Editor's Note:

I am suggesting the average trader step to the sidelines. The markets remain very extended. This is not a great place to be launching new positions. The NASDAQ is likely to gap higher at the open tomorrow thanks to AAPL's earnings but where it goes from there is anyone's guess. Will the NASDAQ stretch its gains to 11 in a row? Maybe. But what about day 12? or day 13? Are you willing to bet on new bullish positions with the market looking this extended?

The S&P 500 is also very extended and testing major resistance in the 950-956 zone. Will investors buy a breakout over 956? Will it spark more short covering? I'm encouraged by the market's recent strength but we don't want to chase this move. I saw a lot of failed rallies and bearish reversal patterns today. Our contrarian put play on the SPY tonight is very aggressive and we should be in and out in just a few days if not sooner but we could just as easily be stopped out tomorrow.

I would keep an eye on AAPL. Nimble traders can watch for a failed rally in the $160-162.50 zone as a chance to buy very short-term puts with a tight stop. My bias on AAPL is actually bullish but the stock is overbought and due for a correction. I'd look for a potential bullish entry point near the rising 40-dma or maybe near $145.00.


NEW DIRECTIONAL PUT PLAYS

S&P 500 SPDRS - SPY - close: 95.57 change: +0.43 stop: 97.51

Why We Like It:
The short-term trend in the market has been extremely bullish. Most of it was a short squeeze from last week. Now the S&P 500 index is testing major resistance. The positive earnings news from AAPL could be enough to push the index over resistance. Yet I suspect the rally won't last. The AAPL news could be the big firework at the end of a fireworks show that caps off the finale. Now I'm not calling an end to the rally. I just think we're due for a correction and I want to catch some of it with some short-term puts.

Please see my editor's note before continuing. Tomorrow morning buy some August SPY puts. I wouldn't be surprised to see the SPY gap open higher but as of right now, looking at the after hours trading action tonight, a gap higher is not likely. This is a very aggressive, contrarian play. I would significantly limit my position size. We want to take profits at $92.00 or the 50-dma, whichever one the SPY hits first.

Suggested Options:
I'm suggesting the August puts.

BUY PUT AUG 96.00 SWG-TR open interest=13035 current ask $2.58
BUY PUT AUG 94.00 SWG-TR open interest=57535 current ask $1.76
BUY PUT AUG 92.00 SWG-TR open interest=189268 current ask $1.17

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =       197 million  
Listed on  July 21, 2009