Option Investor
Newsletter

Daily Newsletter, Saturday, 8/6/2011

Table of Contents

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

Market Wrap

U.S. Loses AAA Rating

by Jim Brown

Click here to email Jim Brown

The final curtain in the debt debacle debate slammed down on the U.S. late Friday when S&P cut the U.S. rating for the first time in history from AAA to AA+.

Market Statistics

All day Friday there was a threat of a downgrade of U.S. debt by S&P hanging over the market. News that big is very hard to keep secret and that was responsible for the early morning swoon. Late Friday evening news broke that S&P had backed away from a downgrade of the debt after the White House challenged them on the basis for their move. When S&P is going to downgrade somebody they normally supply that entity with their analysis and reasons for the downgrade so the entity can verify all the assumptions are reasonable. Reportedly the White House responded with hostility claiming the agency was "trillions of dollars" off in its analysis, in part because of the complicated "baselines" that are used to compare long-term government spending and revenue projections. The Treasury Dept showed S&P where they miscalculated deficit projections by more than $2 trillion. S&P later admitted the error but said it did not make any difference in their final decision.

The rumored downgrade was blamed for the -416 point Dow decline mid-morning when the Dow declined from a +172 point gain at the open to -245 point decline just before noon. S&P had said he U.S. needed to announce spending cuts of $4 trillion in the debt limit compromise in order to avoid a downgrade. They backed off that position somewhat as the talks continued over the last couple weeks but it was always the elephant in the room. Fitch and Moody's have already affirmed the U.S. AAA rating but they are keeping the U.S. on credit watch negative until they see how the congressional committee works out with the secondary spending cuts.

Later Friday around 9:PM S&P followed through on the downgrade threat and cut the U.S. from AAA to AA+ with a negative outlook. The negative outlook suggests a further downgrade is possible within 12-18 months. This is the first time in history that the U.S. has not had an AAA rating from S&P. The agency said the U.S. did not go far enough to stabilize the country's debt situation. They also cited "political confusion" as part of the reason and they question the ability of the special congressional committee to make any material changes. U.S. bonds are now rated lower than France, Canada, Germany, Netherlands, Australia, Hong Kong, the Isle of Mann and Britain.

Link To S&P Downgrade

Analysts are mixed on what impact this will have on the markets next week. Several analysts said the market decline last week was in expectation of this downgrade. Apparently the rumor had been circulating in the hedge fund community since Tuesday. Analysts are split on what will happen to U.S. bonds because there are few alternatives to the U.S. treasury market in both depth and liquidity. There are $9.3 trillion in U.S. bonds outstanding. More than $580 billion trade every day and far more than the British Gilts at $34 billion or German bunds at $28 billion. Obviously rates on U.S. bonds will change on Monday. SIFMA, a U.S. securities industry trade group, said the down will likely add +0.7% to the rates and cost the U.S. $100 billion a year in additional interest. China holds $1.16 trillion and Japan $912 billion. They will not be selling because they can't without driving the market down and causing themselves a significant loss.

This will ratchet up the ideological issues over spending cuts and tax reform between now and the 2012 elections and you can bet this downgrade will be a hot topic in the election speeches.

The last downgrade threat came while Bill Clinton was president and a similar default scenario loomed. The U.S. debt at the time was $4.9 trillion. Once the limit was raised the rating agencies canceled their warnings.

The downgrade came despite a remarkable Nonfarm Payroll report for July that actually came in well above expectations. The BLS reported a gain of +117,000 jobs in July compared to consensus estimates for a gain of +85,000 and many whisper numbers at zero. Even better the 18,000 jobs created in June were revised higher to 46,000 and the 25,000 new jobs in May were revised higher to 53,000. That was a total gain of 173,000 jobs when most analysts were expecting something closer to zero.

Private sector jobs increased by +154,000 but that was offset by a decline of 37,000 government jobs. Much of that decline came from Minnesota and their government shutdown. More than 30,000 of those jobs losses came from there and they are temporary. They will reappear as job gains in August.

The companion Household Survey, which captures more of the small business trends showed a loss of -38,000 jobs BUT that was significantly better than the -445,000 drop in June and represents a significant reversal.

The jobs numbers suggest the second dip scenario that was so prevalent over the last two weeks may not be as certain as some thought. Yes, there was a new soft patch but maybe the July jobs gain is our evidence it was just a bump in the road and not a detour. If it were not for the S&P rumor early Friday morning the market outcome could have been a lot different.

Nonfarm Payroll Chart

The economic calendar for next week is pretty skinny with only a couple of reports worthy of highlighting. The biggest is the Fed meeting on Tuesday. I can't even imagine what the Fed is thinking this weekend. The market had its worst week in over two years on fears of a double dip recession. S&P downgrades the U.S. credit rating and Europe is on the verge of a meltdown if something is not done this weekend. It would seem like a perfect opportunity to announce some sort of stimulus except the economy added +173,000 jobs in July. The inflation hawks will be holding the line and Bernanke will have to find some way to stimulate without pushing them into a revolt.

There are things the Fed can do without announcing a QE3 program. I expect them to take some action even if it is only a token move because the wealth effect they worked so hard to create since last August has evaporated. If they can't find some way to shock the market back into rally mode we are likely to see a sharp decline in consumer spending for the rest of the year. The market has a direct impact on consumer sentiment and I suspect that sentiment took a very big hit last week.

This makes Tuesday the pivotal day this week. Monday could be crazy for reasons I will describe later so Tuesday is the Fed's chance to pull us back from the brink.

Friday has the Consumer Sentiment report for August and this month started off really bad. Sentiment declined -8 points to 63.7 in the final reading for July and I would be shocked if we didn't see another large drop. This makes Friday's report critical.

On Friday the Investor's Business Daily Optimism Index dropped -13.5% from July to August to the lowest point in its ten year history. The reading of 35.8 was down from 41.4 in July. It is roughly 20% below its 12-month average. All key components, the six-month outlook, confidence in federal policies and personal finances were also at historic lows. All 21 demographic groups polled showed an increasing level of pessimism over U.S. economics.

Economic Calendar

The earnings cycle is about over but there are a few big companies left to report. Cisco is probably the most important for the week after Juniper and other networkers disappointed with earnings. Cisco has been in a downhill slide since April of 2010 and every earnings report has caused massive drops in the stock.

Cisco Chart

MGM reports on Monday but they will probably be overshadowed by the external events in Washington and Europe. Kohl's and JC Penny's report late in the week and will give us another health check on the bargain conscious consumer.

Earnings Calendar

Last but not least we have Europe continuing its meltdown. Italy and Spain both saw their bond yields move over 6% and EU finance ministers and country leaders were holding emergency meetings and conference calls on Friday hoping to find a way out of the quicksand of financial stress. Italy took center stage with 120% debt to GDP and the most urgent of funding problems.

The ECB said earlier in the week it would buy bonds from troubled countries, the European version of QE2, but did not say it would buy bonds from Italy or Spain. This caused the markets to turn on those countries and the ECB was forced to announce on Friday they might buy their bonds but said they would only do it if the countries implemented some tough austerity measures.

Italy's premier, Silvio Berlusconi, told a hastily arranged news conference the government will speed up measures in its budget law approved last month by Parliament with the possibility of reaching a balanced budget by 2013 instead of 2014 as initially planned. He said he met by phone with world leaders and the G7 finance ministers would meet "within days" about the exploding financial crisis. Although that was an exaggeration his spokesman said a meeting was discussed. Italian politicians, normally on vacation in August pledged to keep working in order to respond to the rapidly worsening economic crisis.

It was enough to rescue the U.S. markets from a -245 point decline and produce a +400 point rally in just one hour. The ECB agreeing to buy Spanish and Italian bonds would be a key step in putting an end to the crisis. Buying bonds provides support and keeps rates low. The Federal Reserve had been buying Treasuries in QE2 in the same type of strategy.

The market rallied on the news and all eyes are going to be on Italy and the ECB on Monday. In the U.S. CNBC is going to have special coverage Sunday night on the European crisis when Europe opens the week for business.

If you thought the market was volatile last week just wait until next week. Last week Morgan Stanley released the results of a study on hedge fund leverage. They said funds had been aggressively going to cash over the last several weeks and where the average fund had been leveraged 1.5 or even as much as 2.0 times their capital the average today was only .45%. That means only 45% of their cash is invested. Hedge funds have been struggling to turn a profit in 2011 and the last couple months have been deadly. One noted analyst commented on Friday that the volatility last week could have been related to some hedge funds imploding. Funds behind the curve may have been over leveraged to try and catch up and instead got caught by the market reversal. Volatility is wonderful if you are on the right side of the market.

The volume in the market suggests there is something going on behind the scenes that we are not aware of yet. I am sure everyone remembers big market events with corresponding volume spikes. We have had dozens over the last decade including the Great Recession, bankruptcy of Lehman, the flash crash, etc. However, I don't remember volume suddenly spiking to the extreme we saw last week. Note how the volume spiked on Thursday with the -513 point loss to 13.8 billion shares with up volume almost microscopic. That is what a normal capitulation day looks like.

However, on Thursday night I wrote that I did not think Thursday was a normal capitulation day and I expected it to be Friday. The open on Friday with the big +171 point rally and then crash -416 points from the highs to a lower low was a capitulation event. The up volume in the afternoon was traders buying the dip on the news out of Europe. Friday's share volume was more than double the daily average. More than 36.1 million option contracts traded on Friday compared to a normal day at 4.5 million. That was a new record by nearly 20%. That is a lot of stop losses getting hit.

HOWEVER, I believe the massive amount of volume suggests there may have been something else going on behind the scenes. Hedge funds imploding? Maybe, but a hard leak of the impending S&P downgrade would make more sense. We know now that the story was given to the news networks earlier in the day but was embargoed until 8:30 Friday night. Bloomberg dispatched a news crew to meet with John Mauldin and Nouriel Roubini before it was public news.

Volume Table

The volatility hounds will be howling next week. With the S&P downgrade, an all night Europe watch Sunday night and FOMC on Tuesday the week could start out in dramatic fashion. It is hard to know for sure but the conventional wisdom would expect the U.S. market to plunge at the open on Monday thanks to the downgrade. However, since there were rumors the last several days we don't know if the downgrade is already priced in or not. I am betting NOT. This is a major event at least psychologically. Since Moody's and Fitch have already affirmed the AAA rating at least for August that may take some of the sting out of it. However, now that S&P has taken the plunge does that mean the other two will follow suit at the end of August? You know S&P is now going to be grabbing headlines every week now with downgrades of related agencies and corporations that depend on the government for their existence.

The wild card here is the Europe mess. If the ECB announces Sunday night they are going to backstop Italian bonds no matter what then the markets could rally on expectations for a final (really?) resolution to the European crisis.

Regardless of the reason for the crash last week there was some serious damage done to the technicals. This was the equivalent of a reboot of the markets. The Dow "only" lost -5% for the week but the Russell lost more than 10%. This was an instant correction.

Despite the broken technicals the S&P performed exactly as it should have with the dip to 1175. Two weeks ago that was a level we would have never believed we would see again in 2011 with the S&P trading over 1350 as recently as early July. The panic dip Friday morning traded down to 1168 purely on momentum as millions of stop losses were hit. Within minutes the dip was bought and the rebound began. This preserved 1175 as short-term support. I could easily see this level tested again at the open on Monday. I would be a buyer if that level is tested again. If this level eventually breaks the next support is 1050.

S&P Chart - Daily

The Dow fell -1,612 points from the high on July 21st to the low on Friday. That has to rank right up there with one of the fastest declines in recent history. The Dow failed to drop to 11,000, which would be the equivalent level to S&P 1175. That does not mean it won't go there but the big cap blue chips are seen as safe deposit boxes in times of market stress so fund managers were more concerned about bailing from the small and mid caps than the Dow's blue chips.

I would be a buyer to any dip to 11,000 but that is 444 points away. (Oh, I forgot, we already had 400-point moves three times in the last three days.) If we are lucky enough to test 11,000 I would be a buyer of the DIA or SPY at that level.

Dow Chart

Nasdaq, different index, same story. Support at 2500 was tested with a dip all the way to 2465 thanks to the high velocity plunge after the open. Buying was pretty strong at that level and that would suggest there is a point where traders are willing to take a risk. Apple traded as low as $362 with support at $360. If you want a position in Apple or Amazon but always thought they were too high dollar then this may be your chance.

I like tech stocks but I would key any purchases on Monday based on the support levels for the S&P and Dow. The Nasdaq ended the day negative with the Dow up +60 so key on the stronger index.

Nasdaq Chart - Daily

The Russell has declined -18.6% from the 860 high on July 7th to Friday's 700 low. The Russell has long passed correction territory at -10% and is rapidly approaching bear market territory at -20%. Fortunately traders defended strong support at 700 and only allowed a 1.1 point incursion below that level. They clearly had their buy orders ready. If that level is tested again I would be a buyer of IWM calls for a trade.

Russell 2000 Chart

Last weekend we were watching the 200-day average on the S&P at 1284 as critical support. This weekend we are watching 1175. What a difference a week makes!

I have read dozens of articles on what to expect when the market opens on Monday. While nearly everyone expects a drop at the open, most believe the dip will be bought. Of course we will not know until 10:AM who was right. The Europe watch on Sunday night will complicate the issue. I am sure the newspaper headlines around the world telling of our rating downgrade could cause some knee jerk selling. However, I would expect that to be in treasuries not equities. Secondarily, strong selling in equities could actually promote strong buying in treasuries as a flight to quality. Yes, an AA+ rating is still quality.

I would use any weakness on Monday morning as a buying opportunity for a trade. We don't know how the long-term scenario is going to play out so I would want to grab a few points and then move to the sidelines later in the week if the market begins to weaken again. We are extremely oversold and it is only a matter of time until we get a real short squeeze.

You have to ask yourself if the economy and financial system is worse today than in 2008 or is it significantly better? Despite the weak reports over the last month we don't have any major U.S. banks failing, the TARP loans have been paid, 73% of S&P companies beat earnings, jobs were better than expected, the debt debacle is behind us and gasoline prices are falling. That would seem to indicate there is no real macro reason for the markets to be crashing. This is a political event roiling the markets. I think a lot of others will see it that way as well but since we have never had a ratings downgrade before there is no precedent in the USA. Other countries have been downgraded and nobody noticed. Of course the hype in the weekend news is going to create some selling from the nervous Nellie's and we just have to let it play out and then pick a spot to jump in.

Jim Brown

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"Knowledge speaks, but wisdom listens."
Jimi Hendrix


New Plays

It's Not Over Yet!

by James Brown

Click here to email James Brown

Editor's Note:

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

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

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

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

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

- James


NEW BULLISH Plays

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

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

Company Description

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

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

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

- Buy the Open on Monday (small positions) -

Suggested Position: buy CBOU stock

- or -

buy the SEP $15 call (CBOU1117I15)

Annotated chart:

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


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

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

Company Description

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

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

Buy-the-Dip Trigger @ $40.00

Suggested Position: buy CYOU stock @ $40.00

Annotated chart:

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


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

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

Company Description

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

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

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

Buy-the-Dip Trigger @ $45.00

Suggested Position: buy HAL stock @ $45.00

- or -

buy the AUG $45 call (HAL1120H45)

- or -

buy the SEP $50 call (HAL1117I50)

Annotated chart:

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



In Play Updates and Reviews

Opened & Closed

by James Brown

Click here to email James Brown

Editor's Note:
Friday proved to be a very volatile day in the stock market. Early gains reversed and stocks fell to new lows by lunchtime. The S&P 500 index fell to 1168 before bouncing on news out of Europe but the index was unable to close back above the 1200 mark.

The better than expected July jobs report fueled some early morning gains and that triggered some of our bullish trades. Yet the sharp reversal lower stopped us out.

-James

Current Portfolio:


BULLISH Play Updates

Motorola Mobility Holdings, Inc. - MMI - close: 23.09 chg: +0.81

Stop Loss: 20.70
Target(s): 25.75, 27.75
Current Gain/Loss: - 1.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/06 update: Our brand new play on MMI is now open. The stock opened higher at $23.34. Combine that with the slightly higher open in the S&P 500 and our play was triggered. Yet shares of MMI didn't make it very far. The upward momentum stalled near the 50-dma. When the market swooned lower on Friday morning MMI dipped to $21.58. Thankfully MMI did not breakdown to a new relative low like most of the market on Friday.

I would wait to see how the market acts on Monday morning before considering new bullish positions here. Aggressive traders might want to consider removing their stop loss for Monday and then re-adding it back on Monday night since there is no way to know how volatile the market will be on Monday.

Earlier Comments:
More conservative traders may want to use a tighter stop instead. Our first target is $25.75. Our secondary, more aggressive target is $27.75. We do want to keep our position size small to limit our risk.

- small positions-

Suggested Position: long MMI stock @ 23.34

- or -

Long SEP $25 call (MMI1117I25) Entry @ $1.05

chart:

Entry on August 5 at $23.34
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 5.9 million
Listed on August 4, 2011


BEARISH Play Updates

None. No bearish plays currently.


CLOSED BULLISH PLAYS

Intersections Inc. - INTX - close: 18.16 change: -0.28

Stop Loss: 17.75
Target(s): 19.90, 21.75
Current Gain/Loss: unopened
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/06 update: It was another very volatile day in the market on Friday. INTX gapped open higher at $18.63, spiked to $19.44, and then promptly reversed lower. Shares broke down under support near $18.00 and its 50-dma. The low today was $17.50. That's a -10% move from the intraday high. INTX hit our stop loss at $17.75.

The larger trend is still up so I'd keep INTX on your watch list.

closed Position: Long INTX stock @ $18.63, exit $17.75 (-

08/05 Play opened at $18.63. Stopped at $17.75
08/04 Adjusted our entry point strategy, our stop loss and targets due to the market drop on Thursday. New stop @ 17.75. New targets are $19.95 and $21.75.

chart:

Entry on August 5 at $18.63
Earnings Date 08/08/11 (unconfirmed)
Average Daily Volume = 150 thousand
Listed on August 2, 2011


PowerShares QQQ ETF - QQQ - close: 53.83 change: -0.34

Stop Loss: 53.49
Target(s): 55.90, 56.90
Current Gain/Loss: - 2.3%
Time Frame: 1 to 2 weeks
New Positions: see below

Comments:
08/06 update: After Thursday's massive decline it looked like an oversold bounce was a good bet as long as the jobs number wasn't a total miss. Sure enough, the market rallied on the jobs data, which was better than expected. Yet the rally didn't last very long. The QQQs opened higher but the bounce ran out of gas in less than an hour thanks to renewed worries about Europe.

Stocks collapsed again intraday and the QQQ plunged to $52.32. Then news surfaced that the ECB might be willing to buy bonds from the struggling countries of Italy and Spain. That helped the market rebound. Tech stocks struggled the whole day and the QQQs settled in the red. Our stop loss was hit Friday morning at $53.49.

closed Position: Long the QQQ @ 54.79, exit 53.49 (-2.3%)

- or -

AUG $57 call (QQQ1120H57) Entry @ $0.40, exit $0.20 (-50%)

- or -

SEP $57 call (QQQ1117I57) Entry @ $0.89, exit $0.50 (-43.8%)

08/05 Our play was opened Friday morning and stopped out before 10 o'clock.

chart:

Entry on August 5 at $54.79
Earnings Date --/--/--
Average Daily Volume = 70 million
Listed on August 4, 2011


ProShares Ultra Financials - UYG - close: 48.85 change: -1.90

Stop Loss: 49.49
Target(s): 54.50, 56.50
Current Gain/Loss: - 4.3%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
08/06 update: Our aggressive, higher-risk trade on the UYG did not pan out. Shares did open higher as expected but the rally reversed lower. The UYG hit our stop at $49.49 on its way down to $47.01.

Traders may want to tray again since the UYG found support near its 2010 lows but given the US credit downgrade news I would probably avoid financials on Monday.

Our plan was to use small positions to limit our risk.

- small positions -

closed Position: long the UYG @ 51.74, exit $49.49 (-4.3%)

- or -

AUG $53 call (UYG1120H53) Entry @ $1.51, exit $1.27 (-15.8%)

08/05 our play was opened and stopped out on Friday morning.

chart:

Entry on August 5 at $51.74
Earnings Date --/--/--
Average Daily Volume = 1.7 million
Listed on August 4, 2011