Option Investor
Newsletter

Daily Newsletter, Thursday, 10/21/2010

Table of Contents

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

Market Wrap

The Market Is Struggling but It's Still Holding On

by Keene Little

Click here to email Keene Little
Market Stats

The numbers above show that the market is holding on even if not in a stellar fashion. Money continues to run a little stronger into the big cap and blue chip names while many of the smaller stocks are not fairing as well. The RUT was the only index of the four to close in the red today. So the bulls are keeping the bears at bay as they make their way into the end of the month/fiscal year and into the elections. Without a display of greater interest in the upside though there is the danger the market could let go suddenly and without warning. It continues to be a time to exercise caution about the upside even if the bears have been thwarted with every selloff attempt.

The day started out on the quiet side with futures slightly green (they had given up a chunk of the overnight rally in the futures) and the morning economic reports did not surprise. And then without anything negative to worry about the bulls came charging in and drove the market higher. At its high the DOW was up a little more than 100 points. But then the bulls took a lunch break and the bears charged in and took away the rally. The DOW dropped into the red by about 40 points before the bulls had had enough and took the ball away from the bulls and drove it back up into the green by almost 40 points.

The day was a nice little seesaw day for traders able to catch the swings and ended as a doji day. As we'll review in the charts, both sides came away neither as winners or losers. In reality the day looked like another distribution day as rallies appear to be getting sold into as inventory is distributed from professional money managers to the masses who now believe in the rally continuing.

In an effort to give the bulls a fair shake and to try to stop being so one-sided bearish, I've been struggling to come up with some bullish things to say about the stock market. My mother always taught me not to say anything if I don't have something nice to say. So with that I'll wish you all a good week and we'll see if I have something nice to say about the bulls next week. :-)

Actually that's not quite true; the bulls are an optimistic lot and I like optimistic people. One thing about a bear market, and all the social upheaval surrounding it, is that I don't like it. Constantly reviewing and looking at bad news and reasons why the stock market rally will not continue is downright depressing. I remember reading that one of the reasons Bill Fleckenstein closed his bear fund last year was because his wife was tired of hearing him constantly talk about why the market was due for a large decline. I figure we've got a few more years of this bear market to finish and I can't wait for us to get back into a period where I'll be looking for all the reasons why the market will rally. It will fit my personality a whole lot better.

So bless their little hearts, the bulls have looked the bears square in the eyes and caused the bears to blink first. I have to admire them for their bravery in the face of adversity. Some may say the bulls are being Pollyannaish with a misplaced trust in the Fed. But who's to argue with their success since August? The stock market is long-term bullish and most investment gurus will tell you to stay invested for the long term. Over the past 10+ years that has looked a little foolish and the bear market will have many questioning practices of the past. But the bulls have more experience in being right, which brings to mind the quote "Never argue with a fool -- they will drag you down to their level and then beat you with experience."

When we get the next leg down, which I have no doubt will come, it will be the bulls declaring the bears are dragging the bulls down to their level. It will be a valid complaint. But back to the issue at hand -- how do I say bullish things about the market when I don't see any? I may see small pockets of bullishness here and there but the overwhelming problem, as I currently see it, is that we have some fairly significant issues to resolve, most of which were created during the last bull market cycle. The reason we have cycles is because one usually corrects the other. We had an unusually large credit bubble (thanks to a lot of financial engineering and greed on everyone's part) and the excesses produced from that, e.g., the home building/mortgage industry, are being corrected. It's really a natural cycle even if it is painful.

I reread an article that I had saved from back in April as the market was peaking. The title of the article was "Why Business Leaders Remain Gloomy" by Rick Newman and published in the U.S. News. What caught my attention is how little has changed in the six months since it was written and here we are testing those April highs. As I said before, I have to admire the bulls for their tenacity. I'll briefly outline the points made by Newman:

1. Job growth is anemic. "There's a good chance it could take longer for jobs to return than after any other recession since the 1930s."
2. Consumers are tapped out. "'Consumers are shell-shocked,' adds John Engler, CEO of the National Association of Manufacturers. 'They're not going to lead us back.'"
3. Housing is likely to stay depressed. "...foreclosures are still near record levels and it could be years before housing generates significant numbers of new jobs. After past recessions, a strong housing market has typically been the catalyst that got the economy growing again. Not this time."
4. Small business is reeling. "Small businesses provide about 65 percent of the new jobs in America. But they're suffocating from lack of credit and closing at record rates. Healthcare reform and other new regulations from Washington are further spooking small businesses and making them reluctant to hire."
5. Banks are still in trouble. "Despite record profits at a few big firms, banking analyst Whitney believes many banks still have major amounts of bad loans they haven't accounted for yet. Americans don't sympathize with banks losing money, but as long as banks are struggling, they'll withhold the credit that's vital to economic growth."
6. Unemployment could become self-perpetuating. "If high unemployment persists, it could further threaten fragile parts of the economy, since people out of work tend to default on loans and mortgages and run out of money to spend."
7. Commercial real estate is still tumbling. "'When rates go up we'll see significant losses taken,' says David Simon, CEO of Simon Property Group, which owns more than 300 malls and other properties. Those losses won't hit consumers directly, but they'll hit banks--which is one big reason they're sitting on money instead of lending it."
8. The economy is too dependent on the government. "'The government can't fix it all,' says Patrik Edsparr, a top executive at Citadel Investment Group. The question is can you phase it out without wrecking the whole house of cards."
9. Washington is dysfunctional. "Business leaders in general are appalled by the profligate spending of the federal government, which many believe is becoming a full-blown national crisis--while Republicans and Democrats dicker over blame."
10. No part of the economy is hot. "Usually after a recession, there's rapid growth in one or two key sectors of the economy, which helps drag all the others out of the dumps. But this time, housing is moribund, growth in consumer spending seems unsustainable, and credit, the lifeblood of capitalism, remains scarce."

Would you agree this is as accurate today as it was back in April? And now we have bullish sentiment that is higher than it was in April. Traders are so convinced the market is headed to new highs that they've all bought in. As Newman mentions in his article, these down cycles are healthy and we do more damage to ourselves and our businesses by not allowing the excesses to be corrected. There is great confidence in the ability of the government to fix things. Any it would appears most market participants have great confidence in the Fed to fix what ails us.

The cycles are good things and it's been our collective unwillingness (particularly by the government) to accept the downside of a cycle. The downside of a cycle is needed to remove bad companies and management teams, streamline inventories (just-in-time inventory systems came out of the previous down cycle) and most importantly, to clear out bad debts and deflate the inflated credit bubble. Current "leadership" (and it's not just this one) has been completely unwilling to let anything fail. A politician's job is dependent on fighting the downturn, usually by throwing our money at it.

The market has been looking to business leaders to help pull us out of the economic malaise in which we find ourselves. The market cheers when the likes of Warren Buffet talk about how bullish they are about our economy. But not all business leaders apparently hold Buffet's bullish enthusiasm.

Business leaders, as insiders, are far outselling buyers of their own stock. Business leaders are not seeing enough improvement in their businesses, contrary to what Warren Buffet believes, to support their current stock prices. These are the people who know the value of their businesses best and they're getting out while the getting is good. In August the ratio of sellers to buyers was about 31:1 ($6.3B in sales vs. $210M in purchases), which is a very high ratio. Since the beginning of October I've seen reports of 1169:1 and most recently an unheard of 2018:1.

Now I agree that a lot of this selling is by those who are front running the tax-rate increase next year (assuming the Bush tax cuts are left to expire) but this is an outrageous amount of selling vs. buying by the insiders. Meanwhile CNBC and other stock-pumping entertainers on TV continue to talk about what a great buying opportunity it is right now. Bite me. Oops, sorry, I'm supposed to say nice things or nothing at all. Maria, you sound good when you're signing off.

OK, let's take a look at the charts where I'll be sure to point out some bullish possibilities (wink). Starting with the SPX weekly chart below, the rally from August has SPX getting a lot closer to potential resistance at its 200-week moving average, which stopped the rally back in April (it missed tagging it by 4 points). The 200-wma is currently at 1195.53, another 6 points above today's high. But hey, bullishly, SPX has climbed above its downtrend line from October 2007 through the April high. This is an untested trend line (needs a 3rd point to confirm it) but it does look bullish, no? If reached we'll have to see how it does near the 200-wma which is very likely a more important level.

S&P 500, SPX, Weekly chart

The daily SPX chart below shows another reason why the 1195-1196 area could be important. The 78.6% and 88.6% retracement levels are often associated with double-top/bottom patterns. The 78.6%, near 1175, is where price has been cycling around for the past week or so. If SPX can press up to the 1196 area it will be important to see how well it can stay up. In the meantime we see SPX testing its broken uptrend line from August (it broke on Tuesday), both yesterday and today, and as depicted we could see it hug that broken uptrend line into next week. A drop back below Tuesday's low near 1159 would signal we've probably seen the high for the rally.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1183
- bearish below 1159

The 60-min chart shows the uptrend line from August and how price has been cycling around since breaking on Tuesday. The price pattern is starting to make me think we're going to see a small rising wedge pattern to end the rally. This is just a guess right now but it fits with the expectation that the market will hold up into next week and finish around 1195-1196. This idea is just a guess right now but watch for choppy price action over the next few days as the market holds up -- it would be a good signal that the rally is coming to an end.

S&P 500, SPX, 60-min chart

Another reason we could see the market hold up into next week has to do with an analogy between the top in April and the one potentially forming now. Thanks to Walter who sent me the chart below, it shows the similarities of the move up from February-April and August-October. The sharp spike down on Tuesday matches the one on April 16th. The market then made a new high near 1220, 6 points higher than the April 15th high. It took 7 trading days to do it. If we add 6 points to the October 18th high at 1185.53 we get 1191.53. Adding 7 trading days to the 18th gives us Wednesday, October 27th. So between this analog pointing to 1192-ish and the 1195-1196 level on the weekly and daily charts I think it gives us a good upside target, especially if price chops its way higher into mid week next week without making much headway to the upside. That should increase your confidence level to start looking for some short entries.

SPX comparison between the April high and the current high

The DOW also dropped out of its rising wedge pattern on Tuesday and has been clawing to get back up inside the wedge since. It closed at its uptrend line from August both days and it may continue to do so if the market can push marginally higher into next week. It could result in a test of the April high near 11258. It came within 45 points of that high this morning.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11,150
- bearish below 10,917

Looking at the Nasdaq Composite this week I wanted to point out another index that is struggling with the 88.6% retracement of the April-July decline, which for the Naz is near 2481. Today's high was 2482. It's also struggling underneath its downtrend line from October 2007. Bullishly it's holding above its uptrend line from August (it broke it briefly today) and I see the potential to rally up to the 2500 area if the market holds on into next week. As with the other indexes, a drop below Tuesday's low near 2422 would be a sell signal.

Nasdaq Composite, COMPQ, Daily chart

Key Levels for COMPQ:
- cautiously bullish above 2500
- bearish below 2422

As a side note, and noted on the above chart, there was much fanfare by the bears back in July (including by me) when the 50-dma crossed through the 200-dma to the downside. It was the "Death Cross" and meant to harbor many bad things for the stock market. That didn't exactly work out to plan for the bears. Now we've got a "Golden Cross" about to occur as the 50-dma crosses up through the 200-dma. Instead of being a bullish omen I can't help but wonder if the other side is about to get tortured with this signal.

While the COMPQ has been struggling below the April high and at its downtrend line from October 2007 the NDX has climbed above both. So the bullish thing to say here (see, I'm trying) is that the generals are not afraid and they're out there leading the charge up the hill. But I can't help myself -- the bearish thing is that the troops aren't following. Everyone knows the generals can't fight anymore -- they're too old and have put on too much weight. When they turn around and see the troops lagging behind they're going to get very nervous and come running back down to see what the problem is. When the troops see the generals running back down the hill towards them they're going to scatter, screaming like little girls.

In actuality, what's happening is money is running into the big-cap tech stocks and this is typically a defensive move. It's much safer to park your money in the big caps in the event of a selloff since it's much easier to sell the big caps without damaging price too much. Try selling a couple million shares of a smaller stock without affecting its price whereas the same order for a CSCO doesn't even cause a burp.

So we've seen a relatively stronger rally in the NDX and it continues to easily hold its uptrend line from August. But it's been struggling with another potentially important Fib level -- the 113% extension of the previous move (the April-July decline), which is typically associated with a momentum reversal (head-fake break with a throw-over finish) in a double-top/bottom pattern. If the 78.6%-88.6% retracement level doesn't hold it's very common to see a move to the 113%-127% extension level. The 113% extension is shown on the NDX chart at 2106.14. Today's high was 2106.24. If that doesn't hold the bulls back, I see the potential for a move to the top of its rising wedge pattern, currently near 2128 and climbing to 2145 by next Wednesday.

Nasda-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2106
- bearish below 2054

I mentioned above the 78.6% and 88.6% retracement levels often associated with a double top/bottom. The RUT tagged its 78.6% retracement last week and hasn't been able to make any further progress. It has been the weak sister for the past week and like the DOW and SPX has broken its uptrend line from August. It tried to climb back up above the trend line but got slapped back down and wasn't able to close at the trend line as the DOW and SPX did. Weakness in the small caps is not a good sign for the bulls. It is a good sign if you're looking for a top. But if the market holds up into next week we could see a retest of the 712 area or slightly higher.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 712
- bearish below 690

The VXX is the S&P 500 volatility index (VIX) short-term futures ETF, which has options. As you can see on its daily chart below, it's getting really pinched in its descending wedge from July. The requisite wave count (5-wave move within the wedge) can be considered complete here and if the descending wedge is the correct interpretation we'll see it come rocketing out of it. A strong rally in the VXX would obviously mean bearish things for the stock market. Wait for the break above 15.16 to confirm the move. It's got some nice potential for a call option play. See there, a bullish recommendation!

Volatility index short-term futures, VXX, Daily chart

If you'd like to see even greater upside potential, check out the weekly chart of VXX below. The bullish divergence says the downside momentum is clearly waning, especially between the April low and the current low. This looks lip-smacking good for a longer-term call option play. With option premium so low right now you can go way out and not cost an arm and a leg. And when volatility premium gets jacked up you'll get that added bonus. But wait for the confirmation of the break to the upside. You'll have plenty of upside potential to play.

Volatility index short-term futures, VXX, Weekly chart

There has been a real separation this week between the two banking indexes I watch, the KBW Bank index (BKX) and the S&P Bank index (BIX). The BKX significantly underperformed the BIX in this week's bounce so I'll show the BIX since it's stronger and I'm trying to see the bullish side of things (give me a break, I'm really trying here, wink). Oh, my bad, I can't say too much that's bullish about the BIX either; at least not yet.

The bounce off last Friday's low has brought the BIX up to its downtrend line from April but this is an untested trend line (only two points) and therefore may be of no consequence, although today it had traders selling there. The key level for the bulls is to recapture the high on October 7th at 131.43 as that would open up the door to the 137.35 level (for two equal legs up from August) or slightly higher to the downtrend line from May 2007 (using the log price scale). A rally in the banks would be bullish for the broader market, period. But a turn back down from here would look bearish and a break below the key level to the downside at 120.44 would indicate the next leg down of the bear market is underway.

Banking index, BIX, Daily chart

The TRAN has been struggling with the top of its rising wedge pattern from August. At the same time it's trying to break out of its parallel up-channel from July. If the broader market holds up we could see the TRAN attack the 4800 level. A break below 4618 would signal the next leg down is in progress.

Transportation Index, TRAN, Daily chart

The U.S. dollar's bounce off last week's low is the strongest bounce since the high in June. It looks like the kickoff to the next rally leg which should take the dollar well above the June high. I don't like the price pattern of the bounce so far since it looks corrective (3-wave move up and then big pullback this week) but I've learned over the years that the 1st wave in a new trend often leaves much to be desired, especially in the age of market manipulation by big players and there are certainly some very big players (governments and their central banks) playing in the currency markets right now as they battle each other to see who can get their currency down into the basement the fastest.

If the dollar is not finished putting in a bottom yet we could see a drop down the 75-76 area, accompanied by lots of bullish divergence, and then the start of the next rally. A drop below 77 would suggest this short-term bearish scenario. But a continuation higher and a move above Tuesday night's high of 78.61 would be a strong signal that the bigger rally is underway. But the dollar bears (all 97% of them) are not in trouble until the dollar can break out of its down-channel from June, currently near 80.70. If we see a choppy sideways/up bounce over the next few weeks that stays inside the down-channel I will become less bullish the dollar and instead start looking for another leg down that takes us to new lows (below the November 2009 low at 74.27).

U.S. Dollar contract, DX, Daily chart

Today on the Market Monitor Jane had posted some news about a new ETF that will start trading tomorrow -- Glitter (GLTR). This ETF will include the shiny metals -- gold, silver, platinum and palladium. A reader (thanks Scott) reminded me that this fits well as a signal the top is very likely in for the metals. When a trend is well established we see things like this. Usually front covers on business and general-interest magazines will show well-established trends, often at the end of the trend. The government is usually the last to recognize a trend because it takes a response from all the people to get government to move. When you hear about a government program to fix a problem they're usually too late. So when Scott also noted that many of the central banks in Europe are ending their gold sales, which many had started when gold was much lower, it could be another sign of a top in the precious metals. If these banks start buying it's usually a good signal we've definitely reached the top.

Using a chart I'm also getting the impression that gold has topped out. It appears to have finished a little shy of the 1402 upside target I've been watching but once it started breaking its steeper uptrend lines since July (the sign of a break of the parabolic move up, which warned of a blow-off top in the making) we've got a sell signal. You will often see 4 steepening trend lines and when the 4th one is broken it's your first clue the move is over. The decline to today's low has now broken the two steepest uptrend lines and found support at the 2nd uptrend line, which is the one off the July low through the August low. The move down from the high also looks like a 5-wave move which is impulsive and tells us the trend has changed to the downside. A 5-wave move down should get a bounce to correct it and then that will be followed by another leg down. After the 2nd leg down we'll have an opportunity to evaluate it for the potential to then turn around and continue higher. But for now it looks like we'll have a multi-week correction at a minimum of the rally.

Gold continuous contract, GC, Daily chart

While gold found support at its uptrend line from July, the gold miners were not quite as fortunate, closing just below that trend line today, as well as its 50-dma. But if they bounce back up tomorrow we should see a correction of the leg down from last week before continuing lower into November.

Gold Miners, GDX, Daily chart

Following up on silver's weekly chart that I showed last week, it has now given us a sell signal. After stopping at the 127% extension of the previous decline (in 2008) it has now dropped back inside its parallel up-channel from late 2008. This is typically a very good signal that the top has been made with a throw-over finish above the top of the up-channel (for a head-fake break). Silver will likely retrace the leg up from August very quickly.

Silver continuous contract, SI, Weekly chart

It seems every day oil makes the opposite move to the day before. Talk about whipsaw -- oil traders are have a wild time and the moves are big. The choppy pattern has had me thinking we'll get at least a retest of the high near 84.50 but a drop below Tuesday's low at 79.39 would suggest the top is already in place.

Oil continuous contract, CL, Daily chart

There are no major economic reports on Friday. This morning's reports were not market moving, especially as they all came in line with expectations. The only weak number was the Philly Fed number, coming in at 1.0 vs. the expected 1.4 but it came in stronger than September's.

Economic reports, summary and Key Trading Levels

Summarizing where I think we are, the bulls haven't done too much wrong yet although I think Tuesday's decline was the first chink in their armor. The bears are going to keep hitting there and try to break the armor open and land some serious blows. Wednesday's recovery was a statement to the bears -- back off or else. Today's loss of the rally showed another weakness in the bulls right now. The recovery once again was a statement to the bears to back away.

This back and forth price action, especially with the break of support, is usually a good sign of topping action as big money distributes inventory to the masses. I see the potential for the market to hold up and drive marginally higher into mid week next week. Once the end of the month/fiscal year had been made (Wednesday is within the 3-day settlement window) and we're close enough to the elections for government work we could find much less of an interest in holding the market up. As mentioned above, a choppy move higher into next week would be the signal to get ready for a strong reversal back down.

Don't jump the gun on getting short. We've seen how relentless the market can be so wait for the key levels to the downside to break before adding to any short positions, and then manage carefully. It's a day-traders market right now with all the choppy price action. Swing and position traders can't trust either side right now so the sidelines is a good place to be (remember, flat is a position). If you're long the market be careful and drag your stops up higher. Keep in mind that any disconnect to the downside could have the market jumping over your stops. I recommend market orders for ALL stop orders. A bad fill is better than no fill.

Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1183
- bearish below 1159

Key Levels for DOW:
- cautiously bullish above 11,150
- bearish below 10,917

Key Levels for COMPQ:
- cautiously bullish above 2500
- bearish below 2422

Key Levels for NDX:
- cautiously bullish above 2106
- bearish below 2054

Key Levels for RUT:
- cautiously bullish above 712
- bearish below 690

Keene H. Little, CMT


New Plays

Watch The Dollar

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. We are in the midst of whipsaws and despite a few recent winners, our positions have struggled lately. Particularly since last Monday (10/11) as the market has essentially paused, with the SPX trading in a 25 point range between 1,160 and 1,185. It appears this may be the theme through the elections during the first week of November. I encourage readers to pick close targets and tight stops and stick with them. Hitting singles in this environment is paramount to success and cash is also a position.

One important area to keep an eye on is the US Dollar. It appears we are due for a bounce from the recent sell-off. Commodities and commodity stocks have not traded well in recent days and if the dollar strength continues we may be in for a more meaningful correction, which in my opinion would be a healthy and necessary step for this rally to continue.

I am going to hold off on releasing new plays tonight but have provided the below trading idea. We'll have more plays for you this weekend.

Long SFD (Smithfield Foods) - A stronger dollar should lead to lower commodity prices and will help stocks like SFD. Technically, the stock is consolidating above its 20-day and 50-day SMA in a bull flag. If the stock breaks out target a move up towards the $17.50 to $18.25 area, which is +6% to +10% higher than current levels.



In Play Updates and Reviews

Lots of Movement

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


BULLISH Play Updates

Boyd Gaming - BYD - close 7.69 change -0.05 stop 7.28

Target(s): 8.65, 8.95, 9.20
Key Support/Resistance Areas: 9.60, 9.25, 8.75, 8.00, 7.40
Current Gain/Loss: -6.22%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/20 & 10/21: BYD is finding support at its 20-day SMA and key long support/resistance level in the $7.40 to $7.60 area. This is a logical place to for the stock to make a higher low and head back to at least retest its recent highs. If it does this we can book a decent in the +5% range. I've added a lower target to reflect this strategy. Launching new bullish positions at these levels with tight stop below makes sense a lot of sense to me.

10/19: BYD looked promising this morning but completely lost it in the afternoon. I suggest we keep our stop in place for now and not panic out of the position. BYD is still above the 20-day and 50-day SMA's and has support near current levels.

10/18: I do not see many changes from James' comments below. BYD experienced a relief rally after the Thursday/Friday sell-off. Broken support near $8.00 was a key level that BYD will have to contend with on bounces. Readers may want to consider exiting positions early or tightening stops to the $7.45 area to protect capital, especially considering the overbought broader market conditions.

Current Position: Long BYD stock, entry was at $8.20

Entry on October 14, 2010
Earnings 10/27/10 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on October 9, 2010


Companhia Brasileira de Distribuicao - CBD - cls: 37.16 chg: -0.02 stop: 34.75

Target(s): 39.00
Key Support/Resistance Areas: 35.00, 36.50, 39.00
Current Gain/Loss: +1.16%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
10/21: CBD gapped lower today and traded in volatile $1 range. In the end, the stock managed to post a 2 cent gain. All of the comments below remain valid.

10/20: CBD has made a series of higher lows since the stock slit on Monday. Now we need the stock to follow through higher and a retest of its highs.

10/19: CBD traded right down to our trigger of $36.75 and bounced nicely. The comments below all remain valid.

10/18: We are waiting to be triggered at $36.75 which I expect to happen in the coming days. This is a prior long term resistance area which should now be support. The comments from the play release below remain the same.

10/16: Shares of Brazilian grocery food chain CBD appear to be in breakout mode. The Brazilian economy continues to grow and the surging middle class likes to spend. This has pushed CBD toward all-time highs. Now normally I wouldn't list a stock in the $70s as a PremierInvestor play. However, CBD will see a 2-for-1 split on Monday morning (Oct. 18th). The stock should open around $38.20. I am suggesting we look to buy CBD on a pull back. Broken resistance near $73.50 (post-split will be $36.75) should be new support. Thus, use a trigger at $36.75 to open bullish positions. We'll use a stop loss at $34.75 since the $70 level (post-split: $35) should be additional support.

If triggered our first target is $39.00 (pre-split $78.00). Our second, longer-term target is $42.00. The inverse (bullish version) head-and-shoulders pattern would suggest a bullish target of $88 (post-split would be $44). The Point & Figure chart is very bullish with a price target of $101.00 (post-split $50.50).

Current Position: Long CBD stock, entry was at $36.75

Entry on October 19, 2010
Earnings Date 11/10/10 (unconfirmed)
Average Daily Volume: 545,000
Listed on October 16th, 2010


Hansen Natural Corp. - HANS - close: 50.29 change: -0.05 stop: 44.95

Target(s): 50.00, 52.50,
Key Support/Resistance Areas: 45.00, 47.50, 50.00, etc.
Current Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below for details

Comments:
10/21: We are waiting for our trigger at $48.25. I like the set-up and suggest we remain patient. We could get a pullback in the coming days and using the dips as buying opportunities is the right strategy.

10/16: HANS is probably best known for their Monster brand energy drinks. The stock has been a monster in its own right and shares have been a popular momentum trade over the years. Well once again shares of HANS are surging higher. We'd like to hop on board but we don't want to chase it at these levels. I'm suggesting a trigger to buy the stock (or call options) at $48.25 since broken resistance at $48.00 should be new support. I'm suggesting a stop loss at $44.95 but we may want to raise the stop closer to the rising 50-dma (technical support) currently near 46.20.

If triggered at $48.25 our first target is $51.00. Our second target is $52.50. FYI: The point & figure chart is very bullish and is forecasting a long-term target of $78.

Suggested Position: BUY the stock at $48.25

- or -

BUY the November $50.00 calls (on a dip at $48.25).

Entry on October xx
Earnings Date 11/04/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010


Itron, Inc - ITRI - close 60.69 change +0.32 stop 57.45

Target(s): 63.00, 64.00, 65.00, 66.00
Key Support/Resistance Areas: 66.00, 64.00, 60.50, 59.00, 57.00
Current Gain/Loss: -0.18%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/21: The dip to $59.50 in ITRI was bought today but it still looks like it may be headed for its 50-day SMA near $59.00, which is also a key long term support level. This is a good place to launch new bullish positions.

10/20: I don't see many changes to my comments below. Look for a move back up to $63.00 which is when we will begin to tighten stops and look for a possible break out higher. ITRI may want to test its 50-day SMA which is near $59.00 so we may need to exhibit some patience.

10/19: The correction came a little faster than I anticipated but ITRI hit our trigger of $60.25 to enter long positions. I am a little concerned about the strength of today's sell-off and we may need to exhibit some patience in the coming days. Tighter stops could be considered at $58.45. When the selling subsides ITRI should move back to the $63.00 level with ease and I would target incremental $1 moves higher from there, possibly all the way up to $66.00. I would view any further dips as buying opportunities with tighter stops.

Current Position: Long ITRI stock, entry was at $60.25

Entry on October 19, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 412,000
Listed on October 4, 2010


Jeffries Group, Inc - JEF - close 24.15 change +0.32 stop 22.75

Target(s): 25.10, 25.75
Key Support/Resistance Areas: 25.85, 25.25, 24.25, 23.50, 23.00
Current Gain/Loss: +0.75%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/21: JEF gapped higher at open near our trigger to launch bullish positions so we are long the stock at $23.97. The stock surged higher but closed well off of its highs. I like the price action in JEF and expect further upside if the broader market cooperates. I would view dips as buying opportunities.

10/19: Investment Banks are beginning to trade well, especially those that have little risk exposure to mortgage backed securities like many of the money center banks. JEF should do well in this era of corporate advisory services and M&A activity. JEF could even be a takeover candidate themselves. I like JEF to trade higher as long as the stock breaks out above today's highs. Technically, The volume patterns look good and JEF has closed above short term resistance from the past couple of weeks at $23.50 for two consecutive days. I suggest we enter long positions if the stock trades to $23.91 which is above today's highs. Our stop will be $22.75 and our targets are near the September and August highs, which are +5% and +7.5% from our trigger.

Suggested Position: Long JEF stock if it trades to $23.91
Options Traders: Buy December $24.00 CALL, current ask $1.10

Entry on October xx
Earnings Date 1/20/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on October 19, 2010


Mylan Inc. - MYL - close: 19.17 change: +0.19 stop: 18.45

Target(s): 19.80, 20.45, 21.00, 22.00
Key Support/Resistance Areas: 18.50, 19.00, 20.00, 20.50
Current Gain/Loss: -0.42%
Time Frame: 4 to 6 weeks
New Positions: Neutral

Comments:
10/20 & 10/21: MYL is playing moving average ping pong, bouncing back and forth between the 200-day (above) and rising 20-day (below). The stock is hanging tough and looks bullish. Now we need follow through.

10/19: I could not find any follow-up news to my 10/18 comments. MYL is hanging tough and is holding onto its upward trend line that began on 8/31 and its 20-day SMA. I've adjusted the targets slightly.

10/18: MYL got hit hard today on news that a preliminary injunction against GlaxoSmithKline and Apotex pertaining to the generic drug Paxil CR was denied in US District Court of New Jersey. After the initial reaction the selling subsided and MYL bounced after the company said they are appealing the decision. Regardless of the outcome, this is a new development and readers should use caution, especially considering the overbought broader market conditions. Our stop is in the right place if MYL breaks lower as this will signal a break in trend.

10/16: (James) MYL is a short squeeze candidate. Bigger picture the generic drug makers are facing a potential boom for the next few years as more brand name drugs lose their patent protection. On a short-term basis MYL just broke out over heavy resistance at $19.00 and its 200-dma following news the FDA has approved to generic versions of Merck's Hyzaar and Cozaar blood pressure drugs. Now don't get too excited here since TEVA has already begun selling generic versions of these drugs months ago but it does mean MYL can try and grab its slice of the pie. Technically MYL is seeing a bullish breakout and could see a short squeeze. The most recent data available listed short interest at almost 29% of the 260 million-share float.

I do consider this an aggressive trade so keep your positions somewhat smaller. Buy the stock now (or the calls) and target a move to $20.00, $21 and beyond. FYI: The P&F chart is forecasting at $33 target.

Current Position: Long MYL stock, entry was at $19.25
Options Traders: Long November $20.00 calls

Entry on October 18, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010


PerkinElmer, Inc - PKI - close 23.25 change +0.15 stop 22.05

Target(s): 23.60, 24.25, 24.85
Key Support/Resistance Areas: 25.40, 24.40, 23.30, 22.50, 22.15
Current Gain/Loss: +0.65%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/21: PKI came with 6 cents of our first target. If the broader market holds up we should have no issues reaching our targets. Our stop is below the 200-day SMA and two support levels.

10/20: We are right back to where we started with PKI and are breakeven on the trade as the stock rebounded nicely today. My comments below remain valid.

10/19: Our +2% gain in PKI has turned into a loss with today's -3.4% decline. PKI has broken through its upward trend line from the July lows and its 20-day SMA, so now we have to turn to support levels. The stock has support at $22.50 and the rising 50-day and 200-day SMA's at $22.30 and $22.13. I suggest we protect the trade here and lower our stop $22.05 as PKI may be headed to test one of the SMA's just below. If support is not found at one of the three aforementioned levels the new stop still keeps losses relatively small while giving the trade room to work. Conservative traders may want to consider exiting positions now.

10/18: PKI regained all of Friday's losses and closed at new multi-month closing highs that haven't been seen since early May. However, the broader market is overbought so readers should use caution. Tighter stops in the $22.75 area could be considered to limit downside risk. James' comments below remain valid.

Current Position: Long PKI stock, entry was at $23.10

Entry on October 12, 2010
Earnings 11/4/10 (unconfirmed)
Average Daily Volume: 1.4 million
Listed on October 11, 2010


TJX Companies - TJX - close 44.86 change -0.10 stop 43.35

Target(s): 46.95, 48.20
Key Support/Resistance Areas: 48.50, 47.00, 45.40, 43.50
Current Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see entry point below

Comments :
10/21: $45.40 has acted like a brick wall in TJX since late September. If the stock breaks above the bullish high and tight ascending triangle it should move higher quickly. We are playing the breakout with a trigger of $45.52.

10/19: I suggest we play this conservative and keep the set-up in place with a breakout trigger of $45.52. A dip towards $43.75 would catch my eye as another possible bullish entry point.

10/18: TJX has been consolidating above its rising 20-day SMA for the past couple of weeks and is forming an ascending triangle along the way. Resistance is $45.40 and I suggest readers use a breakout to enter long positions. Let's use a trigger of $45.52 and target a move back towards the stock's 52-week highs. Our targets are $46.95 and $48.20 and our stop is $43.35. More nimble traders may want to try to time an entry on a pullback in the $44.50 area.

Suggested Position: Long TJX stock if it trades to $45.52

Entry on October xx
Earnings Date 11/16/10 (unconfirmed)
Average Daily Volume: 3 million
Listed on October 18, 2010


BEARISH Play Updates

Pulte Group, Inc - PHM - close 8.09 change -0.04 stop 9.05

Target(s): 7.20, 6.75
Key Support/Resistance Areas: 9.00, 8.00, 7.00, 6.50
Current Gain/Loss: +0.74
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/21: We are short PHM at $8.15. There was a surge at the open but the bounces keep getting smacked down. A break below $7.92 should send this lower in a hurry. My comments below remain the same.

10/20: We are adding a short candidate to the model portfolio to balance our positions a bit. I consider this a more aggressive play so please use small position size. PHM saw some unusual option activity on the put side across various strikes in the November, December and January months. In total, 24,000 contracts traded and 75% of them were bought on the ask. PHM is having problems with their debt and their costs to borrow are rising as their credit spreads widen. I suggest we initiate a small short position now and target a move towards the 2008 lows which are about -10% and -13% lower than current levels. Our initial stop will be above the recent highs. I have provided a weekly chart below.

Note: We will most likely experience some volatility in this trade so please use appropriate position size to manage risk. I also like an option play here so that your risk is better defined.

Suggested Position: Short PHM stock, entry was at $8.15 at current levels Option Traders: Long December $8.00 PUT

Entry on October 21, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16th, 2010


CLOSED BULLISH PLAYS

Thompson Creek Metals - TC - close 10.59 change +0.30 stop 10.45

Target(s): 11.10 (hit), 11.75 (hit), 12.40
Key Support/Resistance Areas: 12.60, 11.80, 11.00, 10.55
Final Gain/Loss: -6.28%
Time Frame: 1 to 3 weeks
New Positions: Closed

Comments:
10/21: We have had some opportunities to close TC but did not, and we got hurt today as the stock hit our stop at $10.45. A stronger dollar is hurting the commodity space and it best to step aside. We are flat the positions for a disappointing loss.

10/20: TC recovered nicely but the stock still has a lot of work to do to regain the losses from Tuesday. Unfortunately we do not have a good reference to raise the stop just yet. Let's see how much more we can get out of the position and keep looking for areas to move up the stop. All of the targets above remain valid.

10/18: TC drifted sideways in a fairly tight range on Monday. The stock closed near its highs and continues to look bullish, however, be aware of some possible profit taking in the coming days which I would use an opportunity to launch new positions. If TC breaks above last week's highs there is little resistance until the $12.50 area which is just above our final target. Tighter stops could be considered in the $10.80 area to limit downside risk.

10/16 (James): There is no change from my Thursday comments on TC. The stock saw a little volatility on Friday morning but consolidated sideways into the weekend. A pull back toward the $11.15-11.00 zone should be a new bullish entry point.

10/13: TC hit our first target at $11.75.

Closed Position: Long TC stock, entry was at 11.15

Annotated chart:

Entry on October 12, 2010
Earnings 10/4/2010 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on October 9, 2010



CLOSED BEARISH PLAYS

FLIR Systems - FLIR - close 27.04 change +1.82 stop 27.05

Target(s): 24.40, 23.70, 21.60
Key Support/Resistance Areas: 28.00, 27.00, 26.50, 25.50, 24.00
Final Gain/Loss: -4.80%
Time Frame: 4 to 6 weeks
New Positions: Closed

Comments:
10/21: FLIR reported earnings today and raised their guidance. The stock surged higher and our stop was hit. Per the weekend updates we should have adjusted our stops lower towards $26.00. In any event, we let a winner turn into a loser. FLIR has now turned bullish and I would consider long positions on a dip towards $26.00.

10/20: FLIR has a ton of overhead resistance to deal with on any bounces and continues to look bearish. Be ready to take profits or tighten stops to protect them if the stock breaks lower.

10/19: FLIR continues to look vulnerable and if the correction continues our first two targets could be hit relatively quick. I suggest being ready to take profits or tighten stops to protect them as they approach. I've made some adjustments to the targets.

10/18: FLIR has rallied right into resistance (prior support from February) which also happens to be its 20-day SMA. FLIR also has a downtrend line and its declining 50-day SMA just overhead in the $25.25 area. I like new positions here and suggest playing for a pullback of $1.50 to $2.50.

Closed Position: Short FLIR stock at $27.05, entry was at $25.81

Annotated chart:

Entry on October 15, 2010
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on October 2nd, 2010


Xilinx, Inc. - XLNX - close 26.33 change -0.00 stop 27.42

Target(s): 25.35 (hit), 25.00 (hit), 24.60
Key Support/Resistance Areas: 26.75, 26.00, 25.30, 25.00, 24.00
Final Gain/Loss: +3.10%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
10/21: Our target at $25.00 was hit and we are flat for a small +3.1% gain. I believe the trade still has downside potential per my comments below but I would caution readers to expect volatility.

10/20: We got what we were looking for in XLNX's earnings report. The company's earnings merely met estimates but revenues missed slightly. More importantly, the company guided sales "flat to down 4%" q/q, which implies revenues of $595M to $620M compared to estimates of $623M. This is not what I would want to hear as a shareholder. On 10/1 Goldman Sachs downgraded this stock and slapped a price target of $22 on it, yet the stock has held its ground, probably because the broader market has also. Today's earnings report may be the catalyst we need for move lower. At the time of this writing XLNX is down about -1.50% in the after market. I expect there to be a wave a selling at the open tomorrow which should send the stock towards our targets. Be prepared to take profits or tighten stops to protect them. If the broader market is weak the selling could pick up steam.

10/19: This is turning out to be a frustrating trade as the dips in XLNX keep getting bought. The company reports earnings tomorrow after the bell so if you are not comfortable holding positions close them tomorrow. I've adjusted the targets and suggest readers use weakness to consider exiting positions. My comments below have not changed.

Closed Position: Short XLNX stock at $25.00, entry was at $25.80

Annotated chart:

Entry on October 7, 2010
Earnings: 10/20/10 (unconfirmed)
Average Daily Volume: 7.3 million
Listed on October 6, 2010