Editor's Note:

I personally believe the ECB will be unable to follow through on its pledge from last week to do "whatever is necessary" to save the euro. The ECB might be able to do it over time but I seriously doubt they will announce any big plan on Thursday that will make investors happy.

There is a real possibility the Fed and ECB could try to announce some coordinated action of lesser quality but I am not convinced that will happen. I think the Fed it handicapped by its lack of ammunition.

James is on vacation this week.


NEW DIRECTIONAL CALL PLAYS

No New Calls Today

I believe there is a high risk that the market will roll over this week.


NEW DIRECTIONAL PUT PLAYS

iShares Russell 2000 ETF - IWM - close: 79.37 change: +1.84

Stop Loss: 81.25
Target(s): 75.75
Current Option Gain/Loss: Unopened
Time Frame: 2-4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The market rallied on a "surprise" announcement by the head of the ECB that the bank would do "whatever is necessary" to protect the eurozone. Why was this a surprise to anyone? What is he going to say? Let's kick Greece, Spain and Italy out of the euro and crash the economies of the remaining 14 countries.

The comments simply came at a time when the market was about to break down to retest the June lows and traders were overly short. A massive short squeeze began. It just happened to come the day after a prior squeeze on "possible" ECB and/or Fed easing.

Market volume has been minimal at 6.1 billion shares per day for several weeks. Thursday and Friday both had more than 7.2 billion shares thanks to the squeeze.

The ECB can't afford to let the market down after that comment BUT the ECB does not have blanket authority to do whatever it wants. The Fed could announce a $2 trillion QE program tomorrow it is wanted but the ECB has to get approval from Germany, France, etc, in order to take any major action. The little stuff they can do on their own but the big moves that will be required to save Greece, Spain and Italy will need approval.

The bet for next week is that the ECB will not announce a "bazooka" move that will appease the markets. They may announce some minor moves or another plan to make a plan but I don't think they will satisfy traders. The ECB announcement is on Thursday.

The Fed will release its announcement on Wednesday and odds are better than 50:50 that they do nothing other than claim they are ready to act if the economy slows further. They could push the rate hike date out to 2015 or announce some other minor action but they are out of big bullets and what they do have left they need to save for a really rainy day.

I think the short covering on the Russell was overdone as on all the indexes. The Russell ETF has resistance at 80.50 and the spike failed at 79.75. We could see another spike at the open on Monday or we could see a complete collapse depending on the European headlines.

I am recommending we buy the Oct $78 put in anticipation of a possible decline to the June support at $75.

Trigger: Enter only with an IWM trade at $78.85

- Suggested Positions -

Buy the Oct $78 PUT (IWM1220V78) current ask $2.89

Annotated Chart:

Entry on July xx at $ xx.xx
Average Daily Volume = 60.0 million
Listed on July 28, 2012