Option Investor

Daily Newsletter, Saturday, 7/4/2009

Table of Contents

  1. Index Wrap
  2. New Option Plays

Index Wrap


by Leigh Stevens

Click here to email Leigh Stevens

Happy Independence Day one and all! I've just recuperated from a prolonged cold here on the chilly Monterey Coast but was feeling so good (finally) that I celebrate by updating my column. Hold for fireworks tonight!

The title of my last Stock Index Wrap two weeks ago (Saturday, 6/20) was "Losing Momentum". Loss of momentum is of course often followed by a breakdown in the trend. I wouldn't yet call recent weakness a trend reversal. To suggest a downside reversal in the intermediate trend, the S&P 500 (SPX) would have to pierce the 880 area, where a line of lows formed during May.

The Nasdaq Composite (COMP) is a little different in terms of its pattern as COMP would signal a bearish warning on a drop below the recent 1754 low and suggest a downside (trend) reversal if the index pierced 1675, at the line of its May lows.

Basically the technical 'rule' is that a downside trend reversal is 'signaled' or suggested when a key prior low (made before the top end of an uptrend) is penetrated on a closing basis. The one-day rule applies here as there should be a couple of consecutive closes below that prior low.

The break in COMP and NDX occurred on overnight downside price gaps, which often is the start of a greater decline to follow. There are possible Head and Shoulder Top patterns also apparent in the S&P and Dow charts. The Dow was the most 'clear' in that regards and the Dow tends often to trade more technically, so that section is where I've highlighted the potential downside implied by an H&S top.

Aspects becoming less bearish include: 1.) a healthy pullback in the Relative Strength Index (RSI) indicator. Although not into oversold territory by any means, an 'overdue' and balancing type correction appears underway. 2.) Traders have also become somewhat less bullish. Bullish expectations seemed too high before and we are seeing I think a more realistic view of the economy we're IN, not the one we hope to BE in.

Showing the influence of changeable psychology is that although the expectations have been that unemployment will keep rising as this is a well-known LAGGING indicator, traders and money mangers still get spooked with the actual event. Its one thing to intellectually 'know' the course of these things historically and another to not get spooked because of the 'facts' of it. Everyone by now must know someone who's gotten laid off, etc.


I also wrote a 'Trader's Corner' article on Thursday (7/2) that featured the following chart of the S&P 100 (OEX), which I've left unchanged in terms of how I had highlighted a broad rectangle formation with potential upside OR downside objectives, depending on whether there's a decisive upside OR downside penetration of the upper or lower lines of this 'box'.

A rectangle is just a trading range. When back and forth rallies and declines occur that form multiple tops and bottoms in the same areas or approximate same areas, drawing two horizontal lines form a rectangle pattern. We draw 2 vertical lines to close off the rectangular pattern. I also assume that when a rally PRECEDED the rectangle formation the pattern is a rectangle top. The trade benefit however is to see WHICH way a breakout goes, above or below the lines.

[Any recent Trader's Corner article can be viewed and reviewed on the OIN web site by clicking the 'Trader's Corner' index tab at the top of any Option Investor.com web page.]

My first chart should be clear enough without much more than the explanation that the price range between the highs and lows of the rectangle is ADDED to the top or SUBTRACTED from the bottom to give a 'minimum' target for an extension of that move. Such 'minimum' objectives provide one idea of where the index or stock could get to; MORE than that is of course also possible.



The S&P 500 (SPX) chart is neutral in its pattern until the sideways trading range is resolved. My expectation has been that resolution will come to the upside, but this is more of a subjective hunch. In reality, on a breakout above or below the highlighted prior price range is what is predictive. The sideways range could of course go on. There is a tendency for the longer a sideways 'indecision' trend goes on, the stronger should be a next breakout (up or down) move.

I've highlighted support in the 880 area, then down at the prior 827 low. It will be interesting to watch also to see if the 200-day moving average is penetrated. Oftentimes, the first upside move above a long-falling 200-day average doesn't last long.

Resistance is apparent first in the 930 area although I didn't arrow it on the chart. Key technical resistance is around 950, with fairly major resistance expected in the 1000 area.

The 13-day RSI seen above is showing declining momentum and I'm watching to see if this indicator gets to an oversold reading again. This is a likely scenario as the market tends to go eventually from extreme to extreme. Bullish sentiment seems likely to fall further, meaning of course that the inverse is happening, bearishness increases. At this juncture I'm waiting for an 'oversold sentiment' reading before anticipating a next bottom.


The S&P 100 (OEX) Index pattern is in the same 'neutral' sideways pattern as the S&P 500. You can see my highlight below of the well-defined OEX uptrend channel that OEX was in for some time.

Extending those 'broken' trendlines out into the future was telling; the first rally after the trendline break stopped cold at resistance implied by the prior support trendline and I've noted continued resistance along this line which is also in the area of prior highs around 440/441. (I've also projected an upper resistance at the extended upper line which intersects around 470 currently.)

Support is projected at the prior lows around 412, and then down in the 383-387 area.


Looking again at bullish sentiment on the OEX chart above provides a closer up view as well as adds a 5-day moving average. I'm really going to have to migrate this same (sentiment) indicator over to the Nas Composite, as displaying it always on the S&P charts suggests that this indicator somehow pertains ONLY to the S&P or the NYSE market (since so many S&P stocks trade there versus the Nasdaq).

It's the one-day spikes into 'oversold' territory that is key to this indicator as suggesting a bottom is near. Once that happens, assuming some bottoming chart action is ALSO seen, upside reversals tend to follow within 1 to 5 trading days.


I said 2 weeks back that "The Dow 30 (INDU) looks like it will continue its recent correction and head lower, such as back to a retest of support around 8400-8370 or down to prior lows around 8215." Maybe I should stretch out my comments to every 2 weeks! The tip off that the INDU rally was not going to have 'legs' was the failure to pierce the 21-day average; sure enough this was followed by a break below the longer-term 50 and 200-day moving averages.

Resistance is at 8600, then up around 8850. A key technical support is at the cluster of prior lows at 8215. Below the 8200/8215 area, there's nothing but 'air' between 8200 and 7800 in terms of prior lows to key off from and bring in possible buyers.

The pattern in the Dow and which is somewhat more clearly defined than on the S&P charts, is that of a possible Head & Shoulder's Top, with a 'neckline' at 8215. Based on this pattern and assuming there is a break of 8215, an objective implied by the H&S top is for an eventual drop to the 7550 area. If there's a steep fall like that bearish sentiment will build up and 'set up' the next rally so to speak.

As could be anticipated with the lagging INDU, the average looks like it may get oversold first or the most, in terms of the 13-day RSI.


The Nasdaq Composite (COMP) chart looks bearish in that the break of its well-defined up trendline in late-June set up this same line as (per one Street of Dreams mentor of mine) the 'kiss of death trendline'. Meaning, prices come back up TO that line but can't get back above it. At some point there's a sharp break from what is now a stubborn line of resistance. Moreover, with the rally back close to the prior high, we're looking at an approximate double top as well.

The double top idea gains more credence if the prior low at 1754 is pierced. Stay tuned on that. A break of the 1750 area could lead to a further fall to the 1670/1675 area.

Key overhead technical resistance is at 1880-1882. Major resistance comes in around the 2000 level. The further downside move that may have kicked off this past week comes after COMP completed a 50 percent retracement of the August '08 to March '09 decline. A 50% retracement isn't 'resistance' in the sense of a prior high, but a 50% retracement is significant as being a 'normal' recovery rally BEFORE the prior trend resumes again which in this case is down.

I also mentioned two weeks back that I wouldn't feel comfortable buying into a dip/correction unless the index got to or near an oversold reading again. The Composite RSI may be heading to such a low again before this correction runs its course.


The Nasdaq 100 (NDX) pattern repeats that of the Composite so I'll just go straight into support/resistance levels. I would note that a 'double top' pattern didn't form to the same close degree seen in COMP.

Key resistance is at the prior high in the 1515 area in NDX, with next resistance projected at 1550. Very near resistance can be assumed to lay at the top end of the recent overnight (downside) price gap at 1480.

Near support can be assumed at the prior low in the 1413 area. A Close below this prior low that's NOT reversed back to the upside the following day, suggests a next lower objective to the 1350 area in a retest of the line of prior lows.

It will be surprising to many if NDX pulls back as far as 1350-1300. I anticipate that such a pullback would bring in many willing buyers of the key big cap tech stocks. I've got some stocks in mind if NDX digs into buying interest in that zone; e.g., AAPL around 120 again.


The Nasdaq 100 tracking stock (QQQQ) remains mixed to bearish in its pattern, reflecting of course the underlying NDX index.

Volume patterns and the On Balance Volume (OBV) indicator support a bearish chart. Thursday's sharp break came with above average daily volume in the Q's, supporting the idea of more weakness ahead as at least some of those long the stock get spooked further. Q2 earnings coming out ahead will be a sizable influence also.

Near QQQQ resistance: 36.8

Key next overhead resistance: 38.0

Near QQQQ support: 34.8

Next support: 33.1

First area of major support: 32.0


The Russell 2000 (RUT) chart pattern, like the Nasdaq which it most closely tracks, has the same look of a possible second rally collapse. More so in RUT as the recent high was well shy of the first top seen in the 530 area, which wasn't the case in the Nasdaq.

Near RUT resistance is at 519/520, then at 532/535.

Near RUT support is at 489 as implied by the prior (down) swing low, extending down to 483, the area of the 200-day moving average. Next chart support comes in at 470 with next support below that seen another 20 points lower around 450.




1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.


3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.

New Option Plays

Auto parts, Wholesale, Insurance, Miners, Telecom & Lumber

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 has yet to break support but a lot of individual stocks are breaking down. You could throw darts at a wall of stock symbols and come away with more bearish candidates than bullish ones. I'm adding several candidates but don't try to play them all. Pick which ones look the most appealing to you.


Autozone Inc. - AZO - close: 150.00 change: -2.76 stop: 155.25

Why We Like It:
The bounce in AZO is fading again and the failed rally at $154.00 late last week looks like a new entry point to buy puts. Shares have developed a bearish trend of lower highs and lower lows and the Point & Figure chart is forecasting a drop to $134. I'm suggesting bearish positions now with a stop at $155.25. Our first target is $141.00. Our second target is $132.50.

Suggested Options:
I am suggesting the August puts.

BUY PUT AUG 150 AZO-TJ open interest= 339 current ask $6.10
BUY PUT AUG 145 AZO-TI open interest= 167 current ask $4.10
BUY PUT AUG 140 AZU-TH open interest= 280 current ask $2.70

Annotated Chart:

Picked on     July 04 at $150.00
Change since picked:      + 0.00
Earnings Date           09/22/09 (unconfirmed)
Average Daily Volume =       1.0 million  
Listed on  July 04, 2009         

Costco - COST - close: 44.64 change: -1.15 stop: 46.10

Why We Like It:
You might think that wholesalers like COST would be doing better during these tough times as consumers try to save money. Yet the stock has been sinking almost the entire month of June and now COST is nearing support near $44.00. I'm suggesting readers buy puts at $43.90. If triggered our target is $40.25.

Suggested Options:
I am suggesting the August puts.

BUY PUT AUG 45.00 PRQ-TI open interest=2214 current ask $2.15
BUY PUT AUG 42.50 PRQ-TV open interest=1127 current ask $1.10
BUY PUT AUG 40.00 PRQ-TH open interest= 345 current ask .50

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =      4.75 million  
Listed on  July 04, 2009         

Freeport McMoran - FCX - close: 49.72 change: -0.85 stop: 53.01

Why We Like It:
The S&P 500 isn't the only one with a bearish head-and-shoulders pattern developing. FCX appears to be forming a right shoulder with last week's failed rally near $52.00. I'm suggesting put positions now. FCX should have support near $45.00 so we're setting our first target at $45.25. Our second target is $41.00. FCX can be somewhat volatile so we're setting the stop at $53.01. I do consider this a higher-risk trade. If the dollar retreats commodities should rise, which should benefit the miners although that relationship may not hold up short-term. The Point & Figure chart has turned bearish with a $36 target.

Suggested Options:
I am suggesting the August puts.

BUY PUT AUG 50.00 FCX-TJ open interest=4460 current ask $4.90
BUY PUT AUG 45.00 FCX-TI open interest=4956 current ask $2.62
BUY PUT AUG 40.00 FCX-TH open interest=5315 current ask $1.22

Annotated Chart:

Picked on     July 04 at $ 49.72
Change since picked:      + 0.00
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =        18 million  
Listed on  July 04, 2009         

MetLife Inc. - MET - close: 28.04 change: -1.72 stop: 30.35

Why We Like It:
MET's bullish trend has broken and shares are now suffering under a new trend of lower highs. Last week MET spent days failing near $30.00 and its 200-dma. I'm suggesting put positions now or on a bounce back toward $29.50-30.00. Our first target is $25.25. Our second target is $21.75.

Suggested Options:
I am suggesting the August puts.

BUY PUT AUG 30.00 MET-TF open interest= 485 current ask $3.50
BUY PUT AUG 27.00 MET-TH open interest= 294 current ask $1.95
BUY PUT AUG 25.00 MET-TE open interest=2186 current ask $1.20

Annotated Chart:

Picked on     July 04 at $ 28.04
Change since picked:      + 0.00
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       7.4 million  
Listed on  July 04, 2009         

NII Holdings - NIHD - close: 18.61 change: -0.98 stop: 20.10

Why We Like It:
The trend is turning bearish for this foreign mobile telecom provider. NIHD filled the gap from June 22nd but the bounce failed at $20.00 and its 200-dma. Now shares have broken their bullish trend and technical support at the 50-dma. I'm suggesting put positions now or on a bounce back toward the $19.50 region. Our first target is $16.15.

Suggested Options:
I am suggesting the August puts.

BUY PUT AUG 20.00 QHQ-TD open interest= 601 current ask $2.50
BUY PUT AUG 17.50 QHQ-TW open interest= 137 current ask $1.25

Annotated Chart:

Picked on     July 04 at $ 18.61
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       2.9 million  
Listed on  July 04, 2009         

Weyerhaeuser - WY - close: 29.51 change: -1.26 stop: 31.51

Why We Like It:
Commodity stocks of all types are breaking down. The oversold bounce in WY has failed near $31.00 and Thursday's break under round-number support at $30.00 looks like a new entry point to buy puts. I'm suggesting positions now with a stop at $31.51. Our first target is $26.00. Our second target is $23.00. The P&F chart points to a $24 target.

Suggested Options:
I am suggesting the August puts.

BUY PUT AUG 30.00 HYW-TC open interest= 97  current ask $2.50
BUY PUT AUG 28.00 HYW-TE open interest=193  current ask $1.55
BUY PUT AUG 25.00 HYW-TY open interest= 72  current ask .70

Annotated Chart:

Picked on     July 04 at $ 29.51
Change since picked:      + 0.00
Earnings Date           07/31/09 (unconfirmed)
Average Daily Volume =       2.1 million  
Listed on  July 04, 2009