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Markets Panic Higher

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Play Editor's note: Gosh, it was only yesterday that I warned we were at a severe risk for a short-covering rally. That's all today was - short covering. It's a bear-market rally. Trade defensively and trade with smaller positions. Generally speaking, traders need to spend more energy on managing our risk than anything else. I'm not adding any new plays tonight but I'll be watching with an expectation for the rally to fizzle here in a day or two.

---------------------- CALL Play Updates ----------------------

Burlington Northern - BNI - cls: 83.45 chg: +4.78 stop: 73.85

Today's 900-point rally in the DJIA and a 10.7% gain for the S&P 500 index creates a complication in our plans to buy a dip in BNI near support. We wanted to buy calls on a dip in the $75.50-74.00 zone. BNI slipped to $77.58 at its worst levels of the day before soaring to a 6% gain. The afternoon short-covering rally pushed the stock above its very short-term trendline of lower highs, which is a bullish development.

The next level of overhead resistance appears to be the $86-87 region. If the stock sees any follow through on today's gain we'll re-evaluate our strategy tomorrow.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/08 (confirmed)
Average Daily Volume = 5.1 million

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CSX Corp. - CSX - close: 43.13 chg: +2.47 stop: 39.49 *new*

CSX, another railroad stock, also ended the day with a 6% gain. The stock actually broke down under support near $40.00 and dipped to $39.59 this morning. CSX reversed but has failed to breakout past its trend of lower highs and failed to breakout past its 10-dma. Yesterday we suggested that readers looking for another bullish entry point would probably get an entry near $40.00 today. Currently our target to exit is $49.90. Please note we're adjusting the stop loss to $39.49.

Picked on October 23 at $ 40.41 /gap down entry
Change since picked: + 2.72 /originally listed at $43.74
Earnings Date 10/14/08 (confirmed)
Average Daily Volume = 6.5 million

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Freeport McMoran - FCX - close: 26.80 change: +3.05 stop: 18.45

Aggressive traders may want to consider starting new bullish positions on FCX. If you look at an intraday chart of the last few days and squint your eyes a bit it almost looks like a bullish double bottom. Personally, I don't want to chase a 12.8% short-covering rally in FCX. One could easily argue that the short-covering is not over and that FCX could hit overhead resistance near $30.00 and its 10-dma before stalling again.

Given this market's recent history of bear-market rallies we can probably just wait for the next significant failed-rally pattern and short (buy puts on) FCX instead.

Our plan had been to buy calls on FCX with a dip into the $21.00-20.00 zone of long-term support. We may have to re-evaluate if this rally has any legs to it.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/21/08 (confirmed)
Average Daily Volume = 20 million

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Hansen Natural - HANS - close: 24.04 change: +3.04 stop: 19.95

The short covering started a bit early for HANS. The stock delivered a nice little "V" bottom before lunchtime after slipping to $20.61. The stock rebounded almost 16.6% off its lows. We cautioned readers yesterday that if you were looking for a new entry point wait for a dip toward $20 and then buy the bounce back above $21.00. HANS delivered on that entry point. We're not suggesting new positions at this time.

We have two targets. Our first target is $26.85. Our secondary target is $30.00.

Picked on October 23 at $ 21.47 /gap down entry
Change since picked: + 2.57 /originally listed at 22.88
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 10.6 million

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MasterCard - MA - close: 136.01 chg: + 9.66 stop: 118.99

The market's final hour rebound lifted MA more than twelve points. Shares are fast approaching potential resistance in the $140.00 area. More conservative traders may want to raise their stops toward today's low (123.50).

We have two targets. Our first target is $158.00. Our second target is $169.50.

Picked on October 23 at $131.00 *triggered 10/23
Change since picked: + 5.01
Earnings Date 11/03/08 (confirmed)
Average Daily Volume = 3.8 million

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Energy SPDR - XLE - close: 47.09 chg: +6.23 stop: 37.45

Hmmm... at this point it looks like we may have missed the move in the XLE. We were looking for a dip to $40.50 and yesterday the XLE hit $40.78. Today this energy ETF soared more than 15% and appears to have broken through some of its trendlines of lower highs. We are not going to chase this move. If the rally continues tomorrow we'll re-evaluate our strategy.

Currently the plan was to buy calls in the $40.50-39.00 zone. If triggered we're setting two targets. Our first target is $45.00. Our second target is $49.75.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 47.7 million

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---------------------- PUT Play Updates ----------------------

PriceLine.com - PCLN - close: 52.84 change: +3.58 stop: 54.15

Target achieved. It was an extremely volatile day for shares of PCLN. It started with our first opportunity to open positions when the stock gapped open at $50.40. Then the stock plunged to $45.15 only to rally all the way back to a 7.2% gain (almost an $8 gain from its lows). Our first target for our puts was the $45.25 mark. The question now is what do we do next? Odds are pretty good that the market's late day bounce will see some follow through tomorrow morning. Beyond that no one really knows as investors react to the Fed's decision on interest rates and the Fed's comments. It would not take much for PCLN to hit our stop loss at $54.15. More conservative traders may want to just exit right here right now if you didn't exit this morning at our first target. We're not suggesting new entry points but we're going to keep the play alive to see what happens. Our secondary, more aggressive target was the $41.00 mark.

Chart:
PCLN

Picked on October 27 at $ 50.40 /gap open entry/target hit 45.25
Change since picked: + 0.00 /originally listed at 49.25
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 2.0 million

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Volatility Index - VIX - cls: 66.96 chg: -13.10 stop: n/a

The range on the VIX appears to be from 79 to about 65.50. I don't know why the VIX is seeing so many bad ticks these days. There were a few today with one hitting 53.81 and it might show up as the intraday low. It certainly looks like the VIX is putting in a top, which would be bullish for the markets.

If you sold any 75.00, 80.00 or higher November calls then the situation is looking very good for you.

We're not suggesting readers buy puts at this time. With the VIX this high if you want to bet on its going lower the better bet would be to sell calls instead. The November 65 calls are about $3.80 bid and the Nov. 70 calls are bidding $3.10.

If the VIX is under your call's strike price at expiration they'll expire at zero ($0.00) and you keep all the premium you sold it for.

Note: The VIX options, which are European style options, have a unique expiration date. November VIX options expire on November 19th, 2008. The last day of trading for these options is the Tuesday before expiration. For more information check this link:
http://www.cboe.com/Products/indexopts/vixoptions_spec.aspx

Our September 16th put position (suggested entry at 30.30) has a 25.50 target. In all honesty this position may be dead. We still have plenty of time with these next two. The September 29th position (suggested entry at 46.72) has two targets at 36.00 and 31.00. Our October 8th position (entry 57.53) has two targets at 40.00 and 35.00.

Picked on September 16 at = 30.30 first position
Change since picked: +36.66
Picked again Sept. 29 at = 46.72 second position
Changed since picked: +20.24
Picked again Octo. 08 at = 57.53 third position
Changed since picked: + 9.43
Earnings Date 00/00/00
Average Daily Volume = --- million ---

---------------------- Strangle & Spread Play Updates ----------------------

CBOE Volatility Index - VIX - cls: 66.96 chg: -13.10 stop: n/a

We've been expecting the VIX to top out eventually and today is probably another step in that process. We don't see any changes from our weekend comments. If you're launching new spreads now consider adjusting your strike prices higher than the ones we have listed. Monday's trading note appears to be right on after a 16% drop in the VIX today.

Monday's Trading Note:
"Here's a thought... if you think the VIX is topping out here near 80 then consider the following. What if you sold your calls that we bought here with the VIX at 80 or on another spike into the 85-90 zone. This way we capture a maximum amount of appreciation in the higher-strike call because when the VIX finally does reverse these calls will evaporate the fastest.

This would leave us short the lower-strike call position. This move only makes sense if you think the VIX has reached its peak. If you think the market is going to see another dramatic plunge then the VIX might spike past 90, which would be an even more opportune time to sell the calls you own but you'll need to be paying attention since such a move might not last very long."

Summary:

Please see the CBOE website or our Sunday, October 12th play description for details on margin requirements for selling VIX options. Link:
http://www.cboe.com/Products/indexopts/vixoptions_spec.aspx

Note: VIX options are European style options that settle for cash at expiration. Furthermore VIX options have unique expiration dates. November options expire on Wednesday, November 19, 2008 and will stop trading on Tuesday, November 18th.

VIX spread #1 has been completed.

VIX spread #2 with November options (date Oct. 12th):

We wanted to SELL the November 30 calls (opening price 10/13/08 was $ 8.60) and BUY the November 50 (opening price was $1.61) as a hedge against the VIX remaining elevated.

In a different format the play is:

SELL CALL NOV 30.00 VIX-KF.
Monday 10/13/08 open 8.60, high 9.80, closed 8.40
Update 10/15/08 open 10.00, high 13.00, closed 13.00
Update 10/16/08 open 13.70, high 16.20, closed 13.25
Update 10/17/08 open 15.55, high 17.70, closed 17.50bid
Update 10/20/08 open 16.30, high 17.20, closed 15.00bid
Update 10/21/08 open -----, high 15.50, closed 14.40bid
Update 10/22/08 open 16.40, high 19.20, closed 18.10bid
Update 10/23/08 open 17.50, high 21.40, closed 20.30bid
Update 10/24/08 open 25.00, high 26.50, closed 25.80bid
Update 10/27/08 open 26.32, high 26.45, closed 29.30bid
Update 10/28/08 open 29.00, high 29.00, closed 23.70bid

-and-
BUY CALL NOV 50.00 VIX-KJ.
Monday 10/13/08 open 1.61, high 2.10, closed 1.50
Update 10/15/08 open 2.00, high 3.60, closed 3.60
Update 10/16/08 open 3.70, high 5.50, closed 3.65
Update 10/17/08 open 4.50, high 5.30, closed 5.50ask
Update 10/20/08 open 3.90, high 5.30, closed 4.40ask
Update 10/21/08 open ----, high 4.70, closed 3.80ask
Update 10/22/08 open 4.30, high 6.60, closed 6.40ask
Update 10/23/08 open 5.70, high 7.70, closed 7.30ask
Update 10/24/08 open 10.10, high 11.00, closed 11.00ask
Update 10/27/08 open 11.43, high 13.80, closed 14.20ask
Update 10/28/08 open 11.00, high 13.30, closed 9.40ask

Picked on October 12 at $ 69.95
Change since picked: - 2.99

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VIX spread #3 with November options (published 10/22/08):

We wanted to SELL the November 35 calls (10/23/08 opening price was $ 14.00) and BUY the November 60 (10/23/08 opening price was $3.00) as a hedge against the VIX remaining elevated. We'll fill in the prices Thursday morning. Our account will be credited with the amount for selling the November 35 calls, while it the price paid for the 60 calls will be deducted.

In a different format the play is:

SELL CALL NOV 35.00 VIX-KI
Wednesday 10/22/08 closed at 14.00 bid
Update 10/23/08 open 14.00, high 17.00, closed 15.30bid
Update 10/24/08 open 19.40, high 21.50, closed 20.60bid
Update 10/27/08 open 23.00, high 23.00, closed 23.90bid
Update 10/28/08 open 22.93, high 24.70, closed 18.60bid

-and-
BUY CALL NOV 60.00 VIX-KN
Wednesday 10/22/08 closed at 3.70 ask
Update 10/23/08 open 3.00, high 4.50, closed 4.10ask
Update 10/24/08 open 7.00, high 7.00, closed 6.90ask
Update 10/27/08 open 6.91, high 8.80, closed 9.00ask
Update 10/28/08 open 7.60, high 8.60, closed 5.50ask

Picked on October 12 at $ 69.65
Change since picked: - 2.69

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---------------------- CLOSED PLAYS ----------------------

AutoZone - AZO - close: 114.20 change: +11.32 stop: 107.05

Ouch! AZO gapped open higher on Tuesday but spent most of the session churning sideways. Then when the final hour rally accelerated AZO went from $106 to $114. Shares hit our stop loss at $107.05.

Chart:
AZO

Picked on October 27 at $102.88 /stopped out 107.05
Change since picked: + 0.00
Earnings Date 12/04/08 (unconfirmed)
Average Daily Volume = 964 thousand

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Burlington Northern - BNI - cls: 83.45 chg: +4.78 stop: 82.35

Railroad stocks kept pace with the larger transport sector, which rose about 6% on the session. BNI broke through its short-term pattern of lower highs and hit our stop loss at $82.35.

chart:
BNI

Picked on October 26 at $ 80.00 /stopped out 82.35
Change since picked: + 3.45
Earnings Date 10/23/08 (confirmed)
Average Daily Volume = 5.1 million

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Chattem Inc. - CHTT - close: 73.54 chg: +4.91 stop: 70.75

CHTT's reaction to the final-hour short covering was pretty bullish. The stock's 7% gain produced a bullish breakout over multiple levels of short-term resistance. CHTT hit our stop loss at $70.75 closing our put play.

chart:
CHTT

Picked on October 26 at $ 67.73 /stopped out 70.75
Change since picked: + 5.81
Earnings Date 09/25/08 (confirmed)
Average Daily Volume = 400 thousand

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McDonald's - MCD - close: 56.62 change: +4.86 stop: 54.55

MCD spent most of its day in the $52.50-53.50 zone but that all changed when the market melted higher. The stock hit our stop loss at $54.55 ending our new put play. The next level of overhead resistance for MCD looks like the 200-dma near $58.00 and the $60.00 region with its 50 and 100-dma.

Chart:
MCD

Picked on October 27 at $ 51.76 /stopped out 54.55
Change since picked: + 4.86
Earnings Date 10/22/08 (confirmed)
Average Daily Volume = 12 million

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