Editor's Note:

If you have not yet read tonight's market wrap, please do. If last week wasn't bad enough for the stock market we are now facing a very uncertain Monday. After the closing bell on Friday the credit rating agency Standard & Poor's announced they were downgrading the U.S. credit rating to AA+ from AAA. While this event has been considered a possibility for months no one was expecting it so soon after the debt ceiling extension was passed.

There is no way to gauge just how violently the stock market might react to this news. We are expecting the U.S. market to gap down lower at the open on Monday but how far the selling pressure takes the market down is anyone's guess. The S&P 500 is already down -10.7% in just the last two weeks. At the low on Friday the index was down -13.1% in two weeks. It is too late to buy puts options or short stocks in this market. The market is already oversold and stocks will gap open lower on Monday.

Instead of trying to play the downside we would rather focus on trying to play the oversold bounce that should appear pretty soon. It could be intraday on Monday or the oversold bounce could be on Tuesday after the FOMC meeting. Trying to predict the future is a tough gig. Part of the challenge is your stop loss placement. If you open bullish positions at the open on Monday morning (assuming a gap down) then where do you put your stop loss? You don't know if the market will see a -2%, -5%, or -10% move on Monday. We do want to keep in mind that a number of analysts and market pundits believe that a U.S. credit downgrade has already been anticipated by Wall Street. Thus while the market should see a flush lower on Monday morning it may not be as bad as if this had occurred several days ago.

The smartest trade on Monday is probably no trade at all. Art Cashin had a great quote on Friday. "Sometimes it's the second mouse who gets the cheese!" The best play may be to let someone else step in front of this train and we can pick an entry point once the dust has started to settle.

We will go ahead and add a few bullish trading candidates but consider them all higher-risk, speculative trades. We will want to keep our position size small to limit our risk.

- James


NEW BULLISH Plays

Caribou Coffee Inc. - CBOU - close: 15.48 change: +1.02

Stop Loss: 13.35
Target(s): 16.75, 17.50
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CBOU reported earnings this past week. Profits and revenues were better than expected but management issued bearish guidance. This failed to stop the stock from surging higher. I suspect that a lot of this gain could be short covering. The most recent data listed short interest at 8.5% of the very, very small float of only 13.4 million shares.

There is no denying that the action this past week has been bullish. CBOU is at new multi-year highs and volume on the rally has been strong. I do want to point out that one of my biggest concerns, aside from the wider market issues, is that CBOU's IPO opening price and all-time high is essentially $15.50. This level could be significant resistance.

I am still suggesting that we buy the stock (or calls) at the open on Monday (I am anticipating a gap down due to widespread market weakness). More conservative traders could wait for another dip or bounce near $14.00. An alternative entry point would be to wait for a close over potential resistance at $15.50 instead. We will start this trade with a stop loss at $13.35. Our targets are $16.75 and $17.50.

- Buy the Open on Monday (small positions) -

Suggested Position: buy CBOU stock

- or -

buy the SEP $15 call (CBOU1117I15)

Annotated chart:

Entry on August 8 at $ xx.xx
Earnings Date 11/10/11 (unconfirmed)
Average Daily Volume = 756 thousand
Listed on August 6, 2011


Changyou.com Ltd. - CYOU - close: 42.38 change: +1.33

Stop Loss: 38.45
Target(s): 43.75, 47.50
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CYOU has already seen a -20% correction from its recent highs. Yet in spite of the volatility the larger trend is still a bullish one of higher lows and higher highs. CYOU found support near $40.00 and its 100-dma on Friday. I am suggesting we buy the dip there again at $40.00. If triggered we'll use a stop loss at $38.45. Cautious traders could use a tighter stop loss but keep in mind CYOU can be a volatile stock. We do want to keep our position size small to limit our risk. If we do get stopped out we might try again and buy a dip near $37 and its rising 200-dma.

FYI: CYOU does have options but the spreads are a little too wide.

Buy-the-Dip Trigger @ $40.00

Suggested Position: buy CYOU stock @ $40.00

Annotated chart:

Entry on August xx at $ xx.xx
Earnings Date 10/24/11 (unconfirmed)
Average Daily Volume = 417 thousand
Listed on August 6, 2011


Halliburton Co. - HAL - close: 47.09 change: -0.94

Stop Loss: 43.90
Target(s): 49.75
Current Gain/Loss: unopened
Time Frame: 2 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Oil and oil service stocks have been crushed lower in recent sessions. Part of the problem has been the correction in oil prices. HAL had been holding up relatively well but finally caved in late last week. Shares fell toward horizontal price support in the $45 area and hit technical support at its rising 200-dma on Friday morning.

Given the U.S. credit downgrade we're expecting stocks to dip again on Monday. We want to be ready to buy the dip in HAL at $45.00. The low on Friday was actually $44.85. If we are triggered at $45.00 we'll use a stop loss at $43.90. More aggressive traders may want to put their stop under the March lows near $42.50 instead. Our first target is $49.75.

We anticipate the bounce to be fast and sharp so we're listing the August calls, but bear in mind that August options expire in two weeks. You may want to play Septembers.

Buy-the-Dip Trigger @ $45.00

Suggested Position: buy HAL stock @ $45.00

- or -

buy the AUG $45 call (HAL1120H45)

- or -

buy the SEP $50 call (HAL1117I50)

Annotated chart:

Entry on August xx at $ xx.xx
Earnings Date 10/17/11 (unconfirmed)
Average Daily Volume = 12.9 million
Listed on August 6, 2011