Option Investor
Newsletter

Daily Newsletter, Saturday, 8/28/2010

Table of Contents

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

Market Wrap

Intel Warns, Market Rallies

by Jim Brown

Click here to email Jim Brown

Intel warned on sales for Q3 and Bernanke failed to name any material change in policy but the market rallied contrary to analyst expectations.

Market Statistics

Navigating the market when actions and reactions are mismatched is always a challenge. Bernanke's speech on Friday was heralded as a make or break moment for the Fed if he did not announce some new plan. Analysts warned that a failure to disclose new plans would likely tank the market. So much for headline analysts knowing what they are talking about. Add in a revenue warning by Intel and the stock being halted and you would have expected another leg down for the market. Nope, didn't happen.

Friday did not follow anyone's expectations unless you were expecting short covering ahead of the weekend. Shorts were loaded up on expectations Bernanke would disappoint and when that did not happen on the scale they expected they were forced to cover rather than hold over the risky weekend.

Another data point that held considerable risk for the market was the GDP revision for Q2. Expectations had been for a revision down to 1.2% growth from the last update at 2.4% growth. Those expectations failed to appear although it was revised lower. The headline number dropped to +1.6% helped by a strong revision to corporate profits by +$73 billion. The majority of the decline was attributed to an upward revision to imports although some of the impact of the imports was offset by a rise in consumer spending.

According to the GDP the U.S. economic growth is continuing but at a drunken stagger rather than a sprint. The GDP is also a seriously lagging report with the period covered ending two months ago. Weak growth in Europe is weighing on the U.S. in the form of lower exports and that should get worse. Job growth remains a serious problem according to Bernanke and that will be a drag on GDP the rest of 2010.

Chart of Q2 GDP

The Final revision to the August Consumer Sentiment declined slightly to 68.9 from the first august release at 69.6. This was certainly not a major event but I would be very afraid of the next release on September 17th. The economic conditions have declined significantly in the last two weeks with the higher jobless claims and next Friday we are probably going to see another loss of jobs in the non-farm payroll report. We could see a material decline in sentiment on the 17th.

The factors impacting sentiment the most are jobs, stock market, gasoline prices and home prices. Of those factors only the price of gasoline is moving in the right direction. Weak consumer sentiment increases the risk to the economy due to weaker consumer spending.

Sentiment Chart

Next week is loaded with critical economic events. The highlights are the FOMC minutes for the August meeting, the national ISM and the Non-Farm Payrolls. The FOMC minutes will give analysts more insight into the squabbling that went on behind the scenes at the August meeting and a better idea what the Fed is actually expecting from the economy. The ISM is expected to decline in line with the regional reports but remain in expansion territory over 50.

The Non-Farm Payroll report is expected to show a loss of -100,000 jobs but it is unknown what impact if any will be seen from lingering census terminations. The headline forecast is for permanent job losses and does not include any census workers. Last month the economy lost -131,000 jobs but that included a loss of -202,000 government/census jobs and a gain of 71,000 private sector jobs. It is actually possible that we see a headline job gain if the census exodus is over. However, whisper numbers range from a loss of -50,000 to a loss of -200,000 jobs. A job gain would be a very unexpected surprise.

Jobless Claims has been a problem over the last four weeks with the prior week's number revised higher to 504,000 and last week's rate at 473,000. For the last four weeks the average has been solidly over 485,000 per week and that suggests the Non-Farm Payrolls are going to be negative.

Economic Calendar

All eyes were on Bernanke when he gave his 17-page speech Friday morning in Jackson Hole. While it is not normally a policy speech he did spell out some points that pleased the market. Essentially he took on the job as cheerleader of the economy at a time that most would find little to cheer about. Bernanke attempted to boost public confidence that the recovery still has enough staying power to survive until hiring and spending pick up in 2011.

He avoided indications the Fed was about to jump back into stimulus mode and in doing so he kept from fanning fears that the recovery is more fragile than it really is. Bernanke noted the recovery had lost some momentum but echoed the new Fed party line that growth is on track for a 2011 recovery. I said new party line because several Fed heads have stressed that point in recent speeches. The rebound point is no longer late 2010 but has moved into 2011.

Bernanke did make numerous points that were chosen to remind the market the Fed was ready, willing and able to provide additional stimulus if necessary. He said the Fed would continue to evaluate additional monetary easing and act accordingly. The issue is whether the benefits outweigh the costs. He reminded listeners the FOMC will strongly resist deflation.

He gave three solutions but stressed the Fed had plenty more at its disposal. The Fed can make additional purchases of long-term securities. They are expecting to buy $400 billion in 2011 as prior debt purchases are redeemed. By making these purchases they avoid a "passive tightening." Second the Fed can modify its communications. This means changing the "extended period" language to something less vague like "until unemployment returns to 8%." That is just an example not something Bernanke said.

A third option would be reducing interest paid to banks on reserves on deposit with the Fed. This has been discussed at length recently as a potential method for forcing banks to lend. If the Fed quit paying interest on the billions on deposit it would force the banks to withdraw those deposits and put the money to work elsewhere. Personally I think the banks would just buy short-term treasuries and continue to hold the cash in fear of a second dip.

Bernanke continued to stress that deflation was a "low risk" and inflation would remain subdued for sometime and was reasonably well anchored. That is Fedspeak for there is no inflation and we don't expect any. He calmed those worried about the U.S. by pledging to do whatever's necessary to resurrect the economy should "unexpected developments" stifle the recovery.

Overall the Bernanke speech offered something for everyone without offering any hard specifics that would roil any particular segment of the market. The stock market dropped sharply when the text was released but the dip was immediately bought even before the text could be analyzed. The initial drop was obviously a sell program timed to take advantage of any Bernanke induced sell off. The initial rebound was obviously a buy program scheduled to take advantage of cheaper prices from any sell off. The battling programs offset each other and left the Dow with about a +30 point gain.

After the speech concluded and the broadcasters had time to disseminate the text another buy program hit at 11:AM that powered the Dow to 10,100 and set the stage for the end of day short covering.

St Louis Fed President James Bullard seems to be toeing the party line and now believes there will be reasonable growth in the second half and the economy will pickup in 2011. He broke with tradition and appeared on CNBC several weeks ago for a two-hour stint and expressed various points of disagreement with the rest of the FOMC. He was pounding the table on the possibility of deflation.

In Friday's interview he was a changed person. Now he believes the economy is on track although growing slower than initially expected and it will pick up sharply in 2011. He believes the Fed has plenty of options to stimulate growth and expressed no difference of opinion with the rest of the FOMC. When questioned about deflation he said the economy still could be at "some risk" of declining prices although it is not yet a dire situation. This is a marked change over the last couple weeks and makes you wonder if he got his hand slapped by Bernanke and his peers on the FOMC for his prior comments.

The market rebound was even more unusual after Intel warned at exactly 10:AM that revenue would be less than previously expected. I though it was interesting that Intel chose to release their warning at exactly 10:AM and exactly the same time Bernanke's speech began and the text released. They were obviously hoping to capitalize on the confusion surrounding the speech in hopes of preventing a sharp decline in Intel's stock price. The ploy worked because Intel dipped to $17.81 on the news then rallied to close positive at $18.38.

Intel warned that revenue could come in as much as $1 billion below its prior guidance because of weaker than expected demand for personal computers. Their new guidance calls for revenue between $10.8B to $11.2B compared to its prior high range of up to $12B. Analysts were expecting $11.5 billion. Intel also said gross margins were going to be as much as 2% below prior estimates. With its warning Intel joined a long list of companies that have already warned on Q3.

Dell and Hewlett Packard warned last week that the back to school shopping season had been a little weaker than expected. HPQ said there was weakness in the laptop market and BTS shopping started later than normal. Several chip companies have warned that manufacturers have been canceling or delaying orders because of weak demand.

Long time chip/tech sector analyst Dan Niles said he was shorting anything with chips and he expected a continued slowdown in the economy and the tech sector. He said you could buy Apple and HPQ but only if you have enough chip shorts to offset short-term fluctuations in those longs. Dan said he expected a double dip over the next two quarters but he defined a double dip as a GDP of less than 1% growth. That seems to be a pretty safe bet with the second revision of the Q2 GDP already revised down to +1.6%. Q3 could easily be less than 1% growth.

Research in Motion (RIMM) lost ground despite the rally because of the continuing problems with India. The country in on track to shut down all the Blackberry devices in India if they can't reach an agreement on accessing the messages. Like the problem with Saudi Arabia a couple weeks ago India wants to be able to read the private emails for "security" purposes. RIMM has proposed several options but they have not reach an agreement with India as of Friday. RIMM has proposed a forum for law enforcement where selective message availability would be allowed. RIMM claims blocking the Blackberry network for all of India would be detrimental for Indian businesses and counter productive to the efficiency of local firms. There are more than one million Blackberry users in India.

RIMM Chart

Boeing (BA) stunned investors again when it announced on Friday it was delaying the delivery date on the 787 Dreamliner again until the middle of Q1-2011. The postponement was due to a delay in the availability of the Rolls-Royce Trent-1000 engine needed for the final phases of flight-testing the carbon-composite aircraft. Boeing uses both the Rolls Royce engines and GE engines in its test aircraft. This is the sixth delay Boeing has announced for the Dreamliner. The Dreamliner is 50% carbon composite and 15% titanium. Boeing has received orders for 850 planes, which can carry up to 330 people with nine abreast seating. Rolls Royce had an accident at its test site in Derby England on August 2nd when an engine blew up. This forced Rolls Royce to shut down the facility for repairs. That explosion suggests there will be some modifications to future engines including those already in use in the Dreamliner test program. Despite the news Boeing recovered from the initial dip to close up +1.84 for the day.

Norfolk Southern (NSC) completed its sale of $250 million in century bonds. These are 100-year bonds that will be due in 2105. Yes, year 2105. If you buy these bonds don't plan on being around to collect. These were added to an indenture dated March 2005. These are 6% senior notes paid semiannually. Demand was so strong that they bumped the offering from its planned $100 million to the $250 million total. NSC joins other companies like DIS, IBM, BNI, FDX, F and MOT in selling century bonds. For companies looking to lock in long term financing at historic low interest rates this is a deal. For institutions like insurance companies looking for long-term income this is a better rate than they can get on the open market. However, analysts warn that companies crowding into bonds today at these low rates are flirting with disaster.

Bond funds have seen cash inflows of $480.2 billion over the last 24 months. That is equivalent to nearly the amount of money spent by equity investors in the dot.com bubble. Treasury yields have not been this low since 1955. Bill Gross of Pimco warned investors last week that bonds have seen their best days and stocks look better now. This is especially true when almost every dividend paying S&P-500 stock is yielding more now than the 10-year treasury. More and more analysts are ringing the bell on the bond bubble and calling for an exit but every new offering either corporate or government is very over subscribed.

Fannie Mae reported on Friday that their 90-day delinquencies fell to 4.99% from 5.15% in the prior month. That was the fourth month that delinquencies declined. Hopefully that means we are over the hump but I am not holding my breath. We really won't know until March of 2011 and the start of the next buying season.

Natural gas futures expired on Friday at a contract low of $3.65. There is an excess of gas in storage and there have been no major storms in the gulf to shut down production. The excess shale gas production is depressing prices because producers can't afford to quit producing. Chesapeake shut down some production earlier in the summer in hopes of boosting prices but they could not hold out long enough to make it worthwhile.

Gas producers have leveraged themselves to the max in order to buy up increasingly large amounts of acreage. They have borrowed increasingly larger amounts of money to fund their drilling and fracturing. As long as they are punching holes at a faster rate the cash flow even at a smaller dollar per Mcf continues to flow. Because depletion of a shale well can be as much as 75% the first year they have to keep drilling to keep generating the high initial flows and generating cash to pay the bills. It is the perfect example of a hamster wheel. As long as they keep drilling the cash keeps flowing but the increased flows produce lower gas prices. This story is not going to end well. If Pennsylvania and/or New York outlaw fracturing the entire sector is going to implode when the cash flow machine stops. Meanwhile short-term gas supplies continue to increase while prices continue to fall.

Natural Gas Chart

Crude prices profited from a monster short squeeze after three weeks of declines totaling -$13. The price of crude spiked higher on two days of declines in the dollar and Friday's gains were accentuated by some serious short covering. The energy sector in general was setup for a continued decline on weak economics and was heavily shorted. Friday's rally after Bernanke and Intel sent shorts running for the safety of cash ahead of the weekend.

Crude Oil Chart

The number of Americans expected to travel during the Labor Day weekend this year will rise 9.9 percent from 2009 as some aspects of the U.S. economy show signs of improvement, travel and auto group AAA said Wednesday. Close to 34.4 million travelers will venture at least 50 miles away from home, compared with 31.3 million last year when the recession curbed holiday plans, AAA forecast. About 10.3 percent more Americans will go by car this holiday weekend, while the number traveling by air will rise by 4.6 percent.

Microsoft billionaire Paul Allen filed suit on Friday against Ebay, Yahoo, Netflix, AOL, Office Depot, Office Max, Staples, Google, Apple and Facebook and YouTube. The suit claims that Allen's Interval Research firm developed patents over Internet usage technology back in the early 1990s. Allen's suit claims the patents being violated are key to how e-commerce and search companies work. The patents described in the suit refer to technology used for such things as web browsing and sending alerts (popups) over the web. One concerns things like recommending products based on the products you previously viewed. You have seen the ads, "other shoppers bought these items as well." Two companies missing from the suit were Microsoft and Amazon. Since Amazon uses every advertising method known to man you wonder why they were not in the suit. A Google spokesman said, "This is an unfortunate trend of people trying to compete in the courtroom instead of the marketplace."

We are nearing the point in the cycle where the election will be a major factor in market sentiment and movement. Historically in a mid-term election cycle the market as reflected in the S&P declines 1% in the first ten months of the year. In the two months after the election the average gain is +4%. With hedge funds either negative or flat for the year and most heavily invested in cash there is a date between now and November 2nd that they will begin to buy in anticipation of the post election rally. Howard Present, founder of F-Squared Investments, said on Friday they are trying to build a 50% cash position going into September and they were not alone in the industry.

It does not seem to make a difference in the long term which party wins the election other than the results are better when the House and Senate are controlled by opposite parties. That recipe for gridlock is favorable to the markets and we have a good chance of that happening in 2010. That suggests the closer we get to November and the more that looks like a reality the more interest there will be in buying stocks.

Remember, part of the election cycle is the negative sentiment produced by the campaigns. The challengers will talk endlessly about how bad the economy is and why you should throw the bums out. The defenders will talk about how bad it is and blame it on the challenger's party in an attempt to poison sentiment towards the challengers. This is not a political statement, just a normal campaign process. The bottom line is a constant stream of negative campaign ads that will push sentiment lower. Eventually investors will swim to the top of the muck and see what they hope is light after November 2nd and start voting with their money and buy stocks as we get closer to the election.

The current economic conditions may not have changed on Friday and conditions appear to be declining but the Bernanke speech pacified some investors. Fears of an economy spiraling out of control may have eased with the feel good words of Bernanke saying we will do whatever is necessary to prevent a double dip or a deflationary period. The speech may have calmed the waters even though it was short on specifics and long on generalities.

Despite the calming influence there are still some critical economic events next week. Those short-term mile markers can resurrect the fear and dread if they come in sufficiently negative. While I would like to think that last weeks bounce off support was the end of the bearishness, I am far from convinced. In every bear market there are multiple rebounds from oversold conditions and Friday's buy program triggered short covering was one of those events. I doubt the bulls are ready to charge back into the market. There are significant headwinds for the economy despite the best hopes of the Fed. We will hear about some of those headwinds when the FOMC minutes are released on Tuesday.

One of the headwinds is the drop in stimulus spending. The amount of money being spent from the stimulus funds is drying up faster than ice cubes on Texas concrete in August. More than 80% of the funds have already been spent, canceled or postponed. I wrote last week that move then 40 states are suffering budget shortfalls that will mean further layoffs and service cuts. The rising jobless claims are an indication that stimulus projects are winding down. In theory the economy was supposed to have rebounded into self-sufficiency mode by now and would no longer need the stimulus money. Those "shovel ready" projects have ended but state and local governments have no money to keep those workers on new projects.

The corporate world is still in hunker down mode with the exception of the recent round of M&A activity. They are flush with cash and ready to rush into the next wave of expansion but that won't happen until there is a solid recovery. They were burned too badly in 2008 to over extend themselves again.

This leaves the market in the same shape as the corporations. Investors and funds are piling up cash for the next buying cycle but that buying is dependent on signs the economy is improving not declining. The post election rally should begin before the election but the start of that buying is also dependent in some part on the state of the economy. If it continues to appear that we are sliding into another hole then investors may wait until the polls close before taking a chance.

Art Cashin had an interesting view of the markets on Friday. He suggested the markets were being manipulated by the Dow 10,000 hat vendor at the NYSE. The Dow has crossed the 10K mark on 23 trading days so far in 2010.

With the big cap tech companies warning on falling computer sales it does not look good for the Nasdaq. The Semiconductor Index may have rebounded from a seven month low into positive territory after the Intel warning but it was short covering not a sudden rush to own chip stocks. The SOX is poised to retest that low at 310 and probably the 52-week low at 290 before the election rally begins. As the chips go so goes the Nasdaq.

Semiconductor Index Chart

The Nasdaq rallied back to strong resistance at 2150 and stalled there into the close. Ordinarily this rebound would have been bullish after two tests of initial support at 2100. The jury is still out until we see if there is any follow through to the short squeeze next week. Both dips were instantly followed with buy programs so at least one institution was bargain hunting. After Intel's warning it will be interesting to see if they are still interested in buying again next week.

Intel's warning was not an end of the world as we know it warning. For Intel to downgrade revenue by $500M to $1B when they are doing $11B per quarter is a haircut not brain surgery. When Intel upped their guidance with earnings there were quite a few analysts that scratched their heads and wondered what Intel was seeing that prompted them to raise guidance. With their warning on Friday they simply walked the numbers back down to where analysts expected them to be before the upgrade. They will still make a lot of money and the sales are still decent.

If traders take that into account then maybe chip stocks won't continue their downward slide next week. However, with Dan Niles saying, "short anything with chips" there is always a worry somebody might listen to him.

I think the key to the Nasdaq is resistance at 2160. If the tech index moves over 2160 we could see another run to 2200 but I believe it will only be a trade and not the beginning of a new bull market. Support is 2100 followed by 2060.

Nasdaq Chart - 30 Min

Nasdaq Chart - Daily

The S&P dipped to support at 1040 twice last week with a decent rebound both times. However, resistance at 1060 was a challenge until the buy program on Friday pushed the index over that level and triggered some afternoon short covering. Even though it closed over 1060 it is not out of the woods with the 1064 level acting to slow the advance at the close.

If the S&P does move higher the 1080 level should be a serious challenge. That is just far enough to remove the rest of the oversold indications and make the bulls start wondering about bailing with some profits. If the gloom and doom returns the next support below 1040 is the 38% Fib retracement at 1014 and the July lows. I think the S&P is in the neutral zone and could wander in either direction for 20 points without forcing traders to make a new trade decision. This would be a good range to wait out the payroll report next Friday.

S&P-500 Chart - 30 min

S&P-500 Chart - Daily

The Dow rallied past initial resistance at 10100 and not by a token amount like the S&P. This was a decent close 52 points over resistance. Of course it was mostly short covering of the index ETFs like the DIA, which had 25% more volume than on Thursday. Ten of the Dow 30 stocks gained over a buck with IBM, CAT and BA the leaders at nearly $2 each.

There was nothing really specific to the individual stocks but a solely a reaction to the short covering and the calming words of the Fed. Once economic reports begin popping next week we are likely to see some worry creep back into the index.

If the Dow can continue to find traction the next material resistance is 10300. The 300-point range between 10000-10300 could be a perfect range ahead of the payroll report next Friday. That does not require a major resistance breakout or a support breakdown. The Dow can wander without worry about levels as long as it stays within that 300-point range.

Dow Chart - 30 min

Dow Chart - Daily

In summary the markets rallied on Friday on short covering triggered by some buy programs and on fears of holding shorts over the weekend. How much enthusiasm will carry over into next week with a calendar full of critical economic reports is unknown. There are so many economic landmines that bulls wanting to climb the wall of worry will have to watch their steps very carefully.

The bigger question is whether the markets rally into the jobs report on expectations for a better report or sell off in advance on worries there will be more jobs lost than expected. The FOMC minutes, ISM, Challenger Report, Monster Employment and Jobless Claims will all have employment components that will telegraph numbers for the Friday Non-Farm Payrolls. Every interim report will be a landmine for the bulls to step over on their way to Friday. I am leaning towards a bad news bulls type of week where the indexes creep upward in hopes of better news. After all there is a ton of bad news already priced into the market.

Jim Brown


New Plays

Long Ag Play

by Scott Hawes

Click here to email Scott Hawes


NEW BULLISH Plays

China Agritech, Inc - CAGC - close 16.72 change +0.74 stop 15.23

Company Description:
China Agritech, Inc. (China Agritech) is a holding company. Through its subsidiaries, the Company manufactures and sells organic liquid compound fertilizers, organic granular compound fertilizers and related agricultural products in the People's Republic of China. Its direct and indirect subsidiaries include Anhui Agritech Development Co. Ltd. (Anhui Agritech), Agritech Fertilizer Limited (Beijing Agritech), China Tailong Holdings Company Limited (Tailong), Pacific Dragon Fertilizer Co. Ltd. (Pacific Dragon) and Xinjiang Agritech Agriculture Resources Co., Ltd (Xinjiang Agritech). The Company's main products include spray, water-flush, dip and granular fertilizer products and other customized, crop-specific fertilizers that are tailored to its customers' specific requirements. Its liquid fertilizer products can be applied on a widespread basis via spraying by machine or aircraft.

Target(s): 17.70, 18.35, 19.40
Key Support/Resistance Areas: 19.60, 18.50, 16.00, 15.35
Time Frame: 1 to 2 weeks

Why We Like It:
The agriculture space continues to garner much attention throughout the world as commodity and food prices are increasing at a rapid pace, mainly from emerging markets. CAGC is a Chinese company in this space and the stock is forming a nice cup and handle pattern. CAGC is finding support at its 20 and 200-day SMA's and I believe it will bounce higher with the broader markets in the coming days and weeks. I'm not looking to hit a home run with this trade but our targets range from +6% to +16% higher. All of them are achievable with broader market strength which I think we will see, at least over the next week or two. Our stop is below the recent swing low, the upward trend line from 7/20 and the aforementioned SMA's. More nimble traders may want to try to time an entry in the $16.25 area.

Suggested Position: Long CAGC stock at current levels

Options Traders: Buy October $17.00 CALL, current ask $1.65

Annotated daily chart:

Entry on August xx
Earnings 11/11/2010 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on August 28, 2010


In Play Updates and Reviews

Two Small Winners Closed

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Friday's reversal off of the morning lows was nothing short of amazing and I suspect we could get some follow through. I think a dip early in the week could be a buying opportunity and I suggest keeping a tight leash on short positions. Please email me with any questions.

Current Portfolio:


BULLISH Play Updates

Athenahealth, Inc. - ATHN - close 27.86 change -0.05 stop 26.90

Target(s): 28.75 (hit), 29.50, 31.50 (hit), 32.95
Key Support/Resistance Areas: 34.25, 31.75, 30.00, 28.25, 25.75
Current Gain/Loss: -7.90%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
8/28: ATHN squeezed out a gain on Friday but it would have been nice to see a better effort considering the broader market reversal. Technically ATHN has formed the handle on a bullish cup and handle formation. Now we need follow through this week.

8/26: ATHN hit our lowered target of $28.75 but sold off and gave back all of yesterday's gains. The stock is still above the lows from Tuesday so I am sticking with it here to see if things reverse higher. I want to caution readers that if we get weakness in the broader market tomorrow we could get stopped out.

8/25: We are moving in the right direction with ATHN. Let's see where this bounce takes the stock, however, the broader market is weak so readers may want to consider looking for an exit using the above targets.

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 37.02 change +0.47 stop 34.45

Target(s): 38.90, 40.50, 41.50
Key Support/Resistance Areas: 41.50, 40.50, 39.20, 38.00, 35.50
Current Gain/Loss: +0.00%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
8/28: ANDE is hanging tough and maintaining its upward trend line with the 20-day SMA acting as support. I'm looking for the stock to break out higher and move up towards our targets.

8/26: ANDE is bouncing perfectly off of its upward trend line and 20-day SMA and it did again today. My comments from the past few days remain valid.

8/25: ANDE is hanging tough and if it breaks above $37.50 to $38.00 our targets should easily be reached.

8/24: ANDE surged +3.44% higher today on a very weak tape in the broader market. We are just about break-even on this trade but I urge readers to be cautious as ANDE can't buck the broader market trend forever. However, if the market bounces from here ANDE should head towards our first target of $38.90 (lowered 25 cents). I want to raise the stop up to $34.45 which is below the 50-day SMA and well below the recent congestion area and key resistance level of $35.50. This should protect us from a head fake lower and protect against a hard reversal.

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 19, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 180,000
Listed on August 18, 2010


Newmont Mining Corp - NEM - close 59.95 change +0.51 stop 58.20

Target(s): 59.30 (hit), 59.85, 60.50
Key Support/Resistance Areas: 62.00, 59.50, 58.16, 55.00, 54.30, 52.30
Current Gain/Loss: +5.64%
Time Frame: Several weeks
New Positions: No

Comments:
8/28: NEM looks poised to reach our targets this week. We currently have a better than a +5% gain so taking profits is an option. My comments from below remain the same.

8/26: NEM is back at our first target and it is time to consider taking profits. This is more of a defensive play so I am comfortable leaving this open to see if we can get more out of the position. I want to raise our stop $58.20 which will lock in a gain on the position. NEM is forming a bull flag on its hourly chart and if it breaks higher our final targets could get hit quickly. I've changed the final target to $60.50. Readers who want to try to get more than this out of the position might want to consider $61.90 which is near the highest all time closing price. I'd rather get out ahead of that.

8/25: NEM is heading back up towards our $59.30 target. I suggest not letting this reverse again. Protect profits.

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


Rackspace Hosting, Inc - RAX - close 10.87 change +1.53 stop 17.95

Target(s): 20.75(hit), 21.30, 23.00
Key Support/Resistance Areas: 23.50, 21.40, 20.00, 19.00, 18.00
Current Gain/Loss: +6.21%
Time Frame: 3 to 5 weeks
New Positions: Yes, preferably on a pullback

Comments:
8/27: Wow! RAX surged nearly +8% higher on Friday and is approaching our 2nd target. I think this stock has the potential of reaching its 52-week highs near our final target of $23.00. RAX is also being talked about as a potential takeover target in the cloud computing space which is why I have suggested the December options, i.e. to give this time to work. Readers may want to consider taking some profits off of the table and keeping the remainder of your position open to see if RAX rewards us.

8/26: RAX printed highs not seen since April and briefly broke out of its ascending triangle. My comments from the play release remain the same. Let's stick with the plan. Readers might want to consider new positions if RAX prints $19.00.

8/25: M&A activity is heating up in the tech sector. Dell and Hewlett-Packard are in a bidding war over a 3Par at a huge 160% premium over its closing price just a couple of weeks ago. Whoever loses the bid will most likely be looking for a similar firm to acquire and there seems to be none better than RAX. Regardless of whether RAX fits the bill for an acquisition they are in the red hot cloud computing industry which is outperforming the broader market. I suggest we take advantage of the momentum and initiate long positions now. Technically, RAX is above all of its moving averages and is forming an ascending triangle. Our stop will be $17.95 and I have three targets with the most aggressive being the YTD highs near $23.00. I envision this trade lasting several weeks or more but if the stock surges we won't hesitate to book profits.

Current Position: Long RAX stock, entry was at $19.65

Options Traders: Long December $21.00 CALL

Annotated chart:

Entry on August 25, 2010
Earnings 11/9/2010 (unconfirmed)
Average Daily Volume: 1.75 million
Listed on August 25, 2010


BEARISH Play Updates

Automatic Data Processing - ADP - close: 39.36 change: +0.61 stop: 41.26

Target(s): 38.85, 37.25, 36.50, 34.00
Key Support/Resistance Areas: 41.00, 39.00, 37.30
Current Gain/Loss: -1.57%
Time Frame: Several weeks
New Positions: Yes

Comments:
8/28: ADP looks ready to bounce along side the broader market. The stock closed right on a steep downtrend line but I think it's only a matter of time before it's broken. Readers may want to consider using a tighter stop or simply exiting positions. Our official stop is above the 20 and 50-day SMA's but a tighter stop of $40.10 could be used. I've also listed a target near breakeven ($38.85) on the trade. ADP could show some weakness early in the week and this could be used a logical exit point as it is an intraday support level.

8/26: We are right back to where we started with ADP. The stock continues to look vulnerable and ready to break. If the broader market is weak ADP should follow.

8/25: ADP continues to look vulnerable but we may need to be patient until the broader market finishes this bounce which should be short lived. There is plenty of overhead resistance.

8/24: We were triggered on our short entry in ADP at $38.75. This is the lowest close since 10/8 and the stock looks vulnerable. I've added $37.25 as a first target because it is near a long term upward trend line and prior swing low from 9/3/09.

Current Positions: Short ADP stock, entry was at $38.75

Option Traders: Long November $37.00 puts

Annotated chart:

Entry on August 24, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume: 3.2 million
Listed on August 19, 2010


Chesapeake Energy - CHK - close 20.81 change +0.74 stop 21.60

Target(s): 19.70 (hit), 19.10, 18.25
Key Support/Resistance Areas: 22.50, 21.60, 20.30, 19.65, 18.75, 18.00
Current Gain/Loss: +0.00% Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
8/28: My comments from below about CHK violating the prior days candlesticks is not a good sign for this short position. Our stop is $21.60 so we won't get hurt too bad if we are taken out but readers should be aware that Friday's pattern can be considered a reversal pattern. In hindsight, we should have taken the +5% gain we had from the breakdown on 8/25. Nice job to readers that did.

8/26: Natural gas inventories continue to be bearish and the early strength in CHK was sold right into. The stock printed a nasty candlestick, closing at its lows for the day. However, if this candlestick is violated it is a bullish signal so I want to tighten the stop to $21.60. I am still bearish on CHK but want to protect against a hard reversal. The stop is also quite a bit higher and above the recent downtrend line and 20-day SMA. I wouldn't want to be involved if CHK trades this high. I am also adjusting the 2nd and 3rd target slightly higher.

8/25: CHK traded right down to its 52-week low which was the target I suggested taking profits at last night. CHK still looks weak but I believe the stock may bounce here with the broader market. If things turn back down CHK should break these levels.

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: 27.96 change: +0.76 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 29.70

Comments:
8/28: I think CNW bounces higher from here with the broader market so we may get filled after all. However, I want to increase the trigger to $29.70 which is close to filling a gap down on 8/11. Our stop is above the 50-day SMA. I am looking for CNW to turn back down at $29.70 to test $28.25 which will produce about a +5% gain.

8/25 & 8/26: My comments remain the same from below. Let's see if CNW gives us an entry on a bounce in the coming days.

8/24: CNW managed to gain +1.33% to close at $27.52. This stock is shortable on strength but we are still waiting on our trigger. The plan is to initiate bearish positions if CNW can bounce to $29.20. The stock is still very oversold with its recent decline from $35.00. A normal 38.2% Fibonacci retracement and the declining 20-day SMA are near $29.80. If the stock can manage to bounce to $29.20 I would be short seller.

Suggested Position: Short CNW stock if it trades to $29.70

Annotated chart:

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


HNSI, Inc - HNSI - close 27.61 change +0.71 stop 29.11

Target(s): 26.70, 26.40, 25.80, 25.05, 23.75
Key Support/Resistance Areas: 28.90, 27.25, 25.80, 200-SMA, 23.50, 22.00
Current Gain/Loss: -1.51%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
8/28: HSNI may bounce with the broader market but I will be surprised if it takes out the downtrend line from its April highs. I have tightened the targets significantly and suggest readers take a small gain or tighten stops to protect the gains should HSNI reach them.

8/26: The early rally in HSNI was sold into and the stock closed near its lows of the day. I am looking for a breakdown towards its 200-day SMA.

8/25: HSNI hit our target on the late day rally so we are short the stock. I believe this rally will be short lived and the stock should turn back lower in the coming days. My comments from the pay release are below.

8/24: Retailers are weak and HSNI looks like it is headed to test its 200-day SMA and possibly its recent swing lows. The stock has made a great comeback off of its 2009 lows but the selling has picked back up in recent weeks. The stock lost -5.3% today on strong volume and I expect it to continue if the broader market cooperates. I would like to see a retracement of some of today's gains to initiate short positions but if the stock breaks down I also suggest initiating short positions. Let's use triggers on a bounce to $27.20 or a breakdown to $25.69. More nimble traders can initiate positions now. We'll keep a tight stop at $29.11 which is above the downtrend line and Monday's high. If we get filled at $27.20 our first target is nearly 8% lower and above the 200-day SMA. HSNI closed below its 20, 50, and 100 day SMA's today.

Current Position: Short HSNI stock, entry was at $27.20

Options Traders: Long October $25.00 PUTS

Annotated chart:

Entry on August xx
Earnings: 11/11/2010 (unconfirmed)
Average Daily Volume: 495,000
Listed on August24, 2010


Starbucks Corp. - SBUX - close: 23.47 change: +0.20 stop: 25.05

Target(s): 22.20, 21.30, 20.00
Key Support/Resistance Areas: 25.00, 23.50, 22.00, 21.00, 20.00
Current Gain/Loss: -0.73%
Time Frame: Several weeks
New Positions: Yes

Comments:
8/28: My best guess is that SBUX has some unhappy shareholders at higher prices which should keep bounces in the stock in check. There is a lot of congestion overhead but we may need to exhibit some patience through a bounce.

8/26: SBUX filled the gap I referred to yesterday and it was immediately sold into. Now we need follow through and weakness in the broader market should get things moving lower in earnest. I've adjusted our first target up 10 cents. This is prior resistance form last fall which should provide support. If we breakdown before bouncing I would be taking profits or tightening stops to protect them at this level.

8/25: The rally in SBUX may have been short covering today and the stock could fill the gap down from yesterday before the selling resumes. There is plenty of overhead resistance to keep bounces in check.

Current Position: Short SBUX stock, entry was at $23.30

Options Traders: Long October $23.00 puts

Annotated chart:

Entry on August 24, 2010
Earnings Date 11/04/10 (unconfirmed)
Average Daily Volume: 8.0 million
Listed on August 19, 2010


CLOSED BULLISH PLAYS

UltraShort Semiconductor ETF - SSG - close: 18.92 change: -0.70 stop: 18.40

Target(s): 20.40, 21.45, 22.00
Key Support/Resistance Areas: 22.00, 20.00, 19.00, 17.00
Final Gain/Loss: +3.82%
Time Frame: 4 to 6 weeks
New Positions: Closed

Comments:
NOTE: This is a bearish trade using a long position in an inverse ETF. Since we are bullish on the inverse ETF it is listed as a bullish trade.

8/28: The broader market weakness (strength in SSG) was very short lived as I suspected in Thursday's update. But hopefully readers were ready to sell when our $20.40 target was hit because things reversed fast. So we'll take a small gain of +3.8%. Readers who have positions I would honor stops as I think SSG could head back to test its 50-day SMA near $17.00. Friday's reversal was nothing short of amazing and I suspect there could be follow through.

8/26: SSG bounced back today gaining +3.4%. If there is market weakness tomorrow it could get ugly and be quick. On the other hand if we bounce it could spur short covering (bad for SSG) and we could get stopped out. Our initial plan was for this trade to last several weeks but the market is oversold and we are approaching support levels. If we go lower it could be quick with a swift reversal and I would rather be selling SSG on strength rather than weakness. I've offered two additional targets for readers looking to book nice gains if there is weakness. Our stop is in the right place.

8/25: Unfortunately, we were triggered at $19.65 as opposed to the pullback to $17.80. We have tight stop so if the Semi's bounce much more there is good chance we will get taken out. I like this ETF on weakness but will suggest stepping aside and possible entering at a lower price if our stop is hit.

Closed Position: Long SSG stock at $20.40, entry was at $19.65

Annotated chart:

Entry on August 25, 2010
Earnings Date: N/A
Average Daily Volume: 178,000
Listed on August 21, 2010


CLOSED BEARISH PLAYS

SPDR Retail ETF - XRT - close 36.52 change -0.46 stop 38.62

Target(s): 36.00 (hit), 35.25, 34.65
Key Support/Resistance Areas: 39.00, 38.00, 37.60, 36.50, 35.80, 35.00
Final Gain/Loss: +4.05%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
8/28: Once again you had to be ready to sell at $36.00 which is where XRT reversed on Friday. I suggested we protect profits down here so we have another small gain of +4%. I do believe XRT will turn back down but probably not before heading higher. A test of the 200-day SMA is probably another good shorting opportunity.

8/26: The selling resumed in XRT today and there is plenty of resistance overhead. $36.00 is still a valid target and I would be protecting profits if XRT gets down there again.

8/25: XRT printed a bullish engulfing candlestick today and closed the gap lower from yesterday. In this case I believe the selling will resume. My comments from below remain the same.

8/24: XRT hit our first target of $36.00 this morning and bounced. I see no reason the ETF won't trade down to its July lows which are just below our second target of $35.25. Let's move our stop down to $38.62.

Closed Position: Short XRT stock at $36.00, entry was at $37.52

Annotated chart:

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