Editor's Note:

The stock market is looking pretty ugly these days. The oversold bounce has failed. The major indices are poised to test and possibly break below their summer lows. This could signal a new leg lower.

We are adding some bearish LEAPS candidates to take advantage of the downdraft if stocks do fall to new lows. In addition to the IWM and IYT listed tonight you could also trade the SPY and DIA with similar strategies (see below).

- James



New Watch List Entries

IWM - iShares Russell 2000

IYT - iShares Dow Transports


Active Watch List Candidates

AGN - Allergan

HSY - Hershey Co

LTD - Limited Brands Inc

PSMT - PriceSmart

ROST - Ross Stores

TJX - TJX Cos. Inc.


Dropped Watch List Entries

LVS, RRC, and VMW have been removed from the watch list.



New Watch List Candidates:


iShares Russell 2000 ETF - IWM - close: 64.30

Company Info

The stock market's major indices are on the verge of a breakdown. If we do see a breakdown the small caps will likely underperform the rest of the market. I'm suggesting a bearish trade on the IWM.

You can already see the IWM's oversold bounce has failed. Shares have painted a bearish head-and-shoulders pattern over the last several weeks. Nimble traders could launch positions on an intraday drop below $63.00. I am suggesting we wait for the IWM to actually close under $63.00 before initiating positions and then we'll launch our put play.

Stocks tend to fall a lot faster than they climb so I am only listing the 2012 January puts.

If IWM closes under $63.00, buy PUTS.

BUY the 2012 Jan. $60 PUT (IWM1221M60)

Chart of IWM:

Originally listed on the Watch List: 10/01/11


iShares Dow Jones Transport ETF - IYT - close: 75.24

Company Info

The IYT follows the Dow Jones Transportation Average (index). This index has twenty components and is a price-weighted index. Thus the stocks with the biggest impact on the Transportation average and the IYT are probably FDX, UPS, UNP, NSC, CHRW, etc. based on their share price.

The market is on the verge of a breakdown. It looks like the transports are leading it lower. After weeks of churning sideways the IYT broke to new lows just two weeks ago. The oversold bounce has failed. Now it's on the verge of a new leg lower.

I am suggesting we buy puts if the IYT closes under $74.00. More nimble traders may want to use an intraday drop below $74.00 as their entry point. The hardest part will be placing our stop loss. Currently market volatility is pretty high and bear markets are notorious for super sharp rebounds. If triggered we'll start with a stop loss at $78.25.

Stocks tend to fall a lot faster than they climb so I am only listing the 2012 January puts.

If IYT closes under $74.00, buy PUTS.

BUY the 2012 Jan. $65 PUT (IYT1221M65)

Chart of IYT:

Originally listed on the Watch List: 10/01/11


Active Watch List Candidates:



Allergan Inc. - AGN - close: 82.38

update 10/01: AGN tried all week to breakout past resistance near $85.00. On Thursday it managed to close at $85.03 but the stock reversed hard on Friday down -3.1%. Our entry point to buy call LEAPS was not met (a close over $85.50). Please note that we're adjusting that to a close over $86.00.

On a short-term basis AGN is poised to test support near $80.00. A close under $80 would break the multi-week trend of higher lows.

If triggered we'll use a stop loss at $79.45. Our long-term target is $99.00.

TRADING NOTE: The option spreads for AGN leaps seem to be getting WORSE! This might be due to the rising volatility index (VIX). If these spreads do not contract soon I will drop AGN from the watch list. They are too wide to trade.

Earlier Comments:
Option spreads are wide for these LEAPS. We want to keep our position size pretty small to limit our risk.

Wait for a close over $86.00 *updated*

BUY the 2013 Jan $100 call (AGN1319A100)

Originally listed on the Watch List: 09/24/11


Hershey Co. - HSY - close: 59.24

update 10/01: HSY came awfully close to fulfilling our entry point requirement. Our plan was to buy calls if HSY closed above $60.00. Well Monday saw HSY close at $60.00. Tuesday saw an intraday rally to $60.96 but it closed at $59.97. The next three days HSY spent consolidating under the $60 level.

The larger trend is still up and I suspect that HSY could see more buying interest as people start to think about the Halloween holiday.

Please note that I am adjusting our entry point strategy. We want to wait for HSY to close above $60.25. We'll start with a stop loss at $55.75.

trigger: A close over $60.25 *updated*

BUY the 2013 Jan $65 call (HSY1319A65)

Originally listed on the Watch List: 09/17/11


Limited Brands, Inc. - LTD - close: 38.51

update 10/01: If you're long LTD you'd better buckle your seatbelt. Looking at the weekly chart shares just produced a big bearish reversal pattern. Granted this needs to see confirmation but LTD definitely looks poised to retreat lower. I am expecting a dip toward the simple 200-dma. That's why our buy-the-dip entry point is at $35.50. Please note I am adjusting our stop loss to $32.90. More aggressive traders may want to keep their stop under the August low instead. We want to keep our position size small. More conservative traders could wait for a bounce off the 200-dma before initiating positions.

Buy-the-Dip trigger: $35.50

BUY the 2013 Jan $40 call (LTD1319A40)

10/01/11 adjusted stop loss to $32.90, if triggered
09/24/11 new trigger @ 35.50, updated 2013 option strike
09/17/11 new trigger @ 37.50, updated option strikes.

Originally listed on the Watch List: 08/27/11


Las Vegas Sands - LVS - close: 38.34

update 10/01: Investors are getting cold feet over China. Worries over an economic slow down and what that might mean for gambling in Macau is impacting the casino stocks. LVS has dropped sharply. Shares look poised to test their August low and the March lows near $36 soon. A breakdown under this level would be very bearish.

Our plan was to buy calls if LVS closed above $50.00. Since that event is not going to happen any time soon we are dropping LVS as a candidate.

trigger: Close Over $50.00

Our trade did not open!

Originally listed on the Watch List: 09/17/11


PriceSmart Inc. - PSMT - close: 62.32

update 10/01: The two-week correction in PSMT has produced a -17% drop. The stock is testing technical support at its 50-dma. The low on Thursday was $61.34. Since the S&P 500 has yet to test its August low near 1100 I suspect we could see PSMT drop toward its 100-dma. We will adjust our buy-the-dip entry point to $55.50 and adjust our stop loss to $49.75.

We want to keep our position size small.

Buy-the-Dip trigger: $55.50 (small positions)

BUY the 2012 Jan $65 call (PSMT1221A65) *new strike*

Originally listed on the Watch List: 09/24/11


Ross Stores Inc. - ROST - close: 78.69

update 10/01: ROST has spent the last two weeks churning sideways in the $77.00-82.50 zone. Friday saw a surge of volume as ROST outperformed with a minor gain. This was probably due to end of quarter window dressing.

We are adjusting our entry point strategy. The new plan is to wait for a close above $83.00 and buy the 2013 Jan $90 call with a stop loss at $75.75. In the meantime, if we happen to see a dip or a bounce near its 200-dma or the $72.50 area then nimble traders may want to take a shot at it with a tight stop loss. Should we see ROST bounce from its 200-dma then we'll reconsider our entry point again.

Buy a close over $83.00 *new trigger*

BUY the 2013 Jan $90 call (ROST1319A90)

10/01/11 new strategy: buy a close over $83.00
09/24/11 new trigger at $73.00, stop 69.50
09/17/11 new trigger at $76.50, stop @ 71.40, new strikes.

Originally listed on the Watch List: 09/10/11


Range Resources Corp. - RRC - close: 58.46

update 10/01: RRC continues to be very, very volatile. The stock bounced around from its 100-dma and the $57.50 area to over $65 and back again. I am removing RRC from the watch list. Instead of waiting to buy a dip near support in the $50-52 zone I'd rather watch from the sidelines and wait for RRC to hit that level and bounce before we consider new positions.

Speculators may want to consider some deep out of the money calls as a cheap bet just in case RRC does receive a takeover bid. There has been a lot of rumor that RRC is an acquisition target.

Buy-the-Dip trigger: $52.50

Our Trade Did Not Open.

09/24/11 new trigger at $52.50, stop 49.40
09/17/11 new trigger at $57.00, stop 53.45

Originally listed on the Watch List: 08/20/11


TJX Cos. Inc. - TJX - close: 55.47

update 10/01: TJX is only a few points away from its all-time highs set two weeks ago. Shares weathered the market weakness relatively well. I don't see any changes from my prior comments. We're looking for a pull back toward its long-term trend of higher lows and technical support at the 200-dma. The plan is to buy calls on a dip at $52.00. More conservative traders may want to wait for a bounce from this area instead. If triggered we'll use a stop loss at $49.40.

Buy-the-Dip trigger: $52.00

BUY the 2013 Jan $60 call (TJX1319A60)

Originally listed on the Watch List: 09/24/11


VMware, Inc. - VMW - close: 80.38

update 10/01: Trading in VMW has taken a turn for the worse. Shares failed at resistance near $90.00 and its 200-dma and the stock closed the week down five points. Aggressive traders might want to consider buying a bounce from the $77.50 area. I am choosing to drop VMW as a candidate. Our trigger to open positions at $96.00 was not hit.

Breakout trigger: $96.00 (Small Positions)

Trade Did Not Open

Originally listed on the Watch List: 09/17/11