Option Investor
Newsletter

Daily Newsletter, Saturday, 9/18/2010

Table of Contents

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

Market Wrap

Living A Charmed Life

by Jim Brown

Click here to email Jim Brown

The daily gains have not been spectacular but so far September has far exceeded trader expectations. The problem with fairy tales is that they always end.

Market Statistics

The gains for the week were deceptive. We really did not have a day with a big gain but the trend continued to creep slowly higher. Negative economic reports, guidance warnings, estimate cuts and broker downgrades kept the bulls from running but the bad news could not keep them down.

Some of the bad news on Friday came from the Consumer Sentiment report for September. The preliminary number declined to 66.6 from 68.9 and the lowest level since August 2009. The decline came exclusively from the expectations component, which fell from 62.9 to 59.1. The current conditions component actually gained .1 to 78.4 from 78.3. The -3.8 point decline in the expectations is a material decline and suggests the short term rebound from the back to school season has faded.

Consumers claim they are worried about the economic outlook. This report is at odds with the recent retail sales reports from last week, where companies like JC Penny, Best Buy and Macy's said spending was improving. Some companies said it was the best back to school season in years.

For the period covered in this report there was a lot of chatter in the news about the potential for a double dip recession. We also saw gasoline prices rise and another drop in headline employment. Home sales fell off the cliff and home prices are declining again. Politicians are talking down the economy in order to explain how they would fix it.

All of these things weigh on sentiment but a continued rally in the stock market would go a long way towards improving the consumer outlook.

Consumer Sentiment Chart

Also weighing on sentiment is the drop in their net wealth over the last year. The Federal Reserve said on Friday that household debt declined by -2.3% in Q2 and the largest decline on record since tracking was initiated in 1952. This is a combination of paying off debt and defaulting on debt. Consumers who can have been deleveraging as quickly as possible and paying down balances in case the economy does get worse. Also, if you file bankruptcy your debt is erased.

Household net worth declined by $1.5 trillion in Q2. That was driven by declines in stockholder equity and mutual funds, which declined by $1.3 trillion accounting for the majority of that number.

Real estate values were slightly higher in Q2 but the ratio of debt to equity rose to 40.7%. That could be a combination of a lower valuation and/or a refinance to garner a lower interest rate. The majority of refinancing loans include the fees as new principal and quite a few have cash back at closing, which raises the amount owed.

Federal borrowing rose by 24.4% while state and local government borrowing declined. State and local governments are held to a tighter standard in most cases with the voters and local oversight groups leaning on lawmakers to limit spending and taxes. When politicians are elected to a Washington post they become insulated from the local process and tend to get caught up in the attempt to improve the bigger picture and increase pork barrel spending for their home state.

Unfortunately Q3 results are expected to be worse on all areas mentioned above.

The Consumer Price Index was also released on Friday and the headline rate rose +0.3% but it was all due to spikes in food (+1.2%) and energy (+3.8%) prices. The core rate was flat at 0.0% after three months of minimal gains. Analysts claim the "shelter index" restrained the core rate. The rent on primary residences fell for the first time since November 2009. That was probably due to the summer rental window closing and landlords reducing rent to avoid having a vacancy over the winter. There is no inflation in the economy and the Fed will have no reason to change their bias at next Tuesday's meeting.

Food prices were up due to the droughts around the world and the fires in Russia. That spiked U.S. grain prices due to export demand and raised prices for that grain in the USA. Energy prices were up because of increasing demand in Asia, the Middle East and Latin America.

Next week is housing week for economics. There are four major housing reports and they should all be negative. Expect a decline in prices and a rise in inventories. This will test the resolve of the stock market bulls unless there is a very unexpected improvement in sales.

Real estate analysts have been lowering numbers almost weekly for the last month in order to remove the optimism from their prior estimates. Even with the downgrades existing home sales are projected to have risen slightly in August but it is only a calendar blip as the last rush of home sales to close before school started. If housing numbers came in better than expected next week I doubt there would be a major rally on the news because of the negative longer-term outlook.

Moody's is predicting another 8% decline in home prices because of the number of pending foreclosures. They expect the market to bottom in Q3-2011. I heard another bank analyst last week claiming a -10% decline but I can't remember which bank.

The most important event next week is the FOMC meeting on Tuesday. There are conflicting expectations for another quantitive easing announcement. Some believe they will announce it to start after the elections in November and others believe they won't announce until after the elections so there won't be any claims of politics involved in their actions. I believe if the Fed believes there is enough justification for a new QE program to provide additional stimulus for the economy they would also believe it best not to wait for two months to start.

This QE2 conundrum will be the focus of commentators on Monday. Analysts will also be waiting for the Fed's outlook on the economy in order to compare it to their outlook from the August 10th meeting.

The Tuesday FOMC meeting will be a pivotal event for the market and the rally could end there if the FOMC statement is bearish.

Economic Calendar

The Jobless Claims on Thursday will be the key to watch for an uptick in claims. The next reading is the one that will correct for any abnormalities in the Labor Day reporting cycle. Moody's is saying it would take a +2.9% GDP rate to produce a positive jobs picture. Anything under 2.9% would result in a net jobs drain. Based on current estimates our Q3 GDP should be something in the 1.3% growth range or less than half what it would take to actually grow jobs. That suggests negative net employment should be with us for several quarters to come.

In stock news FedEx was still declining and holding down the transportation index after saying on Thursday it was closing 100 of its trucking terminals and cutting 1,700 jobs because of the problems in the economic recovery. The closures will come on Jan-30th after the busy holiday shipping season. FedEx reported earnings of $1.20 per share for Q2 and that missed analyst estimates by a penny. The FedEx freight division has been a drag on profits because the demand for shipping items like refrigerators and washing machines continues to be weak. FedEx Freight collects single lot items or less than truckload lots from many manufacturers and consolidates them into single loads for delivery. FedEx Ground ships small packages up to 150 pounds. Under the new plan FedEx is going to consolidate Freight and Ground with FedEx Ground the surviving name.

Oracle (ORCL) reported earnings of 42-cents compared to analyst estimates of 37-cents. Revenue was $7.5 billion, up +48% from the $5.05B in the comparison quarter. Oracle revenue rose on the inclusion of Sun Microsystems into Oracle results. Oracle license fees also rose about 25% while maintenance and support rose +12%. Oracle shares jumped +8% on the news.

Oracle Chart

Research in Motion (RIMM) also reported earnings and raised guidance but the market was not as kind to RIMM shares with a barely positive finish. RIMM said it added 4.5 million new subscribers in the quarter, which was slightly less than their own guidance. RIMM said the new BlackBerry Torch model was finding broad market acceptance even though it was only available through AT&T in the USA. It will be rolled out to 75 other countries this quarter. RIMM showed that sales of BlackBerry phones in the rest of the world were still hot although RIMM is up against some stiff competition in the U.S. with the iPhone, Droid, EVO and Galaxy. Several analysts cut estimates on earnings for future quarters. At one point RIMM had a near monopoly on smart phones but that has changed dramatically in the last two years.

RIMM Chart

Texas Instruments announced a $7.5 billion stock buyback and raised its dividend by 8%. This helped push the semiconductor index higher even though it really did not impact the future sales for the sector. TXN shares jumped +3% to $25.73.

TXN Chart

BP entered the final chapter on the Horizon disaster on Friday when it began pumping cement into the bottom of the Macondo well. The relief well that has taken three months to drill using the Transocean Development Driller II finally received approval to intercept the Macondo well nearly 3.5 miles beneath the surface, which it did early Friday. At 1:30 ET Friday it began pumping cement into the broken well. Once the cement cures and BP completes a pressure test the relief well will also be plugged and abandoned. BP has completed pumping the cement and the final pressure test is scheduled for 11:PM on Saturday.

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That will end this chapter in the Horizon disaster. The three rigs holding position above the well will head off to wherever they anticipate working next and the appointment calendar for BP will be endless courtroom appearances with their lawyers. BP saw about $70 billion erased from their market cap and they have spent close to $10 billion to date on the well and the cleanup. They have another $20 billion committed to the fund for people harmed in some way by the disaster.

When the well was flowing unobstructed into the sea there were estimates from major analysts with gigantic numbers for a final bill for BP. Goldman at one point mentioned $125 billion as the price tag. Now that the oil has all but disappeared from the gulf the estimates are coming back to earth and I have not heard one in weeks over $50 billion. The consensus seems to be in the $30 billion range today.

That does not mean that BP is suddenly a buy. There are a lot of legal attacks still to be launched and depending on the outcome of various investigations BP could still be looking at another $18-$20 billion in fines and penalties. That would be worst case and require them being found "grossly negligent." Once the well is closed this weekend the future news will be all bad. The news will be focused on monster settlements, court awards and findings towards that eventual negligent ruling. The administration no longer appears to be trying to put BP out of business so that is an improvement. It does not mean they won't try to extract the biggest fine possible in order to be seen as tough on big oil. BP may be closing the book on the well but the book they are opening as a sequel is going to be just as painful.

BP Chart

Gold made another new high on Friday at $1,282 intraday on multiple reasons. Investors are expecting further quantitive easing by the Fed that will further devalue the currency. They are also worried that the U.S. debt load is going to push us into a severe problem in the years ahead and it is a currency play given the monster moves in the dollar, yen, yuan and euro over the past weeks. In times of currency stress the yellow metal seems to find a flood of willing buyers.

The obvious question would appear to be "is the move over?" The rally in gold has brought the gold bugs out of the woodwork and the gold scams onto the cable TV airwaves overnight. Real gold analysts claim we could easily hit $1500 before year-end if the Fed goes on another easing binge. Others believe anything over $1,260 is a sell signal because the gold carry trade is running on empty. There are too many points to cover here but basically those analysts expect an implosion in gold prices as changes in currency valuations make it less profitable to do things like borrow yen to buy gold. Of course the bears have been claiming the trade was over for the last $50 of the move and they have been wrong. I personally would not want to chase it at this level.

Gold Chart

The tone on Monday is going to be set by President Obama. He is going to hold a quasi town hall meeting on CNBC at noon. This is a real coup for CNBC for ratings but I wonder if it will drive conservative viewers away. CNBC Washington reporter John Harwood, will be doing the interview and based on his past reporting style he will be lobbing pre-scripted softball questions at the president so all the right answers are produced.

The question is really "which president will show up." Will it be the president advocating class warfare, tax the rich, I want to make it perfectly clear it is Bush's fault. Or will it be a new kinder to business, gentler to entrepreneurs, non teleprompted merchant of hope and change? This would be a real opportunity to steal some of Fox's thunder if Harwood would ask some real questions that real voters want to know. I am sure because this is the president he will get preferential treatment and it will end up being a dog and pony show rather than a hardball interview.

If he dashes hopes for the extension of the tax cuts or appears to be anti business the market could head south quickly. Businessmen and investors are not gullible people and any attempt to turn this into a political lecture may not end well. Several times recently the market has tanked while president Obama was speaking. Hopefully whoever organized this performance understands that CNBC is a direct line to business and the market and scripted it accordingly.

The Dow and Nasdaq ended with gains on Friday that put them on a streak of 11 wins out of the last 13 trading days. The S&P has been up 10 of the last 13 days. That is an extremely overbought scenario even though the daily gains have been minimal. Art Cashin used the analogy the markets were sleepwalking at resistance. The Dow and S&P are scratching out a handful of points every day but unable to manage a breakout. Dips are being bought but breakouts have been hard to find on the Dow and S&P.

Art Hogan at Jefferies is predicting an upside breakout for the market because it is counter to the consensus of a decline into October. He said fund flows were improving and domestic ETFs were seeing positive money flows. He said Jefferies has been waiting for this to happen for six months as a sign investors are moving back into the markets. This news is contrary to the actual $10.7 billion in outflows from ETFs in August. Morningstar said $6.6 billion flowed out of the SPY or S&P-500 SPDR. Year to date $19.1 billion has moved out of the SPY. Meanwhile $4.2 billion flowed into emerging market ETFs in August. Hogan claims that has reversed over the last couple weeks to inflows in domestic funds and that would be bullish.

The market has been getting progressively stronger as evidenced by the internals. The new 52-week highs hit 366 on Friday compared to 81 new lows. However, that was the most new lows since August 31st so there is still an undercurrent. Sectors losing ground on Friday included banking, housing, HMOs, brokers, airlines and energy.

The S&P finally rallied to test strong resistance at 1130 on Friday and it was a very quick test. The index was immediately slammed back to 1122 and it traded sideways the rest of the day. The opening spike to 1131 was a result of the quadruple witching. The closing value on the S&P options are determined by the opening print on the S&P on Friday. Tape jamming was active at the open to pin the index at that 1130 level for expiration. The rest of the day was a non-event.

The key to a stronger rally next week will be that 1130-1133 resistance level. If it can't be pierced then the rally will eventually fail. We can't levitate at 1125 for the rest of September. The bulls will eventually tire of the lack of progress and pull the bids to allow a market reset. I am surprised the bears have not been more effective at this strong resistance. The dips have been shallow and lackluster. Volume on Friday was over 8 billion shares so they had plenty of opportunity but could not do anything with it.

Support is currently 1120 with resistance 1130. That is a very narrow range for a market with all the conflicting drivers we have today. I suspect we are about to see a major breakout but in what direction? I would like to believe it is higher because the technicals point to a test of 1240 if the S&P can move over 1133 on volume. That would be a huge run ahead of the election and makes me wonder what would then happen after the election when the rally is "supposed" to occur.

Fortunately the narrow range will give us a clear signal when the move begins. A break to either side should be strong enough for a decent trade. I am still in buy the dip mode but a break below 1120 could signal a change in the trend rather than just another dip. I would love to remain bullish but we are still seeing earnings warnings and downgrades so there is no guarantee the rest of September will be like the first half.

S&P-500 Chart

Unlike the S&P the Dow has not yet reached the August resistance highs at 10,700. The Dow spiked to 10,567 at Monday's open and closed at 10,604 on Friday. That means it spent all week fighting to gain another +37 points. That is not very awe-inspiring but the trend is still up. Slowly up but still up. One has to wonder what will happen if it actually makes it to 10,700 next week. Will it have the strength to power through or spend the next couple weeks chipping away at resistance 10-12 points a day?

Fortunately by the time the Dow gets to 10,700 the S&P, if it continues leading the Dow, will have broken through the 1133 resistance and be targeting much higher levels. The Dow would likely be drug across 10,700 rather than be leading the charge. The Nasdaq already broke through its corresponding resistance at 2300 so a confirmation move by the S&P next week makes the Dow's attack on 10,700 only a footnote. If the broader indexes can move past strong resistance then the Dow does not matter. It should follow obediently in due time. That just makes SPX 1133 even more important.

Dow Chart

The quadruple witching expiration plus the boost from Oracle's earnings and Texas Instrument's $7.5 billion buyback combined to push the Nasdaq over strong resistance at 2300. The $64 question is can the bulls hold it above 2300 when the opex excitement fades?

Thank you ORCL and TXN but now that is old news. What new event is going to maintain the forward momentum on Monday? There are no material tech earnings on Monday although Adobe reports on Tuesday. The economic report on Monday is the Housing Index and not likely to boost tech stocks. PC sales estimates are still being cut with FBR cutting Microsoft estimates and targets on Friday on falling PC sales. Personally I don't see what has been pushing techs higher since most of the tech news is negative.

How long can this continue? How much longer will the bad news bulls keep buying tech stocks in the face of guidance warnings and downgrades? This is the question that will be weighing on techs next week. I would love to see them retain their leadership role but unless some new tech company announces another multi billion dollar stock buy back or multiple acquisitions I believe we could be in trouble.

Fortunately a constant steady rise in the stock market is like the tune from the Pied Piper. Investors can't seem to resist a slow methodical rise in the markets. The look at the charts and their mind is clouded by the hypothetical projections of trend lines moving higher. That has an even greater pull on trader sentiment than an earnings beat by Oracle. When it comes on the backs of shorts forced to cover the gains are even sweeter.

I am not going to tell you the Nasdaq is going higher. I believe it will over the next couple months but not necessarily over the next week. If it does move higher next week I will be the head cheerleader. Personally I am in buy the dip mode instead of running with the bulls. Support is 2290 followed a long way off at 2230. If 2290 breaks I would immediately start thinking "October correction" and be looking for shorts rather than an entry point for longs.

Nasdaq Chart

The Russell 2000 gained +14 points for the week and it was all on Monday. The close on Monday was 651.89 and the close on Friday at 651.40. There were four dips in the Russell, three to 643, and all were bought but nobody chased the index higher.

This appears to me to be a lack of fund participation and a lack of confidence in the rally. Small caps were just along for the ride and not a favored asset class. That suggests fund managers are still stashing money in liquid large caps where they can exit quickly if the September's Dr Jekyll suddenly turns into Mr. Hyde.

The Russell broke through the 200 day average on Monday at 645 then used that level as support the rest of the week. The Russell is well below critical resistance at 670 and showing no leadership qualities. Until those qualities surface I remain cautious on the market rally.

I mentioned last week that Russell 650 was going to be a major test and that is exactly where it stopped last week.

Russell Chart

In summary, like a lot of traders I am skeptical of this rally and remain in "buy the dip" mode rather than chase the winners mode. Option expiration was a major factor in last week's "pin" on the numbers. (10,600, 1130, 650) The Nasdaq was pinned to 2300 until the ORCL/TXN news ruined the plans of the market makers.

The President's town hall on Monday, the FOMC on Tuesday and four housing reports should be a blanket of bad news that depresses investor sentiment. If we survive next week without a material dip I will be a stronger convert to the bullish case.

Jim Brown


New Plays

Fading Momentum

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. Friday provided no resolution to the sideways channel we have been trading in for the past week. My biggest concern with a breakout higher right now is that it will turn into a head fake because buyers are getting exhausted. The market is in dire need of a healthy correction and I remain in the camp that dips will be bought. If there is breakout to the upside this week prior to a pullback I think it is a good idea to consider closing long positions. The model portfolio has positions to take advantage of a correction and I have provided another short trade tonight that should work great with broader market weakness. We won't open positions until support is broken. In the end, the smart thing to do is to tread lightly and use small position size until we have a better handle on the broader market direction. Please email me with any questions/comments. Enjoy the rest of your weekend.


NEW BEARISH Plays

Temple-Inland - TIN - close 20.08 change +0.45 stop 19.80

Company Description:
Temple-Inland Inc. manufactures corrugated packaging and building products, which the Company considers as two separate operating segments. The Company's vertically integrated corrugated packaging operation includes seven mills and 63 converting facilities. Temple-Inland Inc. manufactures containerboard (linerboard and corrugating medium) and converts it into a line of corrugated packaging. It also manufactures light-weight gypsum facing paper and white-top linerboard at its mill in Newport, Indiana. The building products segment manufactures a range of building products, including lumber, gypsum wallboard, particleboard, medium-density fiberboard (MDF) and fiberboard.

Target(s): 18.60, 18.10
Key Support/Resistance Areas: 20.25, 18.00
Time Frame: 1 to 2 weeks

Why We Like It:
We are back with a short play in TIN after closing a nice winning trade several weeks ago. On 8/31 the stock broke to the upside on heavy volume and has rallied +30% ever since. Over the past two weeks TIN has been drifting higher in an ascending channel on light volume, which is sign this move higher is faltering and built on weak foundation. If TIN falls out of the channel I believe it could create a wave of selling as traders who bought the stock will run for the exits to lock in profits. The stock is also underneath its 100-day and 200-day SMA's. I suggest we initiate short positions if TIN trades to $19.30 which is below Thursday's low and the 50-day SMA. More nimble traders may want to consider a short position at current levels but it is a riskier situation. If triggered, our two targets are -4.5% and -6.5% lower.

Suggested Position: Short TIN stock if it trades to $19.30

Annotated chart:

Entry on September xx
Earnings: 10/19/2010 (unconfirmed)
Average Daily Volume: 2.3 million
Listed on September 18, 2010


In Play Updates and Reviews

Still No Resolution

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


BULLISH Play Updates

Brocade Communications - BRCD - close 5.68 change -0.04 stop 5.34

Target(s): 5.95, 6.20, 6.50
Key Support/Resistance Areas: 6.60, 6.20, 6.00, 5.75, 5.40, 5.00
Current Gain/Loss: -1.22%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/18: I am concerned about BRCD per my 9/15 comments. However, the stock has held its ground and remains in a bull flag. It could just as easily break higher or lower. If a breakout occurs before a pullback I suggest readers begin to look for an exit or tighten stops to protect profits. $5.95 and $6.20 are the primary targets.

9/15: Oh what a day makes. At an analyst day this afternoon BRCD said they were expecting gross margins to be at the low end of their estimated range in 2011. This news sent the stock tumbling. As such, I want to tighten the stop $5.34 and suggest we step aside if it is hit. I've lowered the first target to $5.95 which is just below today's high.

9/14: BRCD pulled a repeat of yesterday and printed its third consecutive bottoming tail candlestick. The stock remains in a bull flag but could pullback with the broader market. I think pullbacks can be bought and will be short lived.

Current Position: Long BRCD stock, entry was at $5.75

Options Traders: Long October $6 CALL

Annotated chart:

Entry on September 10, 2010
Earnings 11/23/10 (unconfirmed)
Average Daily Volume: 12.7 million
Listed on September 4, 2010


Noble Corp - NE - close 35.08 change +0.59 stop 32.25

Target(s): 35.90, 36.80, 38.30
Key Support/Resistance Areas: 36.95, 38.50, 33.50
Current Gain/Loss: +1.39%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/18: NE made a nice recovery today closing +1.7% on the day. The stock remains in a bull flag on its daily chart. If we break higher prior to a pullback I suggest readers look for an exit or tighten stops to lock in profits. I've added $35.90 as a target which is approximately +4% from our entry, while $36.80 is +6%. I'll be looking to take profits or tighten stops as these levels approach. 9/15: NE traded down to $34.36 and bounced hard into the close. Our first target is just under the 200-day SMA and near the 8/4 highs. Our stop is below the converging 20, 50, and 100 day moving averages. My comments from the play release remain the same.

9/13 & 9/14: We are waiting to be triggered at $34.60, which is about -2% lower from current levels. My comments from the play release below have not changed.

9/11: Fundamentally NE is a cheap stock that trades at a PE under 7. Technically, the stock broke out of a downtrend line that began on 4/27. Volume has been picking up as the stock is moving higher and it is also consolidating near its highs on lighter volume, which is a bullish sign. I suggest we use a trigger of $34.60 to open long positions. Our two targets are +6.5% and +10.5% higher. Our initial stop will be $32.25 which is below the rising 20-day and 50-day SMA's.

Current Position: Long NE stock, entry was at $34.60

Options Traders: Long October $36.00 CALL

Annotated chart:

Entry on September 15, 2010
Earnings 10/20/10 (unconfirmed)
Average Daily Volume: 3.7 million
Listed on September 11, 2010


Northern Oil & Gas - NOG - close 15.06 change -0.04 stop 14.25

Target(s): 15.68, 15.95, 16.50
Key Support/Resistance Areas: 17.25, 16.20, 15.75, 15.00, 14.60
Current Gain/Loss: +0.07%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/18: NOG bounced nicely off of its 50-day SMA on Thursday and remains above support. The stock is forming bull flag on its daily chart and we're looking for a breakout. If NOG heads higher before going lower be prepared to take profits as our targets approach. I'm concerned we may see a spike higher only to see it fail. I've added a target of $15.68 which is +4% higher than our entry. My comments from below remain valid.

9/14: We are long NOG at $15.05. There is solid support all the way down to $14.60 including an upward trend line, the 20 and 50-day moving averages and prior support/resistance levels. Pullbacks should get bought and I like new positions on any further dips. Our first target has been lowered 5 cents to $15.95 which is +6% higher than our entry. The play release is below.

9/8: Oil and oil stocks should do well on the slightest prospects of an economic recovery. NOG is a land based driller with major assets in the Bakken region in North Dakota, which is one of the largest discoveries of proven oil reserves ever found in the United States. NOG is forming a bull flag on its daily chart and looks poised to breakout. The stock is consolidating above all of its major moving averages which should also help to provide support on any pullbacks. I suggest readers use a trigger $15.05 to initiate long positions. Our two targets are +6% and +9% higher. Our stop is below all of the moving averages and the recent upward trend line.

Current Position: Long NOG stock, entry was at $15.05

Options Traders: Long October $15.00 CALL

Annotated chart:

Entry on September 14, 2010
Earnings 10/25/10 (unconfirmed)
Average Daily Volume: 506,000
Listed on September 8, 2010


iPath S&P 500 VIX ST Futures - VXX - close 17.16 change -0.22 stop 16.60

Target(s): 18.45, 19.50, 20.40
Key Support/Resistance Areas: 17.50, 18.50, 19.75, 20.60
Current Gain/Loss: -3.05%
Time Frame: 1 week
New Positions: Yes

Comments:
NOTE: I view this as an aggressive trade so small position size is recommended. Long VXX is a bearish play on equities, however, it is listed as long play because we are long the underlying instrument.

9/18: My guess is that a breakout prior to a pullback will most likely stop us out in VXX. But I like volatility here as the market is in much need of a healthy pullback. A pullback will likely be fast and furious and VXX should spike 5% to 10% which will give us an opportunity to close this position for a profit. I've added a target of $18.50. Be ready to take profits or tighten stops to protect them as our targets approach. My comments from below have not changed.

9/15: VXX opened higher today but struggled to hold on to its gains as the market recovered from early losses. Tomorrow's jobless claims is likely to set the tone for the broader market for the remainder of the week. If there is a sell-off I can easily see VXX surging 5% to 10% higher. Otherwise, it will inch closer to our stop and we may need to exhibit some patience.

9/13: The market is overbought and needs a healthy pullback to regain its energy. Traders are getting complacent and I believe there will be a spike in volatility in the coming days. VXX printed a new 52-week low today which barely undercut its 4/21 low which was just before the S&P 500 began to sell-off in earnest. This creates a potential double bottom set-up and I suggest readers initiate long positions at current levels. I also view this as a good hedge against our open long positions in the model portfolio. Our profit targets are +11% and +16% from current levels.

Current Position: Long VXX stock, entry was at 17.70

Options Traders: Long October $19.00 CALL

Annotated chart:

Entry on September 14, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 21 million
Listed on September 13, 2010


BEARISH Play Updates

Freeport-McMoRan - FCX - close 81.72 change +0.01 stop 84.55

Target(s): 79.40, 78.00, 76.80
Key Support/Resistance Areas: 84.25, 76.50, 75.00
Current Gain/Loss: -0.95%
Time Frame: 1 week
New Positions: Yes

Comments:
9/18: FCX looks toppy and ready for pullback, but then again most things do right now. We are looking for a retracement of some of the recent gains which could come quick and hit our targets. Be ready to close positions if it occurs.

9/15: FCX looked vulnerable this morning but recovered with the remainder of the market. We are short the stock at $80.95 and are looking for a move down towards the August highs. My comments from the play release below have not changed.

9/14: FCX has gained nearly +20% since its low on 8/25 less than 3 weeks ago. The stock has surged higher, virtually in a straight line with little to no pause. FCX has rallied right into its primary downtrend line from its January highs and also closed at a prior resistance level from mid-March. This type of move is not sustainable and I suggest readers open short positions at current levels and play for a retracement of the stock's recent gains. Our primary target is $76.80 which is about -5.5% lower than current levels, and also just above a 38.2% retracement from the 8/25 lows to today's highs. For options traders, if this target is reached it should produce a gain of approximately +60% to +65%. This could be a quick trade and a good strategy would be to immediately place a "good til cancelled" or "one cancels the other" order immediately after the position is entered and be ready to take profits or get out should our stop get hit.

Current Position: Short FCX stock, entry was at $80.95

Options Traders: Long October $75.00 PUT

Annotated chart:

Entry on September 15, 2008
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on September 14, 2010


Intuit, Inc. - INTU - close 44.88 change +0.01 stop 45.52

Target(s): 42.90, 42.20, 41.40
Key Support/Resistance Areas: 45.00, 43.25, 42.00, 41.35, 50-day SMA
Current Gain/Loss: -3.58%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

Comments:
9/18: We could be in trouble in this play as the stock broke its intraday downtrend line on Thursday and is consolidating near its all-time highs. A double top scenario is still in play but broader market strength will most likely cause our stop to get hit. I like new positions here with tight stops, i.e. you are either right or right out of the trade with little at risk. I've adjusted the targets and the stop up a few cents. If INTU falls be ready to close positions or tighten stops as I think dips will get bought.

9/11: We got a little unlucky with the gap lower in INTU on Friday but it was expected on the heels of a downgrade. Nonetheless, I'm looking for the stock to continue lower. The broader market will most likely determine how far this goes. Our first two targets are -3% and -4.5% lower from here. The play write-up is below.

9/9: UBS cut its rating on INTU from neutral to buy this afternoon, which is when the selling in the stock began in earnest. In addition, price targets from other analysts are in the $45 range which INTU printed on Tuesday. The stock also printed all-time highs on Tuesday but is showing signs of an imminent decline, especially if the broader market pulls back. Tuesday's candlestick is a reversal pattern and it was confirmed today with a bearish engulfing candlestick. I suggest readers initiate short positions at current levels and play for a pullback to our targets which are near three support/resistance levels. Our stop will be just over Tuesday's high. Our targets are -4.5% to -8% below current levels. I also think this is a good play to consider options which creates defined risk. For example, buying 4 contracts of the October $42.50 strike for 90 cents (mid point of the current bid/ask spread) will cost you $360.00. Should INTU stock move -$1.50 lower over the next 1 to 2 weeks those options should be worth about $1.40. This would represent a +55% gain (or a $200 return on your $360 at risk). I bring this up due to all of the M&A activity and I would rather see readers protect against a large gap if INTU happens to be a takeover target, although I haven't heard anything to substantiate this. Simply put, the stock looks ready for a pullback. Please email me with any questions.

Current Position: Short INTU stock, entry was at $43.33

Option Traders: Long October $42.50 PUTS

Annotated chart:

Entry on September, 10, 2010
Earnings: 11/18/2010 (unconfirmed)
Average Daily Volume: 4 million
Listed on September 9, 2010