Option Investor
Newsletter

Daily Newsletter, Saturday, 9/24/2011

Table of Contents

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

Market Wrap

Eye of the Hurricane?

by Jim Brown

Click here to email Jim Brown
The markets were relatively calm on Friday but is this the calm after the storm or just the eye of the hurricane?

Market Statistics

The Fed raised the recession storm warning flag on Wednesday and global traders took heed and ran for the shelter of cash. The Dow/S&P declined -6.4% for the week and the Nasdaq -5.3%. It was the worst week for the markets since October 2008. The indexes were knocked back to support levels from early August as the sellers came out in force.

The overriding worry is fear of a global recession thanks to worries over Europe. The U.S. is still expected to show positive growth but the estimates continue to weaken. Although the Fed saw "significant risks" to the economic outlook they announced only a lackluster change to their current monetary policy. Investors were confused. If the Fed is warning about a potential recession why didn’t they take more aggressive action? The answer is simple, the Fed has run out of bullets and has little left in the way of economic stimulus in their arsenal. The economy is on its own and investors are worried the recovery will falter.

Europe has not improved in the last 48 hours and the outlook continues to decline. German Chancellor Merkel was on the campaign trail trying to convince Germans they had to support the EFSF because a country failure was not acceptable. Merkel said, "A Greek default is not an option. The damage would be impossible to predict and could start an uncontrolled domino effect." Also, "Greece must complete the tasks it has been given." Since that is not a likely scenario it continues to suggest there are more problems ahead.

The G20, IMF and World Bank are holding meetings this weekend over problems in Europe. Nearly every major developed country is now leaning on Europe to fix their problems immediately. Germany's vote on expanding the European Financial Stability Fund (EFSF) is now scheduled for Thursday. A vote to approve the changes increases Germany's liability to the €440 billion fund from €123 billion to €211 billion. The measure is expected to pass but by a slim majority. Germany's four leading business associations issued an urgent appeal to the German parliament to vote in favor of the EFSF or face "incalculable consequences" for the European Union and its common currency.

The letter from the combined organizations was unprecedented. They admitted that the parliamentarians faced very difficult decisions in agreeing to extend the financial size and powers of the EFSF, allowing it to use its money to buy sovereign bonds in secondary markets, to recapitalize banks, and provide precautionary loans to euro zone governments facing liquidity crises. All such measures were initially rejected by Berlin, but Chancellor Merkel has been forced to accept them as the crisis, and the danger of contagion across the currency union, has worsened. Greek Prime Minister George Papandreou will travel to Berlin on Tuesday to talk with Merkel.

There were no economic reports of note on Friday. However, next week will be entirely different. There are numerous regional activity reports and they have the potential to either turn the market around or send it lower. If the reports show even limited improvement over the prior month it could weaken the worries over a new recession. If they are weaker than the prior month the recession worries will likely increase and the markets move lower.

Consumer confidence and sentiment will be updated and both are expected to decline further thanks to the market crash.

Bernanke speaks on Wednesday but the topic of the speech is not relative to the current economy. The ISM reports on Friday and the national ISM on the following Monday are going to be critical.

Economic Calendar

Equities were fairly calm on Friday with the major indexes closing in the green in a minor oversold bounce. The weekend event risk is so strong there was no incentive for traders to rush back into the markets. The equity indexes dipped at 10:00 as the forced margin selling hit stocks but dip buyers quickly appeared, only with a severe lack of conviction.

The real selling on Friday was in the commodity sector. Despite a monster sell off on Thursday the drop on Friday was even worse. Gold declined over $100 intraday and closed at $1650. Gold lost -9% for the week. Silver was crushed for a -24% drop for the week and a close just over $30. Silver lost -15% on Friday alone. Copper lost -17% for the week on worries demand will decline if a global recession returns.

The real reason for the selling in commodities was related to margin calls, rumors of margin hikes and rumors of hedge fund liquidations. In commodities the damage from a losing position can be much stronger than a losing stock position. Prices move a lot faster and in big increments. When a sell cycle like this occurs it does not matter why traders are selling. The stops get hit and the decline accelerates and traders without stops are faced with blowing out positions rather than meet the margin calls. Commodities can move very fast when these events occur and they can rebound with equal speed as the short that piled in on the decline get squeezed.

After the bell on Friday the CME announced a hike in margin requirements for gold +21% $9,450 to 11,475), silver +16% ($21,600 to $24,975) and copper +18% ($5,738 to $6,750). Those are the full size contracts. The miny gold went from $4,725 to $5,738, silver $10,800 to $12,488 and copper $2,869 to $3,375. Do you think maybe somebody leaked that information since those three commodities were the only ones crushed on Friday? Surely we can trust everyone at the CME, right?

Copper Chart

Gold prices declined to the 100-day average at 1650 and that would be an ideal place to buy the dip. The way to do this with less risk is the Gold ETF (GLD).

Open interest in the gold futures barely changed despite the significant drop and that means there was intense shorting at the same time longs were closing positions. Selling short creates new contracts. That means there is a high probability those shorts will eventually get squeezed.

How many traders and institutional funds have been kicking themselves because they did not get in on the gold rally? I am sure there are tens of thousands. Now they have a chance of buying it -$275 off its highs. Do you think that will attract a lot of buyers? It would seem likely but we have to wait and see.

Gold Chart

Silver was heavily bought by retail investors because the margins were low and it took less money to play. That has changed dramatically. Gold had run away from the retail trader and silver became the poor man's gold. If they did not have stops in place they are even poorer this weekend. A -24% drop for the week is unbelievable. The demand metrics and mine production have not changed only the conviction and capability of those traders who were holding silver futures.

Silver chart

I believe the precious metals will rebound and they will set new highs. It may not be next month or even next year but the stage is set for higher inflation and higher consumption in the years ahead. I am a firm believer in the long term value and in having some investments in the safe other than paper money. The drop in silver has created a buying opportunity for me as an individual. I am going to a trade show this weekend where there will be dozens of vendors selling silver coins, rounds and bars. When possible I like to buy silver coins. There is no doubt about the value and authenticity of a silver quarter but there can be doubts about unfamiliar rounds or bars. They can be easily counterfeited.

I updated my list after the close today based on the closing price of silver at $30. A silver quarter is worth $5.43 this weekend and a silver dollar $23.20. When silver was over $49 back in April those were worth $9.00 and $38.50 respectively. Since I believe silver will eventually be higher than $50 I view this weekend as a significant buying opportunity.

If you do keep gold and silver it is better off in your home safe than a safe deposit box. Don't forget Executive Order 6102. Think it can't happen? If you can tax the rich millionaires you can definitely confiscate from the rich.

Silver Coin Values

Executives from Solyndra, the solar panel market that filed bankruptcy after getting a $535 million stimulus loan from the U.S. Treasury, took the Fifth Amendment in testimony before the House on Friday. Lawmakers quizzed them on how they could continue to paint a rosy picture as late as five weeks before they filed for bankruptcy. The CEO was under the gun for his positive presentations and representations to lawmakers right up to the filing. In a July letter to the House Energy and Commerce Committee the CEO bragged Solyndra's revenues grew from $6 million in 2008 to $100 million in 2009 and $140 million in 2010 and would double in 2011. "You lied to me" claimed representative Cliff Stearns, the lawmaker leading the probe into Solyndra. It would appear the CEO and CFO may be making license plates in prison instead of solar panels in California.

The Solyndra bankruptcy is causing major problems for other solar manufacturers. First Solar (FSLR) is the largest maker of thin-film solar panels. They sold off hard last week after saying they would not get a $1.9 billion loan guarantee from the DOE because of new documentation requirements. There is a September 30th deadline for the loan and First Solar does not believe it can qualify. The DOE is not in a negotiating mood after the Solyndra bankruptcy.

SolarCity is a solar panel installer and they also said they will not get finalization of a $275 million loan guarantee. The company said the increased paperwork resulting from government reviews after the Solyndra bankruptcy was the cause. SolarCity was going to use the loan to install up to 160,000 rooftop solar systems on military family homes.

The DOE has $9 billion in loan commitments it has not finalized and they are now under the gun to thoroughly review every application to make sure there is no repeat of Solyndra. They have increased the documentation necessary to a ridiculous level. That reminds me of the saying about closing the barn door after the horse had already left.

Dish Network (DISH) unveiled a streaming service for movies over the Internet under the Blockbuster brand. They will also offer DVDs by mail. The company said current subscribers to the Dish satellite-television service can pay an extra $10 per month to access the Blockbuster Movie Pass service starting October 1st. Dish says it can stream over 3,000 movies and has over 100,000 titles of DVD movies and video games available by mail or though Blockbuster stores.

By comparison Netflix has 20,000 movies and shows to stream. Wal-Mart's Vudu service offers more than 30,000. Amazon has more than 100,000 streaming titles and subscribers to Amazon Prime can stream 9,000 titles for free. Dish bought Blockbuster in April for $320 million.

This move by Dish puts more pressure on Netflix since they are going to lose access to content from Starz in February. Starz aggregates content from multiple providers including Disney.

JP Morgan joined the crowd slashing estimates for Netflix after last week's disaster. JPM cut their price target to $205 compared to the NFLX close at $129. I am sure NetFlix shareholders would be thrilled it that came to pass. JPM cut earnings estimates below current consensus. The JPM analyst projects 23.7 million subscribers for Q3, 24.1 million in Q4 and 31.6 million in 2012. The analyst said NFLX shares should remain range bound for some time as competitors try to steal subscribers with announcements of their own like the Dish announcement on Friday.

Netflix Chart

Amazon (AMZN) has announced a press conference for Wednesday in New York and the Internet retailer is expected to formerly announce their new tablet computer. The tablet is expected to be priced aggressively and below the competition. Getting an Amazon tablet into customer hands will increase sales of other Amazon merchandise. Rumors claim it will be a seven inch device, full color, touch screen, run Android software and cost $250 or less. The only part of that I don't like is the seven inches. As you get older size does matter in terms of viewing pleasure. You have to wonder if there will be a sell the news event since it has been expected for so long. Hopefully last week's $25 drop already solved that problem.

Amazon Chart

Mosaic (MOS) joined the S&P-500 at the close on Friday. It is replacing National Semi (NSM), which is being acquired by Texas Instruments. In conjunction with the inclusion into the S&P Mosaic announced a secondary offering of 18 million shares in anticipation of more demand by fund managers. The shares are being sold by the Margret Cargill trust. These are existing shares and will not change the outstanding share count of 276 million. They priced the offering at $57.65 per share and it closes on September 29th. Mosaic will not receive any money from the offering. The Cargill trust is the sole beneficiary.

Mosaic also released preliminary earnings of $1.17 compared to 67-cents on a 41% increase in revenue to $3.1 billion. Analysts were expecting $1.29 per share. Mosaic said the miss was due to higher costs for ammonia and sulfur. Mosaic did say they expected sales to remain strong thanks to higher global demand and low global stocks of grain and oil seeds. Mosaic has a rocky chart thanks to the weekly stories about droughts and floods, feast and famine in crop expectations.

Mosaic Chart

Currencies are typically the lowest volatility of all the things you can trade. They have very small intraday moves and pretty stable trends. Same with bonds. Last week that historical trend changed. Art Cashin pointed out there was massive liquidation across all asset classes. It was a sudden desire by some large institutional traders to get liquid. The massive moves in the futures and currencies triggered stops and sell orders that flooded the system.

As I related in my Thursday night commentary there was a convergence of numerous factors that pushed institutions to liquefy positions. European banks were being downgraded and 16 needed immediate recapitalization. The U.S. had "significant" economic risks. China was suddenly seeing a decline in production. Some suppliers to Chinese manufacturers were reporting problems with payments for goods. FedEx confirmed the slowdown with news shipments from Asia had declined -4%. United Continental and Delta said freight traffic was falling. Mercedes said sales in China slowed over the summer. Luxury car sales had been China's fastest growing auto sector.

It was a perfect storm of events that brought back memories of the financial crisis in 2008. There were sudden and unexpected events popping up everywhere. Cashin believes the selling was much more determined than just a combination of events. He said it screamed of forced liquidation. Were we about to have an AIG event from somewhere in Europe? We will only know in retrospect but it was definitely a rough two days.

The S&P declined -6.7% and traded as low as 1114 intraday before rebounding slightly on Friday to close at 1136. The current support at 1120 held but the rebound was lackluster considering the massive decline. This could have been due to the weekend event risk or due to the rising worries over "significant risk" as it was called by the Fed.

The year-end targets by the major analysts have been sliding almost weekly now. The obvious reason is the current S&P level and the 95 days left until year end. To rally from our current level to the forecast highs of some analysts would require an instant end to the European debt crisis and a sudden and unexpected improvement in the U.S. economic reports. It is not likely to happen. The average target is 1311 and there is a remote possibility we could see that level but it is definitely remote and require a major change in sentiment. The targets in the table are several days old but the most recent I have. Some may have changed and I missed it.

S&P Targets

I believe we are seriously oversold but there are very few bullish points that could produce a strong rally. With a handful of critical economic reports next week it is definitely possible but every one would have to be better than the prior month. The bad news bulls have indigestion from consuming too much bad news already.

One positive point is the lack of follow on selling on Friday. The sellers may have run out of shares to sell. The low volume indicated a severe lack of conviction from either side. Only 4.8 billion shares traded on Friday. That was the lowest volume of any day since New Year's Eve. This came after nearly 14 billion on Thursday. The lack of conviction was probably due to the bulls being wary of the weekend event risk. The last three Monday opens have been significantly negative. For example last Monday the S&P gapped down -25 points. What investor would want to buck that three week trend when Europe appears to be worsening almost daily?

If we can manage to get past the open on Monday, without a break of support at 1120, I think we could see a bounce. The economic reports will still be a key and negative economics is not going to play well in the market. As long as we hold over 1120 there is a chance of a rally. A break and close below that level would be seriously bearish and could target 1050.

S&P Chart - Weekly

S&P Chart - 90 Min

The Dow was negative much of the day and barely pulled out a positive close at the end on what was probably short covering. Hewlett Packard and DuPont were the biggest losers. Lackluster trading would be an understatement here but I have already covered those points above. The Dow needs to break above 10,800 and make a serious run at 11,000 before anyone is going to get very excited. Support is now 10,600.

Dow Chart

The Nasdaq had a respectable day with a +27 point gain. Support at 2420 held on Thursday and 2465 emerged as support at 11:AM. The positive Nasdaq finish was never in doubt but there was still a lack of enthusiasm.

Nasdaq 2500 is the next psychological target. The chip stocks are in rally mode but the big cap techs were only mildly positive. It is that lack of conviction thing again.

Nasdaq Chart - 90 Min

Like the Nasdaq the Russell had a decent day. Not exciting but decent. Prior support at 650 was regained with the 652 close but there was no excitement.

The Russell should now be our window on the market. When the market reacts violently to news and hits critical support levels the Russell is the index to watch. When it begins outperforming the other indexes we will know the fund managers are losing their fear of further declines.

Russell Chart

The markets are oversold and due for a bounce. Unfortunately they are also at the mercy of the events in Europe and the heavy calendar of economic reports next week. With the Greek prime minister visiting Germany on Tuesday I don't expect any surprising news from Europe this weekend. Hopefully that will allow us to break the chain of severely negative Monday opens.

I am expecting a rate cut from the ECB soon, probably by Oct 6th. While that will not help the U.S. specifically it will show some commitment on the part of the ECB to help revive the European economy. That should help our markets.

On Saturday Treasury Secretary Geithner told the IMF policy committee at a meeting in Washington "Time was running out to stave off potential domino-style defaults in Europe. European governments need to join with the ECB to provide stronger support and calm market fears." Also, "The threat of cascading defaults, bank runs and catastrophic risk must be taken off the table. Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets even more severe."

Mark Carney, the head of Canada's central bank called for overwhelming the problem by raising the current €400 billion EFSF to 1.0 trillion euros. The IMF meeting ended with a generic statement pledging to work decisively and in a coordinated way to deal with the debt crisis but conveniently left out any specifics. The market was hoping to get something more concrete out of the meeting so I don't know how this will impact our open on Monday.

I was looking for the mother of all "sell the news" events on the FOMC announcement and it came to pass. I don't see anything on the calendar for this week that could be that dramatic on the downside but there is the potential for some positive news events. Keep your fingers crossed.

I would look for an S&P move over 1140 and Russell move over 655 as early signs of a potential rebound. "If" we do get a rebound I don't expect a rocket ride to prior resistance at 1220. I think the road will be rocky until the market gets some economic and European news it likes. Metals are likely to be rocky at the open because of the increased margin requirements. Those caught unawares will be forced to sell something. However, anyone in the market on margin was likely already blown out on Thr/Fri. Once we see the beginning of a rebound in metals my favorite vehicles for a short term trade would be the SLV and JJC.

Jim Brown

Send Jim an email

"Every man is a damn fool for at least five minutes every day; wisdom consists of not exceeding that limit."
Elbert Hubbard


Index Wrap

When Up Means Further Down to Go

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

2600 was the key level in the key tech index (COMP) and when selling overwhelmed buying the rally was dead. Hello increased volatility again as hi-frequency trading propels both rallies and selloffs further than they would go otherwise.

If this Market seems unfamiliar to you in terms of its temper and tone, then I suppose you haven't traded the commodities markets. At least for the cycle we're in, if not forever, the Market has become another 'commodity' and another source of computer driven bets relating to price momentum.

Myself, I think it's time for some controls on what these computer driven funds can do as it scares away public investors from stocks at a time when there are stocks worth buying. Not that there aren't bearish-looking scary things out there. Anyway, we can't live without volatility and we are hard pressed to live with too much of it!

Some technical measures or models are starting to 'work' again such as envelope resistance measures and the 'centered' 21-day moving average alternatively 'acting as' support and resistance.

Not working are 'standard' technical pattern recognition tools. I don't recall that I ever saw a Head & Shoulder's TOP formation that formed AFTER a lengthily and steep decline. Nevertheless, the recent top pattern looks like the classic H&S Top, as seen on both daily and hourly charts. When the 'neckline' was pierced the fall was sharp such as we've come to expect with the H&S type top.

My first chart is of the hourly S&P 500 (SPX) hourly but the pattern is clearly seen on the SPX, S&P 100 (OEX) and Dow 30 (INDU) daily charts. NOT SO on Nasdaq; the same bearish H&S top pattern isn't there, just 3 slightly higher highs. Suggesting that, as we've known for a long time, tech is and will hold up better on declines and outdistance SPX on the upswings. MacDonald's has little sex appeal compared to Apple's luster.

In my regular commentaries on the different popular indices, I'll be again updating or reconfirming my assessment of major support levels in case this most recent collapse in prices is the first part of another down leg, such as to the low-1000 area in SPX (currently at 1136) or to the 2200 area in the Nas Composite. I don't accept the premise just now but do prepare for the possibility of a big further downswing in case we collectively scare ourselves into another recession. Market sentiment is showing extreme bearishness in some ways of measuring it particularly among investors, but trader sentiment as I look it from a ratio of daily call to put volumes, wasn't bearish enough on Friday to suggest any sustained rebound anytime soon.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) turned bearish on its sharp downside penetration of an up trendline that had developed over prior weeks. It only took two days to go from trading over 1200 back to support in the 1120 area. There was warning in that highs in the 1215 to 1220 area were hit on 3 days running. In this kind of high-volatility market, 3 days not going through the same resistance makes it high risk and here, wrong to be long.

Given the sharp break below SPX's up sloping trendline (the 'neckline') break, the pattern assumes the improbable of a Head & Shoulder's Top. It's got all the requisites including a sharp break of the H&S 'neckline', although this kind of pattern almost always forms after rallies or at tops, NOT as a consolidation after a sharp prior sell off. However, if I take the H&S pattern in the way the pattern usually 'measures' a next downside target, that would be to 1040 or lower.

We can't overlook either the strong support that has come in before on dips to near 1100. The chart pattern leans to a more bearish interpretation of another down leg ahead. The key is buying that comes in or doesn't if SPX dips toward 1100.

Where the previously pierced trendline intercepts is a possible early or near resistance; at 1172-1175, with next key resistance around 1220.

Near support is at 1120, extending to 1100, with next support in the 1050 area. Major support remains 1000.

S&P 100 (OEX) INDEX; DAILY CHART

In 3 weeks the S&P 100 (OEX) chart has gone from 'mixed' to one suggesting upside potential, to the bulls getting carpet bombed this past week.

The break of the up trendline was the key technical trigger that said look out below. I find it hard to believe that we won't see 500 or lower on some upcoming low. A key is where OEX Closes; on the bearish side, it's two days running below 500. Below 503-500, there's only 'air' down to the 470 area. Below 503-500, there's only 'air' down to the 470 area.

Bullish potential is suggested if the index 'bases' in the low-500 area as suggesting that OEX remains more or less locked in a 500-550 trading range. If we could only predict how long an index or stock would REMAIN in a trading range! There are some models, they just don't work all that reliably.

Near resistance is at 525, at the intersection of the previously broken up trendline, extending to around 532, on up to the cluster of prior recent highs at 546-547.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) broke layers of support quickly once there was no headway above 11500. A fall to below the 21-day moving average brought in more selling as did a break of the psychologically important 11000 level; a sharp decline the next day quickly took the Dow to what seems like a successful test of prior support at 10600 that stopped the waterfall decline of late-July into early-August. If INDU continues to find support in this area, exit puts, profit in.

A next down leg is the scenario that has the bulls sweating bullets, with a decisive downside break of 10600 setting off another big round of selling and a possible retest of major support around 10000.

Resistance is suggested at 11258, then at 11530.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) had looked like it was experiencing a bullish breakout above key resistance at 2600; instead, the area above 2600 was where COMP went to die. If you can't churn through what looks look to be considerable supply (as in lots for sale at that level and above), you are going to lose the bullish investment battle; you cannot push the ball up that steep of a hill. Then the market plays whack a mole and the bulls, now timid milk cows, play duck and cover.

The most bullish outlook is suggested if COMP holds at or above 2400. Bullish in an overall chart sense occurs with a successful retest of support around 2333; breaks to 2300 notwithstanding as long as prices come back by the Close. A next down leg is the most bearish possibility as suggested by a move that extends to at or near 2200.

Resistance is at 2532 to 2537; next resistance is at 2600 and selling pressures/resistance extends to the 2640 area.

NASDAQ 100 (NDX); DAILY CHART:

From this past week's action in the Nasdaq 100 (NDX) index it seems that the 5% moving average envelopes are again showing the areas on the upside that are 'extended' for NDX and where the index is vulnerable to a pullback. Predictably, the break below the 'centered' moving average (21) marked the average as representing at least immediate 'resistance'. What most often happens on these kind of breaks is a kind of a pull toward the lower envelope line and sometimes of course a dip to well below the lower line, but this is more rare than commonplace.

If NDX holds mostly at or above 2150 in the coming week, this diminishes a bearish next down leg scenario.

I've pegged near support at 2150, but also find reasons to see more downside than this ahead; if not to 2100-2080, then back to a retest of support at 2040-2037.

Near resistance begins at the 21-day moving average (2221) and then extends to the top end of the recent downside price gap at 2257, with increased selling on up to 2300 and beyond; e.g., the 2337 high and on to around 2350.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) fell from the high end of its uptrend channel to the low end and this either represents a place to get long the stock or a way-station for another decline, perhaps even equal to another down leg that carries another 4+ points like this past week.

One objective suggested by a break below 52.8 is for a move to near 49. That would imply the stock hits 50 and then some. The intraday lows are typically under key numbers, like 50 would be in QQQ. Bullish potential is for a move back up to 58, but another downswing just 'looks' like it is next in this pattern.

To give the benefit of the doubt to a bullish rebound, I'd say it's important to mostly see trading above 52.

Key near support is 52.8-53, with more major support beginning at 50. If a significant down leg develops here, we could see a move to the 48.5-47 price zone. Resistance is suggested by the top end of the recent downside price gap, at 55.3

Daily trading volume spiked on Thursday sharp decline, suggesting that there are still holders that can get 'flushed' out of their positions if prices break enough. Not exactly a bullish omen.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart which previously had traced out a pattern of higher pullback lows suggesting a pattern with bullish potential. Unrealized, it turns out as prices plunged below trendline support at 675, which I've noted now as initial key resistance. I was commenting on the 'commodification' of the stock market, but if this was a commodities chart, I'd be forecasting another down leg ahead. It just looks so.

640 is near support, with more major support beginning at 600 and extending to 587 or so. Near resistance is seen at 675; then back at 715-718 area again, extending to prior highs in the 735-738 area. Major resistance begins around 770.

I wrote last time that ..."if RUT broke under 672, it would suggest a further test of support, in the 650-640 area." RUT got to 635 intraday on Thursday and has rebounded a bit but the recent low doesn't look to be rock solid support. Stay tuned.



GOOD TRADING SUCCESS!


New Option Plays

Dollars, Copper, and Drugs

by James Brown

Click here to email James Brown

Editor's Note:

The market just suffered a very ugly week but there's a decent chance that stocks can rally off their August lows. Of course that chance depends on favorable headlines out of Europe and the parade of economic data this week.

In addition to this evening's new candidates, readers may want to consider these symbols as well. VRTX and TDC both appear to be bullish candidates. If you believe stocks can bounce off their August lows then you might want to consider bullish positions on the index ETFs like DIA, IWM, and the SPY.

- James


NEW DIRECTIONAL CALL PLAYS

Dollar Tree Inc. - DLTR - close: 75.91 change: +1.59

Stop Loss: 73.40
Target(s): 79.75, 82.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
We had DLTR listed as a call play on the newsletter earlier in the week but we were stopped out on Thursday's market-wide plunge. Shares found support near the $74.00 area but the intraday low was actually $73.62. Traders bought the dip on Friday morning and the stock outperformed with a +2.1% gain.

I am suggesting we hop on board. The plan is to buy calls now but only if DLTR and the S&P 500 index both open positive on Monday morning. We'll use a stop loss at $73.40.

*See Entry Details Above*

- Suggested Positions -

buy the OCT $77.50 call (DLTR1122J77.5) current ask $2.35

- or -

buy the NOV $80.00 call (DLTR1119K80) current ask $2.75

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on September 24, 2011


iPath Copper ETN - JJC - close: 42.84 change: -1.72

Stop Loss: 39.95
Target(s): 46.50, 49.75
Current Option Gain/Loss: Unopened
Time Frame: 10 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Copper prices were crushed this past week. The combination of worries about a global economic slow down and then rumors of a margin hike for trading metals helped produce a massive -17% drop in copper. Technically copper is off more than 20% from its highs, placing it in a bear market. Yet the sell-off is so sharp that copper is oversold and due for a bounce. Normal volume is 267 thousand shares a day for the JJC copper ETN. Friday's volume was over one million. That could be signs of a capitulation.

Friday after the market close the CME did raise margin requirements but since the copper prices already sold off on the rumor they could bounce on the news but we do face some risk of follow through selling come Monday morning. Readers may want to use small positions to limit their risk.

I am suggesting bullish positions now. We want to buy calls at the open. You have to decide if you want to use a tight stop loss under Friday's low (which was 42.16) or use a wide stop. The newsletter is placing our stop loss at $39.95. I'm setting our targets are $46.50 and $49.75. We prefer the December $45 calls but I'm listing October calls for more aggressive traders.

- Suggested Positions -

buy the OCT $45 call (JJC1122J45) current ask $1.25

- or -

buy the DEC $45 call (JJC1117L45) current ask $2.55

Annotated Chart:

Entry on September 26 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 267 thousand
Listed on September 24, 2011


Watson Pharmaceuticals - WPI - close: 70.70 change: +1.56

Stop Loss: 66.95
Target(s): 74.75, 78.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Investors seem unconcerned over a potential legal battle for WPI. The company has distribution rights to a generic version of Lovenox, produced by Amphastar Pharmaceuticals. Both companies are being sued by Momenta Pharmaceuticals and Novartis AG who plan to bring their own generic version of the drug to market. News of the lawsuit appeared to have little affect on shares of WPI.

If you look at WPI's performance last week you can see that traders bought the dip near $67.00 on Thursday morning. There was almost no sell-off on Friday morning and shares rallied back to close above potential resistance at $70.00. I am suggesting bullish positions now. However, we only want to buy calls on WPI if both the stock and the S&P 500 index both open higher on Monday morning.

We'll use a stop loss at $66.95. More conservative traders might want to use a stop closer to $68.00 instead. Our targets are $74.75 and $78.50.

*See Entry Details Above*

- Suggested Positions -

buy the OCT $75 call (WPI1122J75) current ask $1.05

- or -

buy the NOV $75 call (WPI1119K75) current ask $2.00

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date 11/01/11 (confirmed)
Average Daily Volume = 1.4 million
Listed on September 24, 2011



In Play Updates and Reviews

New Entry Point

by James Brown

Click here to email James Brown

Editor's Note:

None of our new trades from Thursday night were opened on Friday. We're making some adjustments. The plan is to try again on CELG, CHKP, SLV, and WFM. Please note our new stop loss on SWK.

-James

Current Portfolio:


CALL Play Updates

Celgene Corp. - CELG - close: 62.67 change: -0.87

Stop Loss: 60.75
Target(s): 69.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
09/24 update: Our new trade on CELG is not open yet. Both the S&P 500 and CELG opened lower on Friday. The stock managed to hover just above the $62.00 level. Overall I don't see any changes from my Thursday night comments. I am suggesting we try again.

The plan is to buy calls now but only if CELG and the S&P 500 index open positive on Monday morning. However, we'll use an alternative trigger to buy calls at $64.25 just in case CELG rallies and the market does not but we'll want to keep our position size small if this occurs. Our target is $69.00.

*See Entry Point Details Above*

- Suggested Positions -

buy the OCT $65 call (CELG1122J65) current ask $1.52

chart:

Entry on September xx at $ xx.xx
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 4.0 million
Listed on September 22, 2011


Check Point Software - CHKP - close: 52.87 change: +0.68

Stop Loss: 50.80
Target(s): 55.75 , 57.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
09/24 update: Our trade on CHKP is still not open. The stock opened lower but traders bought the dip again near its exponential 200-dma. The bounce off its lows looks like a new bullish entry point. Once again I am suggesting we launch bullish positions now but only if CHKP and the S&P 500 index both open positive in the morning.

We have a stop loss at $50.80. Our targets are $55.75 and $57.75. More aggressive traders can aim higher.

*See Entry Point Details Above*

- Suggested Positions -

buy the OCT $55 call (CHKP1122J55) current ask $1.75

chart:

Entry on September xx at $ xx.xx
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on September 20, 2011


Hewlett Packard - HPQ - close: 22.32 change: -0.48

Stop Loss: 19.75
Target(s): 29.50
Current Option Gain/Loss: -12.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/24 update: Our speculative trade on HPQ is open. The stock underperformed on Friday. Shares opened at $22.52, dipped to $21.50 but pared its losses to just -2.1%. Essentially this is a bet that HPQ has seen its lows or is near a bottom. Plus, it's a bet that investors might give the company's new CEO Meg Whitman a little leeway as she tries to turn the company around. Volume was pretty strong on Friday at almost 69 million shares.

I would still consider new positions now. However, more conservative traders may want to look for a potential dip into the $21.00-20.00 zone as their entry point. Or wait for a close over $24.00 or $25.00 as an alternative entry point. Our multi-week target is $29.50.

- Suggested Positions -

Long 2012 Jan. $24 call (HPQ1221A24) Entry $2.14

chart:

Entry on September 23 at $22.52
Earnings Date 11/21/11 (unconfirmed)
Average Daily Volume = 26.6 million
Listed on September 22, 2011


ishares Silver ETF - SLV - close: 29.98 change: -4.94

Stop Loss: 27.25
Target(s): 34.50, 37.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

Comments:
09/24 update: Wow! It looks like we were too early in calling a bottom for silver. Rumors that the CME would raise margin requirements on silver trading helped fuel a massive sell-off in metals. Gold, Silver and copper all crumbled on Friday. Our trade did not open since shares of SLV gapped open lower ($31.80) underneath our stop loss (33.45).

After the closing bell on Friday the CME did indeed raise margin requirements. So it seems like the news was leaked. Silver might see a bounce on Monday since the sell-off on higher margins has already happened or it might see a brief sell-off Monday morning but I would expect it to rebound intraday. We still want to buy the SLV.

I am suggesting we buy calls now at the open on Monday. Nimble traders might want consider waiting for another dip near $29.00 as their entry point. Readers might want to keep their position size small because the SLV has been so volatile. We will use a wide (aggressive) stop loss at $27.25. More conservative traders will want to consider a stop closer to $28.50 or $29.00 instead. The low on Friday was $29.05. Our new upside targets are $34.50 and $37.75. We might consider a higher target for the January calls. Keep in mind that the 200-dma and the $38.00 level could be new resistance.

NOTE: We have updated our option strikes!

- Suggested Positions - (Small Positions)

buy the NOV $32 call (SLV1119K32) current ask $2.15

- or -

buy the 2012 Jan $35 call (SLV1221A35) current ask $2.12

chart:

Entry on September 26 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 24.4 million
Listed on September 22, 2011


Whole Foods Market - WFM - close: 68.20 change: +0.57

Stop Loss: 64.90
Target(s): 73.00, 77.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
09/24 update: Our new trade in WFM is not open yet. Both the stock and the S&P 500 opened lower on Friday. Traders quickly bought the dip in WFM. The low was $66.51. I am suggesting we try again. The plan is to buy calls now but only if WFM and the S&P 500 open positive on Friday. If triggered we'll use a stop loss at $64.90.

Please note that I'm listing an alternative entry point. Just in case WFM rallies without the market. We want to open very small bullish positions if WFM hits $70.25 regardless of where the S&P500 is. If this happens we'll use a higher stop loss at $66.49 and adjust our targets to $74.00 and $77.50.

*See Entry Details Above*

- Suggested Positions - (Small Positions)

buy the OCT $70 call (WFM1122J70) current ask $2.68

- or -

buy the NOV $72.50 call (WFM1119K72.5) current ask $3.80

chart:

Entry on September xx at $ xx.xx
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on September 22, 2011


PUT Play Updates

Stanley Black & Decker - SWK - close: 50.53 change: +2.70

Stop Loss: 51.25
Target(s): 50.25, 46.00
Current Option Gain/Loss: Oct$50: + 39.4%, & Oct$55: +41.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/24 update: Uh-oh! Warning. Danger, Will Robinson! Shares of SWK are seeing a significant bounce on Friday. The stock dipped to $47.27 and then surged more than +5% to close back above the $50.00 mark. The move on Friday looks like a bullish reversal pattern. More conservative traders will want to exit immediately. We are lowering our stop loss down to $51.25. No new positions at this time.

- Suggested Positions -

Long OCT $50 put (SWK1122V50) Entry $1.90

- or -

Long OCT $55 put (SWK1122V55) Entry $3.90

09/24 new stop loss @ 51.25
09/22 new stop loss @ 52.25
09/22 1st target exceeded on gap down at $49.12
bid Oct. $50 put @ 3.12 (+64.2%)
bid Oct. $55 put @ 5.75 (+47.4%)
09/21 new stop loss @ 56.25

chart:

Entry on September 12 at $54.78
Earnings Date 10/18/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on September 10, 2011