Option Investor
Newsletter

Daily Newsletter, Saturday, 10/29/2011

Table of Contents

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

Market Wrap

Thank You Merkozy

by Jim Brown

Click here to email Jim Brown
While there are still a lot of unanswered questions about the EU plan there is no doubt that Merkel and Sarkozy were responsible and U.S. traders should be thankful.

Market Statistics

Unfortunately for the week ahead we have to depend on earnings, economics and the Fed to keep the market moving forward. Despite several high profile earnings disappointments the earnings cycle is still intact and positive. The economics are like the earnings. Mostly positive but a few potholes from time to time. The Fed is the wildcard for next week.

The Federal Reserve Open Market Committee (FOMC) will hold a two day meeting on Tue/Wed. The FOMC announcement will be at 12:30 on Wednesday followed by the Bernanke press conference at 2:15. Up until last week's economic news, European can kicking and market rally there were strong rumors the Fed would announce a new stimulus program, QE3, where it would buy residential Mortgage Backed Securities (MBS) to force interest rates lower and further stimulate the housing market.

With the market approaching the July highs, economics improving and Europe off the table for the next few weeks they may elect to wait until the January meeting to make a decision. They rarely do anything at the December meeting. They should actually cancel it because nothing ever happens.

The Fed could actually help the market next week even if they don't announce any new programs. They could say in their statement that the economy is improving and risks are no longer weighted to the downside. The markets would cheer the good news and stocks would go up. If they continue their negative outlook without any action analysts would question their motives and the markets could trade lower.

Next week is filled with important economic reports. I have great hopes the reports will continue to show improvement. Friday's final reading on Consumer Sentiment for October rose significantly from the first reading. The headline number rose to 60.9 from the initial October reading of 57.5. That was the fifth biggest revision since 2001. This is a dramatic improvement compared to the Consumer Confidence report earlier in the week that fell to 30 month lows. The Confidence report is impacted more by consumer finances.

The initial reading of 57.5 was a decline of nearly -2 points from September. To have the final reading jump so significantly suggests sentiment is rapidly improving. To put this in context this survey was done before the agreement in Europe. That should mean the sentiment number for November should also improve significantly.

Note in the chart the August reading of 55.7 was very near a new 28-year low. The rebound to 60.9 represents a +10% improvement in the last 60 days. That is significant. It is conceivable to see a rebound over 65 when the next reading for November comes out on Nov-11th.

Consumer Sentiment Chart

If the ISM reports next week continue to show improvement as expected we could see real confidence in the economy begin to increase. Monday has the ISM NY and ISM Chicago. The NY report was positive last month but only barely. It would be nice to see a resumption of the recent trend. The index hit a new high in July. A break over that high for October would be outstanding.

The Chicago ISM, formerly the Chicago PMI, is predicted to show a minor decline to 59.0 but still well above the low for the year at 56.5 in August. The survey was 60.4 in September. The Chicago ISM is heavily influenced by auto manufacturing and maintenance cycles for retooling between model years. This should have been the problem in August and October should show a return to growth.

The national ISM is on Tuesday. It is expected to have rebounded sharply to 55.0 from September's 51.6. The market would be thrilled if that prediction comes true.

On Wednesday the ADP report will try to predict the added jobs for the Nonfarm Payroll report due out on Friday. The ADP estimates are for a gain of 91,000 private payrolls. The current estimates for the Friday payroll report are for a gain of 100,000 jobs compared to +103,000 last month. Morgan Stanley is expecting +125,000. This report could be a game changer if it was much higher than 100,000. A positive surprise here would go a long way towards pushing the market higher for the rest of 2011.

Economic Calendar

With Europe having kicked the can out of sight for the short term the next major problem for the U.S. markets will be the Congressional Super Committee and their deficit cutting recommendations due out on Nov-23rd. This is going to be a major challenge.

The committee has received more than 175,000 written suggestions on how to cut the deficit by $1.2 trillion over the next ten years. Each side has presented bullet points on what it is thinking and the other side has sworn to defeat those proposals.

Everyone remembers the market turmoil and the damage to consumer sentiment when the first debt limit debacle occurred in July. The S&P lost -240 points from July 25th to August 9th. Don't look now but that curse is coming back to haunt us in three weeks or less.

In theory the committee will agree on a package of spending cuts and tax hikes and the package will be submitted to the House and Senate for an up or down vote. If the committee fails to come to an agreement or the proposal fails to pass the House and Senate votes then a backup package of spending cuts outlined in the first debt debacle will automatically take effect. Those cuts are draconian and totally unacceptable according to leaders in both parties.

It makes for an interesting conundrum if only the impact on the markets was not going to be so devastating. Lawmakers are charged with coming up with a lesser evil that will be acceptable to both parties. Since there are no points acceptable to both parties it will be the equivalent of a judgment by Solomon. For your crimes of overspending it has been decided that you will lose a hand. You get to choose which hand will be hacked off. Lawmakers have until November 23rd to choose which hand they want to give up. There is no alternative.

The problem is not the actual result. The problem will be the constant headlines and bickering that will lead up to the deadline. Fortunately there is no threat of the government shutdown that we had with the August 4th deadline. That will make the process a little more bearable. Secondly, once the vote and deadline passes the problem is over for another year. Those elected in 2012 will have to take up the fight again in 2013. Nothing is going to happen in 2012 because it is an election year.

That makes this November 23rd hurdle the last material roadblock for 2011 and quite possibly for all of 2012 although the election battle next year is sure to poison sentiment to some extent.

I don't know how we will react to a lack of major economic events. Without Europe headlines once a week the bears will go into withdrawal waiting for a shorting opportunity.

Earnings continue to provide an excuse to trade but the number of companies left to report will start to decline next week. Earnings for Q3 have been better than expected despite several high profile disappointments. As of Friday 315 S&P-500 companies have reported earnings. A whopping 71% have beaten estimates. Earnings for Q3 are showing roughly +16% growth and at the top of recent estimates. Earnings growth for the entire year is now expected to be between 18-20%. Not exactly a double dip recession.

On Friday Goodyear Tire (GT) rallied +5% after reporting a +22% jump in revenue to its highest quarter ever. The company said its strategy of promoting high-end tires had paid off even though the number of tires it sold was basically unchanged. Earnings were 60-cents compared to a loss of 8-cents in the year ago quarter. Revenue rose to $6.1 billion from $5 billion. Another sign of recession worries easing.

Goodyear Chart

Drug giant Merck (MRK) posted earnings of 55-cents on $12.02 billion in revenue. That compares to 11-cents in the year ago quarter. Ex items MRK earned 94-cents compared to estimates of 91-cents. Sales were up +8% and the company raised guidance for the current quarter. MRK shares rallied +2% to a three month high.

Merck Chart

Interpublic Group (IPG) posted earnings of 16-cents compared to estimates of 10-cents. The advertising company affirmed its full year estimates despite its peer group all warning of slowing ad spending. WPP Inc, the world's largest advertising company, cut its 2011 outlook on slowing growth in the U.S. and the EU debt crisis. However, Interpublic said it will meet or surpass its prior forecast of 4-5% revenue growth despite the economic uncertainties. The company said it had seen little in the way of pullbacks from clients. Earlier this month Omnicom posted strong results on surging international sales. This should mean the smaller companies like Lamar and Focus Media should also do well. This is another sign we are not heading for another recession.

IPG Chart

CBRE Group (CBG) reported earnings that rose +12% at 24-cents that was in line with analyst estimates. CBRE is a large commercial real estate firm that brokers sales, financing and leases as well as manages properties and investment funds. Management revenue rose +19%. Property sales commissions were up +23% with a 42% increase in the Americas. Commercial mortgage brokerage revenue rose +32%. Global management revenue rose by +56%.

CBRE Chart

I hope everyone sees the pattern here. Quite a few businesses are seeing sharp or at lease decent gains in revenue and earnings. I find it hard to believe we are on the verge of another recession. Unfortunately there is a fly in our economic soup.

Appliance maker Whirpool Corp (WHR) announced it was cutting 5,000 jobs due to a persistent lack of demand for refrigerators and household appliances. The company is going to reduce its annual manufacturing capacity by about six million appliances. Competitor Electrolux said it would also outline a cost cutting plan next month.

Obviously the reasons for their suffering are clear. The U.S. housing market is at decade lows and chronic unemployment is keeping those with homes from upgrading appliances. We heard from Ingersoll Rand that air conditioner sales were weak for the same reasons. 3M said TV sales were weak because the consumer could not afford any more high dollar flat panel devices.

While the unemployment is getting the blame for this weakness it is really a housing story. Existing homeowners can't use their house for an ATM as in the past and home values are low and that is preventing owners from selling. This is the same story we have seen for the last three years. It is not new. The housing sector and everything that depends on it like washing machines and water heaters will continue to be weak at least until spring but more than likely for another couple years.

However, tablet, smartphone and ereader sales are exploding. Consumers are deciding where they want to spend their money and it is not on washing machines and garbage disposals.

Shares of Whirlpool declined -14%.

Whirlpool Chart

Apparently consumers also wanted to spend their money on UGG boots. Deckers (DECK) reported sales of its UGG boots had risen +47% in Q3 and accounted for 90% of the company's revenue. Earnings rose +48% to $1.59 compared to estimates for $1.36. That was a monster beat but you have to wonder how much longer the UGG fad will last. The company did affirm earnings for Q4 would rise +33% but that was down from prior estimates of +36% due to some expenses that had been budgeted for Q3 but were delayed. Investors must have liked what they saw because DECK rallied for a +11% gain to a new historic high.

DECK Chart

The volume of earnings won't really begin to slow until the following week but the quality of earnings will fall off dramatically this week. There are 101 S&P companies reporting this week but only a handful you would recognize. There are a few big names on this list but very few relative to last week. We know how the cycle will end but we still have to go through the motions so everyone can get their 15-min in the spotlight.

Earnings Table

Commodities had a killer week after the dollar was crushed and the euro rallied. Gold was up +$100 for the week and silver +$5.28 for a whopping +17% gain. Oil is up +24% off the October 4th lows. Unbelievable!

However, the winner is copper with a +21% gain over just the last week. That is the largest weekly percentage gain on record. The worries over a hard landing in China or a global meltdown as a result of Europe appear to have passed.

The moves in commodities are also being blamed on the implosion at MF Global. The company is a global futures management and trading firm. It has 2,900 employees and $1.1 billion in revenue last quarter. On Tuesday MF reported an adjusted loss of $17.9 million but analysts had been expecting a profit. What really knocked the props from under their stock price was a disclosure they had a $6.3 billion exposure to short-term European sovereign debt. That is five times their tangible common equity according to Moody's.

The stock declined -62% for the week and briefly traded under $1 after Fitch downgraded their bonds to junk status. Sean Egan, managing director of Egan Jones, puts MF's leverage ratio at better than 40:1 and worse than Lehman's 32:1 when it collapsed. Trading partners were leaving faster than rats from a burning ship. The lack of trading partners is what normally sinks a big company like MF. If nobody wants to take the other side of your trade then you can't trade.

The company reportedly drew down all its credit lines on Thursday to meet margin calls. The company hired investment bank Evercore to help it explore strategic options. Rumors on Friday gave it three days to find a buyer or file bankruptcy on Tuesday. The board is reportedly meeting at 4:PM on Saturday to discuss buyout offers.

Clients were reportedly fleeing the company and that means liquidity issues and closed trades. If you have several million in managed commodities and your broker is imploding your only option is to close those positions and withdraw the cash, assuming there is cash to withdraw. Various analysts suggested the big gains in commodities were due to bearish positions being closed in a rush to escape MF. Apparently the company was net bearish in its commodity positions the prior week.

That makes more sense why thin markets like copper exploded at the same time MF imploded.

MF Chart

Copper Chart

Crude prices have another motive for their gains. The unexpected uptick in U.S. economics plus the stories coming out of Libya about delayed production restart means the minor amount of excess global capacity is still shrinking. We are moving into heating oil season and falling production in Mexico, the North Sea, Nigeria and elsewhere means supplies will remain tight. Heating oil prices could hit records this winter. The prior spike in heating oil came during the spring and summer of 2008 when usage was relatively low. Futures prices hit $3.33 a gallon in April of 2011 but again it was during the off season. Futures prices are currently $3.06 and rising and the heavy demand season is just ahead. Retail prices were $3.80 last week according to the EIA. That is 81-cents over 2010 prices for that same week. Also, the EIA reported the inventory of distillate oils hit nearly a three-year low last week. Days of supply have not been this low since Feb-29th 2009.

EIA Distillate Oil Chart

Crude Oil Chart

Newmont Mining Corp (NEM) posted adjusted earnings of $1.29 compared to estimates of $1.24. The CEO was interviewed on the outlook for gold and as you can imagine he was talking his book. What is he going to say? The price of gold is going lower? Obviously you would not expect him to be bearish. However, I thought some of his comments were interesting.

The average price of gold for the quarter was $1,695. When asked about the future price of gold he repeated the obligatory "$2,000 is within easy reach" claim. He said it takes about 10-11 years from finding a gold deposit to actually opening a mine. The number of new gold deposits have been shrinking. The quality of the gold in those deposits is deteriorating. The easy, high quality gold has been found and companies are being forced to dig deeper, in sometimes hostile environments, only to produce a lower grade of gold. He said the average industry cost to mine an ounce of gold today is close to $650. Five years ago it was $300 and he only sees that cost rising, possibly dramatically. He talked about declining global production over the next ten years. I am not a "gold bug" but I have listed links in my commentaries before about the future for gold prices and I don't recall anyone ever quoting solid facts supporting a decline in prices. Here is a report by Standard Chartered Bank: In Gold We Trust

Gold Chart

October is known as the bear killer month. I would say it earned that title again this month. The Dow is on track for the biggest monthly point gain ever and that is measured from September's close at 10,910 not the monthly low at 10,404. If the month had closed on Friday it would have been a gain of +1,320 points. That is +1,826 if you count from the Oct-4th low. The Dow has posted weekly gains for the last five consecutive weeks. However, Friday's 87-point range was the smallest daily range in over three months.

I would say Friday was a victory for the bulls or at least for the fund managers. They managed to keep the market at the highs with only one day left in their fiscal year. So what happens next week?

Monday will probably be a hangover day as managers try to hold that window dressing into the close. In an interview to be shown on Sunday the outgoing head of the ECB, Jean-Claude Trichet, said "the euro zone debt crisis is not over." Shades of Alan Greenspan trying to grab the spotlight one last time before fading into history. Trichet's term is expiring and the new head of the ECB will host his first meeting next week. However, it will be interesting to see how Trichet's outgoing remarks impact the market on Monday. He went on to say the foundation to the solution had been laid but it would require much precise work in a timely fashion that would require "absolutely decisive" actions on the part of the EU leaders. The actions in the EU statement must be "thoroughly and aggressively implemented." That is not exactly a hallmark of European governments.

The Trichet comments may provide some market volatility on Monday but I think investors are tired of looking over their shoulder for a European headline before making their trades. They may just put a checkmark in the "Europe solution" box and move on.

I think the economics this week are going to be more important than Europe. Add in the FOMC meeting on Tuesday/Wednesday and the Bernanke press conference and there will be plenty to keep traders on the sidelines. Unless there is a huge negative surprise I don't see a major market decline. However, defining "major" could be a challenge given the amount of the gains.

Just to keep things interesting JP Morgan put out a note on Friday saying the markets had put in a "strong foundation for an equity rally into year end" with a 1400-1475 S&P target. Whoo-Hoo! If only they could ensure that prediction came true! They said the risk in Europe had been reduced and there would be no double dip recession.

The S&P closed at 1285 and right at resistance. It did close well over the 200-day average at 1275 for the second consecutive day. Just holding all the gains from Thursday was a major accomplishment.

Volume on Friday was mediocre at 7.7 billion shares but Thursday's volume was a huge 11.8 billion with a 10:1 upside volume advantage. That is very bullish even if a lot of it was short covering. The volume on Friday was evenly split and it qualified as a consolidation day.

It would appear that the 200-day average at 1274 is now initial support but it was NOT tested on Friday with the low at 1277. That is a strong indicator since it should have been a price magnet.

The +19.5% rebound in the S&P from the 1075 lows on Oct 4th has come with only a couple days of profit taking along the way. We have to expect there will be a down day, or two, in our immediate future. If we get a pullback on Mon-Wed I believe it will be a buying opportunity. However, there is some serious headline risk from the economics and the Fed meeting. Of course the week wraps up with nonfarm payrolls so you could say there was serious headline risk all week. This would be a good period for the market to consolidate, show a little bit of profit taking and sort through the remaining earnings and economics. The following week I would expect to be positive except the farther we get into November the closer we get to the Super Committee headline battle.

The bulls will have a major wall of worry to climb all month but they seem to like it best when headlines are giving the bears a shorting opportunity. Those headlines can turn into stepping stones higher.

I am bullish for the month on fundamental terms and on technicals. I am cautious on event risk.

S&P Chart

The Dow is clearly overextended but resistance at 12,250 is much weaker than the July highs at 12,750. There will be plenty of traders waiting to short the highs when we get there. The Dow is well over the 200-day average at 11,973. Initial support should be 11,900 but a pullback to there would likely scare the heck out of investors. We need it but should it happen everyone would be afraid to buy it. Make a plan now to pull the trigger at 11,900 if it comes around again. If you plan on it now there will be less second guessing if it happens.

Dow Chart

The Nasdaq held its 87 point gain from Thursday and that is a bullish sign. Apple did not contribute with only a fractional gain. The biggest Nasdaq winners were AMZN +10.47, DECK +11.44 STMP +6.84 and BIDU +5.81. Amazon has rebounded +$19 since its closing low at $198 on Wednesday. That low was dead on the 200-day average.

If we could just get the Apple faithful to return I think the Nasdaq would catch fire again. Current resistance is 2740 with the July highs at 2875 the next target.

Nasdaq Chart

Nothing is happening on the Russell as far as a trading signal. The Russell pulled back more than the other indexes but that was expected. It still held the majority of its gains and that is bullish. However, as I said before, until the Russell starts leading the big cap indexes the rally is still in doubt. I actually expect this to happen in the next week or so. Once fund managers get past month end they might begin to shift into small caps for the year end rally.

Russell Chart

Australia is expected to cut rates on Monday. That would be a positive event that might give Asian markets a boost but I think the U.S. markets are going to be stuck in consolidation mode early in the week.

We just need to bide our time and look for a real dip to buy.

Jim Brown

Send Jim an email

"Many wealthy people are little more than janitors of their possessions."
Frank Lloyd Wright


Index Wrap

Stocks Go Into Overdrive

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The very strong move of this past week puts the market into overdrive as it were. It looks to me like there's one further spurt higher before there's a dip. It won't take long for the bears to regroup.

Key technically this past week, at least as money fund managers would view it, was that all the major market indexes closed above their 200-day moving averages.

The key levels on a further push higher are seen at 1300, then 1350 in the S&P 500 (SPX) and 2800-2850 in the Nasdaq Composite (COMP). Whether our two key indexes make it through these levels or not, I anticipate them at least getting into these areas. Measured move objectives are to 1350 in SPX and the 2880 area in COMP; this based on the predominate boundaries of the August-September-October wide swinging trading range.

This recent breakout above a long extended trading range that had a LOT of volatility is important in terms of seeing where we are in this market cycle in terms of the all important public take on the market. At the end of the wave of numerous sharp and wild price swings, we arrive at the point when the public finds stocks and the market very unappealing or at least very scary. This is the point also perversely enough that are among some of the best times to buy from a trading perspective.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The result of the S&P 500's accelerated move of this past week carried SPX to well above its prior 3-month range. The longer a sideways trend, the stronger a subsequent 'breakout' move above or below the prior 'rectangle' highlighted on the daily chart.

If the early trading in the coming week doesn't see SPX dip much under the top end of the big Thursday rally (the way it was Friday) I think its part and parcel of a further spurt higher. We could open strong on Monday and stay strong but there may another day of hesitation. The hourly chart patterns (not shown) are suggesting it’s the former and follow through strength.

If on the other hand there's early weakness on profit taking; or, analysis of possible European snafus relating to the grand consensus announced in the midnight hour last week, the downside risk looks to be a dip to the 1250 area, possibly back to 1225, which is a key support and this extends to 1200. A Close below 1225 for more than day would turn the chart mixed as it represents such a lack of follow through to the strong upside momentum seen in the spurt above the SPX 200-day moving average.

At some point there should be a challenge to the prior high. The upside measurement implied by the rectangle pattern is to at least 1350 as a 'minimum' objective.

RSI values seen above are extreme and on this basis alone there's an increasingly likelihood of a correction. Sentiment numbers got close to extremes on a couple of occasions this past week but the indicator registers nothing like what I anticipate seeing if the market was major league overbought and frothy. It's far from that.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart continues to be bullish. With the last spurt higher, the pattern is one that has become almost 'too' bullish as is suggested by how far the index is above its 21-day moving average. When prices get to levels that exceed 4% above or below the 21-day average for OEX, its typically EITHER 1. the tail end of a move; 2., the rate of climb will stall or 3., the index is in a new up leg. That was the case and it became time to shift my upper envelope value from 4% to 6%, equal to the percentage OEX was BELOW its 21-day average at the last low.

OEX hit the my raised 6% upper envelope line on Thursday, suggesting that the more likely trend forecast is that gains from here won't be dramatic; not like last week. If they ARE, it could be a pretty rapid retest of the prior highs in the 1350 area.

A pullback to key near support at 560 would be a key test of buying interest. Next very key support is in the 540 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) chart was bullish last week and more bullish after this past week's upside acceleration and INDU looks headed to a test of prior highs in the 12750 area whether that is this coming week or after a pause or pullback. It looks right now like there's another substantial rally ahead and a move to the 12400 area would be a next test of a pivotal technical resistance. Major resistance begins at 12800.

11800 is highlighted as a key support; better is to say 10800 to 10700 is the key zone of support. Below this area, major chart support is at 114000. Only a couple of Closes below 11400 would turn the intermediate trend lower.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart turned from somewhat mixed as long as the index couldn't get above resistance in the 2650 area. Last week saw finally a strong breakout move from there, up of course and the Close above the 200-day moving average is important as a bullish indicator. Look for near support now in the area of this key longer-term average in the 2700 area.

Key resistance begins around 2750, extending to 2800. I don't anticipate COMP getting above 2800, or 2850 without at least some backing and filling. In terms of the 13-day RSI indicator, the index isn't yet in the 'overbought' areas that I would expect before there was an extreme likelihood of a good sized correction.

COMP is finally well into an area of 'supply' or price areas at and above which more stock will be offered for sale. Buyers may start backing off above 2800.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) continues to rally but it's a slow slough to the upside as highs continue to 'hug' the upper 5% trading 'band' or moving average envelope; this line represents a rising line of 'resistance', not in a conventional sense but more in that at least without more fuel for the bullish fire, the index is going to only go so far above its 'mean', for which the 21-day average serves very well from a trading perspective.

Key near resistance is highlighted for the 2320 area but this should be thought of as extending to the area of the July intraday top at 2438. Some technical projections suggest to me that 2470 to 2500 will also be a key resistance zone.

Ability for the index to hold above support in the 2350 keeps the chart looking quite bullish, but another brief dip to the 2300 area wouldn't go against the bullish outlook seen here; a couple of closes below 2300 would suggest higher risk in remaining in bullish positions.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is bullish and is approaching key resistance implied by the prior top that formed in the 59.6-59.8 area and forays into this area have brought downside reversals on THREE (Feb, April and July) prior occasions this year. Let that fact speak for itself. A decisive upside move above 60, with establishment of a support floor in that area after that, would be a big deal.

Near support is at 58, then in the 56.4-56.0 area.

It's likely that QQQ will retest prior highs and touch 60, maybe even the 61 area. On Balance Volume (OBV) considerations suggest some internal weakness here. I see 60, maybe 61, but some corrective action after that; e.g. a pullback to the 58 again.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart remains in a bullish pattern as it decisively pierced a prior important high at 738. RUT 'gapped' above 740 on the news out of Europe and this area now should be a support floor if the Index is in a new sustainable up leg.

RUT has yet to cross above its 200-day moving average which will be a key test of how far the Index can get on this recent accelerated move. It could be to 820 in my most bullish view of progress in the next 1-2 weeks. A key test in RUT showing increasing strength will be seen by it crossing or not above its 200-day moving average, currently 780.

A retreat wouldn't be a surprise technically as RUT got far extended above its prior rate of advance. Support points look like 740, the 720 area and at 680.

Looking to buy RUT stocks becomes tempting on dips to 740-730. 740 was the key recent 'breakout' point and becomes in effect a key support and test of how much bullish follow there is ahead. Support extends to the 720 area at the trendline and the 700 to 690 zone as next and most pivotal support in terms of any change in the intermediate trend.



GOOD TRADING SUCCESS!


New Option Plays

Industrials, Financials, & Business Services

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Deere & Co. - DE - close: 78.67 change: +0.52

Stop Loss: 74.40
Target(s): 82.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The threat of a global economic slowdown seems to be easing. That should make investors more comfortable with industrial and cyclical names. Plus, rival CAT reported strong earnings results a few days ago. The trend for DE looks bullish but shares are short-term overbought.

We are suggesting investors buy calls on a dip at $76.00 with a stop loss at $74.40. Our multi-week target is $82.00. FYI: The Point & Figure chart for DE is bullish with a $97 target.

buy-the-dip Trigger @ $76.00

- Suggested Positions -

buy the NOV $77.50 calls (DE1119K77.5)

- or -

buy the DEC $80 calls (DE1117L80)

Annotated Chart:

Entry on October xx at $ xx.xx
Earnings Date 11/23/11 (unconfirmed)
Average Daily Volume = 5.6 million
Listed on October 29, 2011


iShares U.S.Financials ETF - IYF - close: 51.89 change: +0.14

Stop Loss: 48.75
Target(s): 54.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
EU leaders have essentially kicked the can down the road a significant ways. Worries over a debt default in the EU and the spread of bad debt contagion should fade from the headlines. That will make investors more comfortable owning the financial stocks.

On a short-term basis the financials look overbought. We want to buy a dip in the IYF at $50.50 with a stop loss at $48.75. Our multi-week target is $54.00. FYI: The Point & Figure chart for IYF is bullish with a $75 target.

buy-the-dip Trigger @ $50.50

- Suggested Positions -

buy the NOV $50 call (IYF1119K50) current ask $2.90

- or -

buy the DEC $53 call (IYF1117L53) current ask $1.65

Annotated Chart:

Entry on October xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 697 thousand
Listed on October 29, 2011


Visa, Inc. - V - close: 95.10 change: +0.70

Stop Loss: 89.49
Target(s): 99.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of Visa spent two weeks consolidating sideways in the $90-95 range. Friday saw the stock breakout past resistance to close at new 52-week highs. Aggressive traders may want to buy calls right here. We are concerned that the major market indices are short-term overbought and due for a pull back. That's why we're suggesting readers wait and look for a dip in Visa before initiating positions.

We are listing a buy-the-dip entry point at $93.00 with a stop loss at $89.49 (under last week's low). Our target is $99.75. FYI: The Point & Figure chart for V is bullish with a $119 target.

buy-the-dip Trigger @ $93.00

- Suggested Positions -

buy the Nov. $95 call (V1119K95) current ask $2.53

- or -

buy the Dec. $95 call (V1117L95) current ask $3.80

Annotated Chart:

Entry on October xx at $ xx.xx
Earnings Date 10/26/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011



In Play Updates and Reviews

Taking Profits in ANF, ROK and SPW

by James Brown

Click here to email James Brown

Editor's Note:

Stocks have delivered an incredible month for the bulls in October. Our short-term concern should be focused on a pull back with the market overbought and due for some profit taking.

We are electing to exit early in our ANF and ROK trades. SPW hit our exit target. Plus, the plan was to exit our IWM strangle on Friday morning.

-James

Current Portfolio:


CALL Play Updates

Bed Bath & Beyond Inc. - BBBY - close: 61.15 change: -1.62

Stop Loss: 59.75
Target(s): 64.75
Current Option Gain/Loss: -42.0%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
10/29 update: BBBY underperformed the market on Friday with a -2.5% decline thanks to some bearish analyst comments. Our November calls were hammered lower on the drop. The stock delivered a choppy week but shares still have a bullish trend of higher lows and higher highs. Technically Friday's dip looks like a new entry point but I am worried the stock market's major indices are overbought and due for a pull back. I am not suggesting new positions at this time.

*Small Positions*- Suggested Positions -

Long NOV $62.50 call (BBBY1119K62.5) Entry $1.50

10/27 new stop loss @ 59.75

chart:

Entry on October 14 at $61.00
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on October 12, 2011


Costco Wholesale - COST - close: 85.22 change: +1.49

Stop Loss: 81.80
Target(s): 97.50
Current Option Gain/Loss: Nov$85 call: -13.1% & Jan $90 call: + 3.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
10/29 update: Traders bought the dip at noon on Friday with COST near its rising 10-dma. The afternoon bounce almost looks like a new bullish entry point but I am concerned the major indices are overbought and due for a pull back. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week exit target is $97.50. Cautious traders will want to consider an exit near $90 or $94 instead. Keep positions small.

(small positions)- Suggested Positions -

Long NOV $85 call (COST1119K85) Entry $1.52

- or -

Long 2012 Jan $90 call (COST1221A90) Entry $1.01

10/27 trade opened on gap higher at $85.00
10/26 Adjusted entry point strategy. Buy calls tomorrow if COST and S&P 500 index open positive. New stop loss at $81.80.

chart:

Entry on October xx at $ xx.xx
Earnings Date 12/07/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on October 22, 2011


iShares China 25 index ETF - FXI - close: 37.79 change: -0.42

Stop Loss: 36.90
Target(s): 39.50
Current Option Gain/Loss: + 8.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/29 update: The trading action in the FXI on Friday is surprising. As we expected the Chinese markets rallied higher on Friday in reaction to the U.S. market's big move on Thursday. Yet shares of the FXI did not gap open higher on Friday like we expected. Instead the ETF gapped open lower and traded sideways in a narrow range.

I am repeating my earlier comments that given our undesirable entry point more conservative traders may want to just go ahead and exit early now. I am not suggesting new positions at this time. The FXI still looks short-term overbought.

- Suggested Positions -

Long NOV $37 call (FXI1119K37) Entry $1.82

10/27 new stop loss @ 36.90
10/27 FXI gaps higher at $37.72, our new entry
10/26 adjusted our entry point strategy. New stop loss @ 33.90

chart:

Entry on October xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 30 million
Listed on October 24, 2011


Roper Industries - ROP - close: 82.89 change: +0.46

Stop Loss: 79.45
Target(s): 84.90
Current Option Gain/Loss: +12.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/29 update: ROP spent Friday in a very narrow range but shares still managed to outperform the market with a +0.55% gain. I remain concerned that the market and ROP are short-term overbought. There is a good chance that ROP will fill the gap and dip back toward support near $80.00 and its 200-dma. I would wait for a dip near $80 before considering new bullish positions.

- Suggested Positions -

Long NOV $80 call (ROP1119K80) Entry $3.30

10/29 wait for a dip near $80 before considering new positions.
10/27 new stop loss @ 79.45
10/27 gap higher at $82.03 is our entry point. Plan was to buy calls at $80.25.

chart:

Entry on October 27 at $82.03
Earnings Date 01/31/12 (unconfirmed)
Average Daily Volume = 740 thousand
Listed on October 26, 2011


Tractor Supply Co - TSCO - close: 71.19 change: -2.46

Stop Loss: 69.90
Target(s): 79.00
Current Option Gain/Loss: Nov$75c: -60.0% & Jan$80c: -40.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/29 update: There is no explanation for TSCO's relative weakness on Friday. The stock gapped open lower and fell to a -3.3% loss. Technically this dip toward support near $70 could be used as a new bullish entry point. However, I am concerned that the major indices are overbought and due for a correction. Readers may want to hesitate on opening new bullish positions.

(small positions)- Suggested Positions -

Long NOV $75 call (TSCO1119K75) Entry $1.75

- or -

Long Jan $80 call (TSCO1221A80) Entry $2.30

10/27 TSCO gapped open higher at $74.36 (up from $72.41)

chart:

Entry on October 27 at $74.36
Earnings Date 10/19/11
Average Daily Volume = 904 thousand
Listed on October 26, 2011


PUT Play Updates

Dollar Tree - DLTR - close: 78.87 change: -0.79

Stop Loss: 82.65
Target(s): 75.10
Current Option Gain/Loss: +3.8%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
10/29 update: So far so good. DLTR opened at $79.46, rallied to $80.25 only to reverse lower. Shares hit new three-week lows intraday on Friday. I would still consider new bearish positions now.

Earlier Comments:
More conservative traders may want to use a trigger under $78.45 to buy puts. Our target is $75.10. More aggressive traders could aim for the 100-dma instead.

- Suggested Positions -

Long NOV $80 put (DLTR1119W80) Entry $2.60

chart:

Entry on October 28 at $79.46
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on October 27, 2011


Shutterfly, Inc. - SFLY - close: 42.90 change: +0.33

Stop Loss: 48.05
Target(s): 35.25
Current Option Gain/Loss: -26.3%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
10/29 update: SFLY produced a small oversold bounce on Friday following Thursday's big drop. I do not see any changes from my Thursday night comments. We would still launch new put positions at current levels. More nimble traders could try and wait for a failed rally or a bounce near $45.00 as their entry point instead.

FYI: The spread on our put is a bit wide, which makes an impact on our gain/loss for this trade.

Earlier Comments:
The $40 level could offer potential support but we're aiming for $35.25 as our exit target.

- Suggested Positions -

Long NOV $40 PUT (SFLY1119W40) Entry $0.95

chart:

Entry on October 28 at $42.88
Earnings Date 10/26/11 (confirmed)
Average Daily Volume = 1.1 million
Listed on October 27, 2011


CLOSED BULLISH PLAYS

Abercrombie & Fitch - ANF - close: 76.81 change: +0.60

Stop Loss: 71.90
Target(s): 77.50
Current Option Gain/Loss: +27.1%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
10/29 update: We didn't get the best entry point on our ANF call play but it still worked out. Shares opened lower on Friday morning but rallied to $77.49 intraday. Our exit target was $77.50. I am suggesting we go ahead and close positions now with shares at $76.81. I would keep ANF on your watch list. A close over $80 would be a bullish breakout over the 2011 resistance in the $78-79 zone. ANF's all-time highs are in the $85-86 area.

- Suggested Positions -

NOV $75 call (ANF1119K75) Entry $3.50, exit $4.45 (+27.1%)

10/29 Suggested an early exit with ANF at $76.81.
10/28 ANF rallied to $77.49. our target was 77.50. It doesn't count for the newsletter but we're going to go ahead and exit early.
10/27 new stop loss @ 71.90, adjusted target to $77.50
10/27 Trade open on gap higher at $74.95
10/26 Adjusted entry point strategy. Buy calls tomorrow if ANF and S&P 500 index open positive.

chart:

Entry on October 27 at $74.95
Earnings Date 11/16/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on October 24, 2011


Rockwell Automation - ROK - close: 71.09 change: +0.74

Stop Loss: 67.90
Target(s): 71.75
Current Option Gain/Loss: +100%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/29 update: I am suggesting we go ahead and take profits now. ROK rallied to $71.62 on Friday. Our exit target is $71.75. Instead of waiting for shares to actually hit our target I am suggesting we book profits now since the market looks overbought and due for a correction.

We can keep ROK on our watch list for a dip. The $65 area should offer some support.

Earlier Comments:
Let's keep our position size small.

(Small Positions)- Suggested Positions -

NOV $70 call (ROK1119K70) Entry $1.65, exit $3.30 (+ 100%)

10/29 go ahead and exit early to lock in a gain.
10/27 Readers may want to take profits now.
10/27 new stop loss @ 67.90
10/26 new stop loss @ 62.90
10/24 new stop loss @ 62.40

chart:

Entry on October 24 at $66.62
Earnings Date 11/08/11 (confirmed)
Average Daily Volume = 1.7 million
Listed on October 22, 2011


SPX Corp. - SPW - close: 57.40 change: +0.94

Stop Loss: 52.75
Target(s): 57.75
Current Option Gain/Loss: +122.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/29 update: Target achieved and just in time! SPW rallied to $58.14 on Friday. Our final target was hit at $57.75. We were going to have to exit soon anyway to avoid holding over earnings on November 2nd.

Earlier Comments:
This is an aggressive trade so we want to keep our position size small.

(Small Positions)- Suggested Positions -

Long NOV $55 call (SPW1119K55) Entry $1.80, exit $4.00 (+122.2%)

10/28 target hit at $57.75
10/27 Readers may want to take profits early right now
10/27 new stop loss @ 52.75
10/24 new stop loss @ 51.75
10/20 trade opened at $51.80
10/19 Trade still not open. Try again.
10/18 New entry point on this bounce. See entry details above
10/17 Trade not open. Remove entry point for 24 hours, then re-evaluate.

chart:

Entry on October 20 at $51.80
Earnings Date 11/02/11 (confirmed)
Average Daily Volume = 701 thousand
Listed on October 15, 2011


CLOSED Market Neutral Plays

iShares Russell 2000 ETF - IWM - close: 76.03 change: -0.38

Stop Loss: n/a
Target(s): To Be Determined
Current Option Gain/Loss: +24.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/29 update: Our plan was to exit this IWM strangle at the open on Friday morning. Shares of this small cap ETF opened lower at $76.30 and then spent the rest of the session churning sideways in a tight range.

FYI: A strangle involves buying both an out of the money call (OTM call) and an out of the money put (OTM put). The expectation is that the underlying equity (IWM in this case) will move enough to make one side profitable and cover the entire position and then some.

- Strangle Position cost: 4.55 exit value: 5.65 (+24.1%)

Out-of-the-Money Call option:
Long NOV $72 call (IWM1119K72) Entry $2.30, exit $5.21

- and -

Out-of-the-Money Put option:
Long NOV $68 put (IWM1119W68) Entry $2.25, exit $0.44

10/28 planned exit at the open
10/27 Strangle is up +29.8%, Plan to exit at the open tomorrow.

chart:

Entry on October 21 at $70.57
Earnings Date --/--/--
Average Daily Volume = 89 million
Listed on October 20, 2011