Editor's Note: Good Evening. The S&P 500 closed above its 200-day SMA today, but not by much. The major indexes have plenty of resistance above including the 100-day and 50-day SMA's. Volume has been light and I am having a hard time trusting this rally. Most of the economic news from today wasn't good but the market rallied in spite of it. It appeared to me that shorts were getting squeezed and when this stops we may turn right back down. Nonetheless, we have to deal with the conditions that our dealt to us and the recent spike through the 200-day SMA was barely enough to hit our stop in SPY. Cautiously bullish is the best term to describe my feelings on the market currently. One sector that I am interested in on the long side is energy.

My strategy in the coming days is to build more short positions, especially if the markets continue to melt-up. I will also continue to look for strategic long plays so that we are hedged and can participate on any further upside. I also want to reiterate that if you can not trade intraday the conditions remain difficult to manage swing trades. The markets are moving fast and furious in both directions and trying to pinpoint entries and exits without being able adjust them intraday is very difficult. I want to point readers to number 6 on the winning axioms list on the OptionInvestor.com web site. It basically says to always pick a sell price you would be happy to get before you buy an option. This is especially a good strategy for readers who do not have the ability to trade intraday and will give you a better chance to book winning trades.

Lastly, I want to address several emails I received over the weekend concerning the way we closed the ACI short trade last week. My intentions in the editor's note were to close long or short positions on Thursday as I suspected the market was going to gap and potentially make a large move. I just didn't know the direction. As a result when the markets gapped higher the right thing to do was to close ACI when the stock traded above its opening range. After reviewing my instructions I realize they were not clear and I am adjusting the results of this trade to the original stop. My sole intentions were to communicate some of the techniques and rules I use to protect capital and I apologize for the misguidance. I always encourage readers to email me if they have any questions.

Current Portfolio:


CALL Play Updates

Direct TV - DTV - close 39.25 change -0.68 stop 35.70

Target(s): 38.20, 38.50, 39.50, 41.50
Key Support/Resistance Areas: 38.60, 37.00, 36.30
Current Gain/Loss: N/A
Time Frame: Several weeks
New Positions: Waiting to be triggered

Comments:
DTV has ran away from us a bit here as we have waited 7 trading days and still haven't gotten filled. $37.20 is a key support area and the 50-day SMA is rising towards this level everyday. Let's use this as our trigger to enter positions. Essentially we are playing for a bounce near the stock's 50-day SMA which it has not touched since the flash crash. The stock also has two trend lines underneath our entry which should provide further support if we get filled. The 50-day SMA is currently $36.87 and it is rising but placing an order slightly above this is suggested.

Suggested Position: Buy July $37.00 CALL if DTV trades down near $37.20 which is just above its 50-day SMA, current ask $2.74, estimated ask at entry $1.40

Entry on June xx
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 12.3 million
Listed on 6/5/10


PUT Play Updates

Freeport McMoRan Copper & Gold - FCX - close 65.26 change +0.33 stop 68.80

Target(s): 63.10, 61.50, 58.30, 55.20
Key Support/Resistance Areas: 66.00, 65.00, 64.00, 58.00, 55.00, 52.00
Current Gain/Loss: -39%
Time Frame: 1 weeks
New Positions: Yes

Comments:
FCX was weak this morning and was lifted by the overall strength in the market. Depending on how you draw it the stock appears to have closed above the downtrend line from its April highs and closed above its 20-day SMA. This has me concerned, however, the stock remains in a downtrend by making a series of lower highs and lower lows. Copper futures still have resistance overhead and so does FCX. However, the broader market needs to cooperate to get things moving lower. Conservative traders may want to consider placing a tighter stop or simply exiting positions to protect capital. This is a critical level for FCX. There could be a double top forming with highs from yesterday and today which may get the stock moving lower tomorrow. I listed two additional targets on Monday which are areas where I urge readers to tighten stops. The first target is at a level where FCX could form an inverse head and shoulders pattern which needs to be considered as a potential reversal point for the stock. I view this trade as aggressive and quick so proper position size should be used to limit risk. I am also choosing an out of the money option to limit capital at risk.

Current Position: July $60.00 PUT, entry was at $2.38

Entry on June 11, 2010
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 19 million
Listed on June 10, 2010


Home Depot - HD - close 32.26 change +0.20 stop 33.65

Target(s): 31.75, 31.35, 30.10
Key Support/Resistance Areas: 33.25, 32.90, 32.15, 31.25, 29.95
Current Gain/Loss: +2.3%
Time Frame: 1 to 2 weeks
New Positions: Yes, but preferably on bounces

Comments:
HD opened higher and immediately sold off reaching a low of $31.55, which was only 15 cents from our first target. HD proceeded to bounce up to $31.78 off of its opening lows before proceeding lower. This was the perfect area to place a protective stop just above at $31.85. If you were able to trade intraday this is where I would have placed the stop to protect HD from reversing and protecting profits in the position. Our puts at this level could have been sold for $1.15 which would have represented a +35% gain. This is just an example of a stock that got close to our target only to reverse. Readers who do not have the ability to trade intraday may want to consider devising an exit strategy based on the option price as opposed to the stock price. For example, after you enter a position pick a realistic profit target you are happy with based on the option price and place a GTC limit order to sell. Even if you chose $1.05 or $1.10 you would have protected a nice profit today. This is listed as a winning axiom on OptionInvestor.com if you want to read more about it and I think this is a great strategy especially with the high volatility. I have listed a slightly higher target of $31.75, which is just above today's lows, for readers looking for a quicker exit. This is an area I suggest tightening stops. HD could just as easily reverse back down tomorrow. The stock did not make it above yesterday's highs unlike the broader market and continues to struggle with the resistance and congestion range from $32.15 to $32.90. The stock remains below its downtrend line that started on May 18th. I expect more downside in HD and it to retest its recent lows and possibly even make a trip down to its 200-day SMA. Our stop is $33.65 which is above the declining 20-day SMA. A tighter stop could be placed at $33.05 which would get you out of the trade if HD begins to fill the gap lower from 6/3 to 6/4.

Current Position: July $32.00 PUTS, entry was at $0.85

Entry on June 14, 2010
Earnings 8/18/2010 (unconfirmed)
Average Daily Volume: 23 million
Listed on June 12, 2010


CLOSED BEARISH PLAYS

SPDR S&P 500 ETF - SPY - close 112.00 change +2.49 stop 112.10

Target(s): 108.00, 107.50, 105.00, 103.50, 102.25
Key Support/Resistance Areas: 111.00, 110.00, 109.00, 108.00
Current Gain/Loss: -42.6%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
SPY flashed a $112.10 print late in the day so officially we are stopped out of this trade. I doubt there many sell orders filled so if readers still have positions I would suggest placing a new stop at $112.50 and see if SPY reverses lower. SPY broke through the resistance levels and the 200-day SMA that was the basis for taking the short position. As I mentioned in the Editor's note I do not trust this rally and SPY could easily turn back lower. Once the short covering quits the buying will most likely wane and markets should move lower. If you had the ability to trade intraday on this position I would have placed a protective stop above the opening 30 minute range which would have gotten you out at a better price and protected capital.

Closed Position: July $109.00 PUTS at $2.15, entry was at $3.75

Annotated chart:

Entry on June 11, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 340 million
Listed on June 10, 2010