA1122J120)

chart:

Entry #1) Entry on September xx at $ xx.xx
Entry #2) Entry on September xx at $ xx.xx
Earnings Date 11/15/11 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on September 8, 2011


U.S. Oil Fund - USO - close: 33.85 change: -0.61

Stop Loss: 31.90
Target(s): $34.75,
Current Option Gain/Loss: +22.4%
Time Frame: 2 to 3 months
New Positions: see below

Comments:
09/10 update: The USO retreated from resistance at the $35.00 level but it failed to break down under the bullish trend of higher lows. I had cautioned readers to expect a dip toward $33.00 and shares hit $33.25 on Friday.

NOTE: We are adjusting our exit strategy. The new plan is to exit positions on the next bounce to $34.75.

Cautious traders might want to up their stop toward the $32.50 area, just under Tuesday's low of $32.60.

No new 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

09/10 New exit target at $34.75
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

chart:

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


PUT Play Updates

Moody's Corp. - MCO - close: 28.97 change: -1.11

Stop Loss: 30.85
Target(s): 26.50 , 25.25
Current Option Gain/Loss: Sep$30: -29.5% & Oct$27: -24.4%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
09/10 update: MCO underperformed the market's major indices on Friday with a -3.69% drop. Volume was light but the pattern of lower highs is intact. Thursday's high was $30.70. We are adjusting our stop loss down to $30.85. Readers can use Friday's drop as a new entry point to buy puts.

Earlier Comments:
FYI: There are plenty of investors who are bearish on MCO. The most recent data listed short interest at almost 15% of the 183 million-share float. That does raise the risk of a short squeeze. We want to keep our position size small.

The Point & Figure chart for MCO is bearish with a $19 target.

* Small Positions * - Suggested Positions -

Long SEP $30 PUT (MCO1117U30) Entry $2.00*

- or -

Long OCT $27 PUT (MCO1122V27) Entry $1.80*

09/10 new stop loss @ 30.85
09/06 *Entry price on these options are estimates. Options did not trade today.

chart:

Entry on September 06 at $28.06
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on September 3, 2011


CBOE Volatility Index - VIX - close: 38.52 change: + 4.20

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -100.0%
Second Position Gain/Loss: -100.0%
Third Position Gain/Loss: -97.3%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
09/10 update: We have less than two weeks left before September VIX options expire on Wednesday, Sep. 21.

The market's plunge on Friday sent the VIX to a +12.2% gain but the rally failed to break the trendline of lower highs.

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.

NOTE: These VIX options expire on Wednesday, September 21st.

- 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 = ---
Listed on August 4, 2011


CLOSED BULLISH PLAYS

Cabot Oil & Gas - COG - close: 70.19 change: -4.11

Stop Loss: 69.90
Target(s): 82.00, 84.75
Current Option Gain/Loss: Oct.$80: -57.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/10 update: Ouch! It's been a rough couple of days for COG. The big bounce from support near $70.00 on Tuesday (Sep. 6th) failed the next day at resistance near $78.50. COG has since fallen 8 1/2 points (-10.8%) in two and a half days. Friday afternoon saw COG breakdown under support near $70.00 and hit our stop loss at $69.90.

We're long-term bullish on COG but 10% moves in less than three days are tough to trade.

- Suggested Positions -

OCT $80 call (COG1122J80) Entry $4.50, exit $1.90 (-57.7%)

09/09 stopped out at $69.90
09/07 trade opened. COG gapped open higher at $76.72
09/06 original trade stopped out. Try again tomorrow with new stop and targets

chart:

Entry on September 7 at $76.72
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on September 6, 2011