Option Investor
Newsletter

Daily Newsletter, Sunday, 8/22/2010

Table of Contents

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

Market Wrap

Big Swings, Minor Loss

by Jim Brown

Click here to email Jim Brown

Option expiration week produced a 333-point range in the Dow but only an 89-point loss for the week. However, Friday was the lowest close for the week.

Market Statistics

It was not a good week for economics and that set the tone for the market. Friday was a neutral day with a couple minor reports but market sentiment was already negative. The Mass Layoff report on Friday came in about where it did in the prior month with 1,609 layoff events impacting 143,703 workers. That was not earth shaking but just a continued weakness in employment.

The Weekly Leading Index took a dive to 120.8 from 122.4 and the first decline in three weeks. It is now only .4 points from a new 52-week low at 120.4 and I fully expect the current decline to continue. I have talked about this weekly report several times in recent months and it clearly shows the economy in decline.

Weekly Leading Index Chart (Moody's)

While there were not any reports stirring up the market on Friday the two out on Thursday will probably haunt us for several more days. The new Jobless Claims at 500,000 was the highest level since November and the third consecutive weekly gain. The rise in new claims during the survey period for the August non-farm payrolls suggests we are going to see even more job losses on the payroll report due out on September 3rd. There are no reliable estimates making news because of the unknowns about the lingering census worker terminations. About the only guarantee is there will be job losses.

The biggest hit to market sentiment came from the Philly Fed survey on Thursday. The index dropped -12.8 points to a -7.7 from a positive 5.1 in July. 58 out of 58 economists surveyed by Bloomberg were expecting a positive number on the Philly Fed. This decline back into contraction territory put the index at a level not seen since July 2009.

This is a serious problem because the manufacturing sector had been leading the rebound. Also, the Philly Fed Survey is the most followed of the manufacturing surveys. The dramatic decline in the headline number and in the individual components is not indicating a slowing of growth to some peaceful level that will eventually pull us out of the slump. It is indicating a contraction back into levels that will trigger more layoffs and put businesses back into recession mode. This was a serious hit to market sentiment that could have a long-term impact.

Philly Fed Components

Philly Fed Chart

Economic reports next week will be dominated by housing and the GDP revision. The GDP estimates have taken a shocking drop with some analysts now talking about numbers under 1.0% for Q2 growth. This is down from some estimates of more than 3.0% just a month ago. Like the Philly Fed this is a dramatic decline and does not bode well for the equity markets.

The housing reports are also expected to be ugly. This is the first month that has no hangover from the tax credit and some analysts are expecting sales declines of 5% to 7% for the July period. These are lagging reports so any negative number will be extrapolated forward to cover August and the rest of the year. Every month for the rest of the year sales are expected to decline so the July numbers next week will just be a jumping off point for future estimate revisions.

There are several more regional manufacturing reports but they will be overshadowed by the Philly numbers. The Kansas and Chicago reports are influenced by the auto sector and as such are not true reads on the general manufacturing activity in their regions.

Ben Bernanke will speak on Friday at the Fed's Jackson Hole conference and analysts are speculating he will use the speech to try and guide expectations on what new quantitative easing the Fed is planning. However, the Fed does not use the Jackson Hole speech as a policy discussion so there may be limited references to future plans. I expect him to say the Fed is ready to act just as a confirmation to the recent FOMC announcement.

Economic Calendar

Another problem weighing on the market was the return of Greece to the spotlight as tensions in Greece rise because of the forced austerity measures. Even though Greece qualified this week to receive the next $11.5 billion in bailout loans the country is crumbling internally.

The austerity measures have caused stores to close, tax revenues are falling as a result and unemployment has hit an unbelievable 70% in some areas according to Spiegel Online. Austerity measures have cut government spending by more than 10% in less than a year. Bankruptcies are soaring, consumption is plunging and purchasing power is evaporating. The National Confederation of Hellenic Commerce said 17% of all shops in Athens have had to file for bankruptcy. GDP was a -1.5% in Q2 and it is expected to finish the year at -4%.

Despite all the existing problems, conditions are expected to worsen. Citizens are warned on TV to expect a large wave of additional layoffs in September. The social unrest is growing and one expert predicts "extreme social consequences" later this year. Riots and strikes are a daily occurrence and increasing. Worries are growing that Greece is going to fail despite the billions in bailout loans. The country is in a death spiral and it is starting to appear in the daily papers once again. The problem we thought had gone away is growing progressively worse. If you follow the timeline of the country's demise we might not be that far ahead of similar problems in Spain, Portugal and possibly even Italy.

The markets did not need a resurgence of the EU debt crisis because we have enough problems here in the U.S. but we don't always get to choose what crisis is going to disrupt our markets.

At home the banking sector lost another eight banks on Friday bringing the total for the year to 118 closed. The Chicago based ShoreBank with $2.16 billion in assets was closed at a cost of $367 million to the FDIC. That was the largest of the banks closed. Others included:

Imperial Savings - Virginia
Community National Bank - Florida
Independent National Bank - Florida
Los Padres Bank - California
Pacific State Bank - California
Butte Community Bank - California
Sonoma Valley Bank - California

The banks are still suffering from the crash in the real estate sector and the high number of loan delinquencies. Over 12 million homeowners are behind in their house payments. The various bailout or modification programs are not working. In July the Treasury Dept reported 630,000 applicants for loan modifications were disqualified for not fitting the required criteria. Only 24,577 who successfully made it into a trial modification program were approved for a permanent loan. This was down from 51,205 in the prior month. If unemployment is rising the number of people in trouble on their house payments is rising as well.

According to RealtyTrac we are likely to see slightly more than one million homes foreclosed this year. That is up from 900,000 in 2009. Moody's Mark Zandi said the projection for 2011 is 1.5 million foreclosures. As of June 30th only $490 million has been spent of the $75 billion set aside to help homeowners avoid foreclosure by lowering payments. The program rules are too strict and people without jobs are tough to finance.

The government is finding it hard to pay its bills as well. Forty-six states plus Washington DC are facing serious budget shortfalls. For 2010 the collective gap is over $140 billion and it is already projected to be over $121 billion in 2011.

The talking heads on TV have been asking the question for weeks, "are we going to have a double dip recession?" If you look around we see that parts of the economy are already in a second recession like retail, housing and manufacturing. It is not a very big jump from here to a full-blown double dip. I told you a couple weeks ago I did not think we were going to dip again but simply see a slower growth process. After seeing the Philly Fed numbers I am no longer confident of that statement.

I believe the Fed is sending the wrong message to the economy. Corporations see the "unusual uncertainty" at the Fed and then decide they should be uncertain as well. They are storing up cash for the next rainy day. The division of opinions at the Fed is also a concern. One half of the board believes in slower growth and the other is warning about deflation. If you are a business owner how do you plan for that? You hoard cash and cancel expansion plans.

Most analysts believe we could see some additional stimulus programs announced at the Fed any day now. How bad is the economy if the Fed is in reaction mode again after buying up $2 trillion in debt to stabilize economic conditions? It does not make business owners sleep well at night.

The market and the economy are killing investors and that is not just the small investor like you and me. Two major hedge fund managers called it quits this week because of very tough conditions. Paolo Pellegrini, the Paulson researcher that recommended shorting sub-prime mortgages before the bubble burst, called it quits. He personally made over $150 million in the call for Paulson and then started his own hedge fund. The fund made 40% in 2008 and 61.6% in 2009 but is down -11% YTD in 2010. Paolo sent a letter to investors this week saying he was shutting down the billion-dollar fund and returning the money to investors. Paolo has turned very bearish on the U.S. and U.S. equities. He turned so bearish that he moved out of the U.S. and returns only to transact business.

An even bigger player, Stan Druckenmiller, sent a letter to investors saying the pain of losing money in this market was forcing him to close up shop. Stan is a billionaire investor who started his fund in 1981 and grew it to $12 billion today. He has managed several high profile trades over the last 25 years that made over a billion dollars. His firm, Duquesne Capital, is down about 10% YTD.

These traders are not alone in shutting their funds because of losses in 2010. There have been numerous funds closed. The volatility has been huge and we are underwater for the year after suffering under a 1600-point range on the Dow. When billionaire hedge fund traders with tons of hired talent quit because of a tough market it is really a tough market. I heard one commentator saying today that these two traders calling it quits was a sure sign of capitulation. Unfortunately I don't buy that argument today.

In stock news the big winner and a major reason the Nasdaq finished in positive territory was SalesForce.com. After the bell on Thursday CRM reported earnings that beat the street by 2-cents on better than expected revenue. They also raised their guidance on future revenue because of a +30% increase in customers. CRM is a heavily shorted stock and the good news prompted a +17% spike in the stock to $113. CRM has a great looking chart that attracts shorts like flies to picnics. I am sure the shorts were ecstatic when it failed at $100 earlier in the week and they increased their shorts only to get crushed on Friday.

CRM Chart

Google announced it bought Like.com in an effort to beef up its product search in time for the holidays. There was no mention of the price tag but it was rumored to be in the range of $100 million. Google has been on a shopping trip of its own of late and appears to be changing to a buyer rather than a developer. Google is rumored to have invested $100 million in social gaming company Zynga and rumored to be buying Slide, a photo sharing service, for $182 million. Google also said it was discontinuing development of Google Wave because user adoption was not as good as they would have liked. Google has also pulled the plug on Dodgeball, Jaiku, Notebook and its video service. Also gone was Google Answers and Hello, a photo sharing service. The news did not help Google shares with a close at a five week low at $462.

Google Chart

Intel closed flat a day after announcing it was buying McAfee (MFE) for a monster premium of 60%. That equates to $48 a share and McAfee has not seen that price since the dot.com boom. Nobody in the analyst community understands the Intel-McAfee deal. The analyst community is united in their dislike and suggest the stupidity behind it means it is time for a new Intel CEO. Some are suggesting corporations don’t buy McAfee software until the real reason for the acquisition becomes apparent. Intel said it was to make their chips more secure but nobody is buying that argument. Intel is paying cash for MFE because Intel shares have no buying power at a 52-week low.

Intel Chart

Intuit, the maker of Quickbooks, rallied +15% after releasing earnings that beat the street and raising guidance. Intuit actually lost 5-cents for the quarter on revenue that rose +18%. Analysts were expecting a 10-cents loss. Intuit said its Mint.com personal finance website had grown to more than three million members. Intuit shares hit $44 after a flurry of upgrades.

You can tell is was a slow news day when Intuit earnings are a highlight of the day. It was also option expiration, which normally spikes volume significantly. However, Friday's volume was only 6.8 billion shares. Volume was really anemic as it should have been on an August Friday. One statistic caught my eye. The new 52-week lows spiked up to levels not seen since the crash at the end of June. When large numbers of stocks are not just declining but making new 52-week lows it confirms the bearish market sentiment.

Any trades that get made over the next couple weeks will probably be called in from the beach. The last two weeks of summer are normally very weak in the volume department with the next trading cycle kicking off after Labor Day.

Over the last week the S&P rallied to resistance at 1100 twice and then closed at a new four week low. It was a textbook failure at clearly defined resistance that even a novice day trader could have captured. As John Gray said in the Market Monitor on Tuesday when the first failure began, "Is it really going to be this easy?" Rarely do we have strong short squeezes exactly to resistance (1100.14) and then an immediate plunge. Normally there is a head fake or a couple point breakthrough and then the selling begins. Clearly the market has a negative bias.

Friday I was surprised at the strength of the short covering in the afternoon. With all the economics for the week displaying the skull and cross bones symbol you would have thought the close would have been more negative. Of course it was expiration Friday so some end of day short covering was a given as traders closed positions rather than face an exercise on Monday. There was also a rumor that the Fed was readying a new stimulus announcement. OK, a summer Friday, very low volume, option expiration and the Fed is going to announce some new stimulus? Are traders really that stupid to fall for the rumor and rush in to buy stocks? Apparently some traders were.

For next week initial support will be 1060-1065 on the S&P with resistance still 1100. Volume will be light and economics will be bad. How much of that is already priced into the market is anybody's guess. We are really close to a bearish cross of the 100 and 200-day averages. The 50-day crossed back in July and a cross by the 100 will be even stronger confirmation.

S&P-500 Chart

The Dow traded in a 333-point range for the week that topped at 10475 but closed at just over 10200. It was a classic failure at the resistance of the 200-day average I don't hold out much hope that it is going to miraculously rebound again next week. We now have a solid lower high pattern followed by a lower close. The best guess would be a test of support at 10100 on very low volume. Dow components HPQ, INTC, MMM, UTX, GE and MSFT are leading the Dow lower. The weak economy is very detrimental to earnings from the industrial components. On a technical basis the Dow is weak and on a fundamental basis it is weak. Bulls may try to "wish it higher" but that has never worked for me as a trading strategy.

Dow Chart

The Nasdaq chart is a clone of the others with a lower high but not quite a lower low. There is support at 2160 and it has held three times in the last two weeks. A break there targets 2063 and the 50% retracement level of the March 2009 low. The rally on Friday to positive territory was due to the gains in CRM, INTU, PCLN, AKAM and FFIV. All the big caps like GOOG, AAPL, MSFT, INTC and RIMM were negative.

There is no spark in the tech sector. Chips are holding on the 6-months lows and the PC sector has shorted out. Hewlett's less than exciting earnings report last week was the final straw on the tech camel. I am expecting further weakness and I believe that 2160 support level will break.

Nasdaq Chart

In another confusing set of events the Russell actually gained slightly for the week and avoided a close at the low of the week on Friday. I can only attribute it to option expiration because small caps do not do well when the economy is falling apart.

The clear target on the Russell is 590 and we can only hope that it will find lasting support there and not just a one-night stand. That level has held on tests twice this year. I would be a buyer for a trade only on a test of the 590 level. Resistance is 630.

Russell 2000 Chart

In summary nothing has changed in my market outlook. I am still in the "why buy" camp until after Labor Day. The next two weeks are going to see very light volume and continued negative economics. Eventually the market will have enough of the gloom and doom and start preparing for a Q4 rally. Of course that assumes we have a normal Q4 rally and not a confirmed double dip recession. If the economics continue to get worse I believe traders will run to the sidelines and cash out in order to avoid a repeat of the 2008 lows. In reality double dips rarely reach the same market lows as the first dip but that does not mean investors won't be expecting it anyway. I think the next couple weeks should be used as trading practice in buying support and selling resistance while we wait for post Labor Day volume to return.

Jim Brown


New Plays

Chips On the Verge of Crumbling

by James Brown

Click here to email James Brown


NEW BEARISH Plays

UltraShort Semiconductor ETF - SSG - close: 18.18 change: -0.08 stop: 18.40

Target(s): 22.00
Key Support/Resistance Areas: 22.00, 20.00, 19.00, 17.00
Current Gain/Loss: +
Time Frame: four to six weeks
New Positions: Yes, See Entry Point Below

Company Description:
ProShares UltraShort Semiconductors seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Semiconductors IndexSM FYI: The Dow Jones U.S. Semiconductor Index measures the performance of the semiconductor industry of the U.S. equity market. Component companies are engaged in the production of semiconductors and other integrated chips, as well as other related products such as circuit boards and motherboards.

The top five holdings are Intel (INTC), Texas Instruments (TXN), Applied Materials (AMAT), Broadcom (BRCM), and SanDisk Corp. (SNDK). (source: company press release or website)

Why We Like It:
Semiconductor companies that supply materials to the smart phone market have been doing better than their peers that provide chips for the PC market. Yet the chip sector in general has been underperforming. The SOX index broke down under significant support a few days ago and looks ready to begin a new leg lower. I am suggesting we take advantage of this weakness with a bullish position on the SSG.

The plan is to buy the SSG when it breaks out past the July high and hits $19.65. Our multi-week target is $22.00. More nimble traders may want to cross their fingers and hope for a pull back toward $17.25-16.75 as an alternative entry point but if you do buy the dip I would use a relatively tight stop loss. FYI: This is a double, inverse ETF. Expect volatility!

Suggested Position: stock/ETF @ 19.65

Annotated chart of the SOX:

Annotated chart of the SSG:

Entry on August xxth @ $xx.xx
Earnings Date --/--/--
Average Daily Volume: 178 thousand
Listed on August 21st, 2010



In Play Updates and Reviews

Path of Least Resistance

by James Brown

Click here to email James Brown

Editor's Note:
I am filling in for Scott this weekend. - James

Current Portfolio:


BULLISH Play Updates

Athenahealth, Inc. - ATHN - close 29.51 change -1.14 stop 26.90

Target(s): 31.50 (hit), 32.95, 34.00
Key Support/Resistance Areas: 34.25, 31.75, 30.00, 28.25, 25.75
Current Gain/Loss: -2.4%
Time Frame: 1 to 2 weeks
New Positions: Yes, preferably on weakness

Comments:
8/21: Ouch! ATHN underperformed its peers and the broader market with a -3.7% decline on Friday. I couldn't find any specific news to account for the sell-off. On Thursday I suggested readers wait for a dip or a bounce near $28.00 before considering new bullish positions. I don't see any changes.

8/19: After several days of gains ATHN was ripe for some profit taking. I'm surprised today wasn't worse. Shares opened lower after ATHN was slapped with a "sell" rating this morning. Traders bought the dip near its rising 10-dma and ATHN reduced its losses to just -1.7%. If you are looking for new bullish entry points I would wait for a dip or a bounce near the $28.00 level, which should offer some short-term support.

8/14: ATHN is in the business of automating health care records and billing. I like ATHN as a long defensive play that should thrive as healthcare regulation takes form. Technically ATHN had a huge gap down after they missed earnings estimates in late April. Since then the stock has formed a nice cup and handle pattern which signals the "changing of the guard" from sellers to buyers. The company reported earnings in late July that beat estimates and the stock is now gaining momentum. On Friday, ATHN closed right on a downward trend line from January but I think it is only a matter of time before this is broken, which is typical of a cup and handle formation. Ideally, I suggest traders initiate long positions on any weakness, but a break out is another strategy. Let's use $28.50 as a trigger on weakness and $30.25 as a trigger on strength. ATHN has a big gap to fill all the way up near $34.00 which is our most aggressive target. Our near term target is $31.50. Our initial stop is $25.50 which is below its upward trend line and the rising 20-day SMA.

Current Position: Long ATHN stock, entry was at $30.25

Options Traders: Long September $31.00 CALL

Annotated chart:

Entry on August 16, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 767,000
Listed on August 14, 2010


The Andersons, Inc - ANDE - close 35.87 change -0.47 stop 33.33

Target(s): 39.15, 40.50, 41.50
Key Support/Resistance Areas: 41.50, 40.50, 39.20, 38.00, 35.50
Current Gain/Loss: -3.1%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
8/21: ANDE lost -1.2% but pared its losses with an intraday bounce near the recent low at $35.30. This could be a new bullish entry point. However, I would use very small positions given the weakness in the major market averages.

8/19: ANDE failed at the $37 level again and ended the session with a 1.5% decline and a small bearish engulfing reversal pattern. Use the weakness to our advantage. ANDE should have some support near $35.00 or this week's low near $35.20. Wait for a dip near the $35 area (or wait for a bounce) to launch new bullish positions.

8/18: We are back with a play in the agriculture sector after a nice winning trade in IPI that was closed this week. The agriculture sector continues to heat up and is gaining momentum. Farmers want and need to grow more food to keep up with demand, especially from emerging markets. Many potash companies have seen significant gains in recent weeks because potash levels need to be replenished in farmland soil. ANDE is a downstream play in this space as they provide products and services to the industry that enable farmers to grow crops and distribute them. I also believe this stock and sector can do well in a down market. Technically, ANDE is forming a long term ascending triangle while finding support above a key pivot level since March (see ovals on chart). I suggest readers take advantage of the momentum and initiate long positions now. Our initial stop will be $33.33, which is below upward trend lines and moving averages, but it will be adjusted as the trade develops. Our targets are +6%, +9.5%, and +12% higher, respectively. NOTE: Average daily volume is a tad light in this stock so I consider it an aggressive play. However, volume has ticked up significantly in recent days/weeks which is a bullish sign.

Current Position: Long ANDE stock, entry was at $37.02

Options Traders: Buy December $40.00 Calls, current ask $2.10

Annotated chart:

Entry on August 18, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 180,000
Listed on August 18, 2010


Newmont Mining Corp - NEM - close 58.02 change -0.42 stop 56.40

Target(s): 59.30, 60.50, 61.50
Key Support/Resistance Areas: 62.00, 59.50, 58.16, 55.00, 54.30, 52.30
Current Gain/Loss: +2.24%
Time Frame: Several weeks
New Positions: No

Comments:
8/21: Gold has put on a pretty good run from its late July lows. Now the commodity and the gold miners look a little bit overbought. I would expect this correction to continue for a few days. Longer-term the trend is still up. Watch for short-term support near $56.00.

8/19: It was a close call today. NEM spiked to $60.23 this morning - almost enough to tag our second target at $60.50. Unfortunately investors were in the mood to take profits with the bearish economic data out this morning. The $58.00 level should be short-term support but I would not be surprised to see NEM retrace back toward the $56.00 level before bouncing again. We are not suggesting new bullish positions at this time.

8/18: NEM keeps chugging higher and closed +1.90% today. We have nearly +5% gains. I've moved the stop up to $56.40 which is just below breakeven on the trade, the 20-day SMA, and the recent upward trend line. If NEM can break above today's highs it should fill a gap lower on 7/16 and hit our second target of $60.50. Once again, this could happen fast and I suggest we close positions at this level, or at least tighten stops to protect gains.

Current Position: Long NEM stock, entry was at $56.75

Annotated chart:

Entry on August 13, 2010
Earnings 11/3/2010 (unconfirmed)
Average Daily Volume: 7.7 million
Listed on August 10, 2010


Oceaneering International - OII - close 50.29 change -0.23 stop 46.60

Target(s): 53.00, 54.40, 57.00
Key Support/Resistance Areas: 57.50, 54.50, 53.40, 49.00
Current Gain/Loss: +2.22%
Time Frame: 1 to 2 weeks
New Positions: Yes, preferably on weakness

Comments:
8/21: Oil service stocks were some of the worst performers on Friday with the OSX index sinking to new five-week lows. OII is still outperforming its peers but this is a dangerous environment if the sector index is sinking. I would wait for a bounce near the 50-dma.

8/19: Oil services index (OSX) gave up -2.2% during today's market-wide decline. OII managed a -2.0% loss and found short-term support near $50.00. If we were in a rising market I would be tempted to buy this dip near $50 and the rising 30-dma but the environment is favoring the bears. Wait for signs of a bounce before considering new positions.

8/14: With the recent oil leak in the Gulf of Mexico the oil services industry is being turned upside down with regulations and drilling moratoriums. I think OII will benefit because the new rules in the gulf point to more underwater robotic contracts. And it just so happens that OII recently raised their guidance because of it. This past week's dip has come right into an upward trend line and a prior resistance level which should now act as support. This is a buying opportunity in OII. I suggest readers enter long positions now. Our stop is $46.60 which is below OII's recent swing low and its rising 50-day SMA. We have three realistic near term targets that will produce a winning nice trade if they are reached.

Current Position: Long OII stock, entry was at $49.20

Options Traders: Long September $50.00 CALL

Annotated chart:

Entry on August 16, 2010
Earnings 10/28/10 (unconfirmed)
Average Daily Volume: 807,000
Listed on August 14, 2010


BEARISH Play Updates

Automatic Data Processing - ADP - close: 39.40 change: -0.05 stop: 41.26

Target(s): 36.00, 34.00
Key Support/Resistance Areas: 41.00, 39.00, 37.30,
Current Gain/Loss: +
Time Frame: 4 to 6 weeks
New Positions: Yes, See Entry Point Below

Comments:
8/21: Our new bearish play on ADP was almost triggered Friday. Shares dipped to $39.10. I am suggesting readers use a trigger to open bearish positions at $38.75. There are no changes from my Thursday comments.

Is it possible that businesses are cutting back on bookkeeping as they reduce the number of employees? For whatever reason shares of ADP are losing ground. In late July, at the company's latest earnings report, management lowered their guidance. Now the stock is trading near the bottom of its $39-42 range. If you check out the weekly chart you can see ADP's bearish H&S pattern.

I am suggesting a trigger to open bearish positions at $38.75. If triggered our first target is $36.00. Our second target is $34.00. Use a stop at $41.26.

Suggested Position: SHORT the stock @ 38.75

Option traders may want to consider the November $37.00 puts.

Annotated chart:

Entry on August xxth @ $xx.xx
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume: 3.2 million
Listed on August 19th, 2010


Chesapeake Energy - CHK - close 20.38 change -0.43 stop 22.85

Target(s): 19.70, 18.80, 18.05
Key Support/Resistance Areas: 22.50, 21.60, 20.30, 19.65, 18.75, 18.00
Current Gain/Loss: +2.07% Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
8/21: Natural gas prices broke down to new 12 weeks lows on Friday. Shares of CHK is showing relative weakness and lost over 2%. Thursday I was beginning to wonder if CHK had lost its downward momentum. Friday was a nice confirmation of the trend lower. I would still consider new positions at current levels or you can wait for a drop under the July lows near $20.30.

8/16: We are short CHK as of the open at $20.81. CHK looks vulnerable but the stock could bounce with the market so we may need to exhibit some patience. CHK has trend lines, moving averages, and resistance levels overhead to keep bounces in check. My comments from below have not changed.

8/14: CHK is a good company but it is facing significant headwinds. There is increasing pressure to ban drilling in the Marcellus shale. Pennsylvania is considering a yearlong moratorium so they can study fracturing problems and its impact on drinking water. If the process is halted in the Marcellus shale then it will probably be halted in the Haynesville and Barnett shale plays, which are the primary assets of CHK. Technically, CHK looks like it is about ready to lose it. The stock is trading in a wide downward channel and on Friday it closed below an upward trend line. It would be nice to short CHK on a bounce but I'm not sure it will happen. I suggest we initiate short positions now. Our most aggressive target right now is to test the July 2009 lows near $18.05. Our stop is $22.85 which is above the recent swing high and several moving averages.

Current Position: Short CHK stock, entry was at $20.81

Options Traders: Long October $20.00 PUTS

Annotated chart:

Entry on August 16, 2010
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on August 14, 2010


Con-way Inc. - CNW - close: 27.61 change: +0.07 stop: 31.55

Target(s): 28.25, 26.75, 25.50
Key Support/Resistance Areas: 25.00, 28.00, 32.00
Current Gain/Loss: N/A
Time Frame: Several Weeks
New Positions: Yes, trigger 29.20

Comments:
8/21: We are still waiting for CNW to hit our entry point. The plan is to open bearish positions if CNW can bounce to $29.20. The stock looks very oversold with its four-week decline from $35. A normal 38.2% Fibonacci retracement would bring CNW back toward $29.80.

8/19: The trend is down for CNW but we're still waiting for the right entry point. Right now the plan is to open bearish positions if CNW bounces back to $29.20. Readers may want to consider an alternative and consider shorts on a new relative low under $26.30.

8/14: The sellers are obviously overwhelming the buyers in CNW and the stock has run away from us, closing -4.30% on Friday. I do not suggest chasing it down here. I am going to leave this play open and see if CNW manages to bounce back up to fill some of these recent gaps. I'm going to lower the trigger to $29.80. If anyone caught it short it has been a good play, but unfortunately our trigger wasn't hit.

Suggested Position: Short CNW stock if it trades to $29.20

Annotated chart:

Entry on August xx
Earnings Date 11/03/10 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on August 7, 2010


Starbucks Corp. - SBUX - close: 24.04 change: -0.46 stop: 25.05

Target(s): 21.00, 20.00
Key Support/Resistance Areas: 25.00, 23.50, 22.00, 21.00, 20.00
Current Gain/Loss: +
Time Frame: 4 to 6 weeks
New Positions: Yes, See Entry Point Below

Comments:
8/21: There is no change from my Thursday comments. SBUX is still consolidating sideways but the path of least resistance is down. Entry point to open bearish positions is at $23.40.

The rally in shares of SBUX appears to have cooled off. It isn't surprising with more and more signs of the economy slowing down, consumers cutting back and saving more. SBUX's latest earnings report was ho-hum. Profits were inline but what impressed was the better than expected revenues. Unfortunately, management guided 2010 inline with prior estimates and guided 2011 lower.

Shares of SBUX are now testing support near $23.50 and its 200-dma. It looks like the stock is ready to break. The weekly chart shows a bearish head-and-shoulders pattern. I am suggesting we wait for a drop under the early July lows. Therefore our entry point to open bearish positions is $23.40. Our target is the $21.00 and 20.00 levels. More nimble traders could try an alternative entry point with another failed rally near $25.00.

Suggested Position: SHORT the stock @ 23.40

- or -

Option traders could buy the October $23.00 puts.

Annotated chart:

Entry on August xxth @ $xx.xx
Earnings Date 11/04/10 (unconfirmed)
Average Daily Volume: 8.0 million
Listed on August 19th, 2010


SPDR Retail ETF - XRT - close 37.43 change +0.09 stop 39.28

Target(s): 36.00, 35.25, 34.65
Key Support/Resistance Areas: 39.00, 38.00, 37.60, 36.50, 35.80, 35.00
Current Gain/Loss: +0.24%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
8/21: Investors are growing increasingly worried about the slowing U.S. economy. Retailers should fare poorly with consumers growing nervous about their jobs and sinking home values. I would still consider new bearish positions at current levels or you can wait for a drop under $36.50.

8/19: Earnings results from Sears (SHLD) this morning were disappointing and the stock crashed with a -9% loss. Competition between retailers is heating up as they fight for the wallets of a consumer that is spending less. Fundamentally the XRT should be a good bearish candidate and I would still consider new positions today.

8/16: The retail sector is facing many headwinds from a weak consumer and many analysts are already pointing to a dismal back to school season. In addition, retailers are going to have offer deeper discounts than they are currently just to get consumers into stores to buy things. This will negatively affect earnings and if retailers begin to warn investors by lowering guidance XRT will suffer. I've chosen the ETF as opposed to individual names to filter out some of the earnings noise being reported this week by many major retailers. I do expect a bounce in the overall market in the coming days and suggest readers initiate short positions on any strength. We'll use $37.35 as a trigger to enter short positions in XRT. Our stop will be $39.28 which is above two downtrend lines and the 20, 50, and 200-day SMA's. If triggered, our first two targets are -3.5% and -5.5% away, respectively.

Current Position: Short XRT stock, entry was at $37.52

Options Traders: Long September $36.00 PUTS

Annotated chart:

Entry on August 17, 2010
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 12 million
Listed on August 16, 2010