Option Investor

Daily Newsletter, Saturday, 7/3/2010

Table of Contents

  1. Market Wrap
  2. Index Wrap
  3. New Option Plays
  4. In Play Updates and Reviews

Market Wrap

Seven Down Days

by Jim Brown

Click here to email Jim Brown

The Dow has now lost ground for the last seven trading days and the S&P the last five days. This is the worst consecutive loosing streak in a year.

Market Statistics

The market has fallen and can't get up. Every intraday rebound attempt fails and we have a bad case of sell the close syndrome. The economic news continues to get worse despite some high profile analyst claims that we are not going to double dip. Abby Joseph Cohen was on CNBC last week pumping up sentiment and repeating her 1275 S&P call. That would be about a 26% gain from here. Abbey has been able to move the market in the past but the only movement this week was down.

The big economic report for Friday was the nonfarm payrolls. The headline number showed a loss of -125,000 jobs driven by 225,000 census job terminations. The consensus estimate was for a loss of -155,000 jobs but they were also expecting a loss of -325,000 census jobs. Quick napkin math shows that there were 100,000 fewer census jobs lost which should have improved the consensus estimate to only -55,000 jobs lost compared to the actual headline number showing -125,000 jobs were lost.

The number should have been much better than the estimate but nearly hit the estimate anyway. The net number after removing census terminations showed that the private sector hired 83,000. That was also less than expected. April and May private sector hiring was also revised down by 57,000 jobs total.

The unemployment rate declined to 9.5% but this was due to a contraction in the labor force with 652,000 people giving up on finding a job. Nearly one million workers gave up on looking for a job in just the last two months. That suggests confidence in the labor market is rapidly declining. The average hourly workweek declined to 34.1 hours and average hourly earnings fell as well. The trend to increase production by having employees work more hours appears to have ended.

Since many analysts were expecting a lot higher number of job losses I thought this was a better than expected report. However, the three-month average of +119,000 new private sector jobs appears to be slowing. If recent economic reports are correct it could easily go negative. Moody's is still projecting growth of 150,000 private sector jobs every month for the rest of 2010 and rising to 200,000 in 2011. At that rate it will take more than six years to return to full employment. We need 150,000 new jobs per month just to keep up with population growth and legal immigration.

It is tough to put a positive spin on the report since there are still another 175,000 census workers to cut in July and the economic recovery seems to have hit a wall. The weekly unemployment claims refuses to go down with 472,000 on Thursday.

The separate Household Survey showed a loss of -301,000 jobs or -363,000 if you do the same seasonal adjustment done in the BLS survey.

Payroll Chart

Factory orders for May fell -1.4% and inline with recent estimates. This compares to a gain of +1.2% in April. Inventories rose for the fifth consecutive month suggesting that the positive GDP impact from inventory rebuilding is about over. This is a lagging report and did not get much press coverage but the trend is definitely lower since March.

Factory Orders

The Weekly Leading Index at 122.2 is leading lower again after a brief blip higher in the prior week. This was the seventh decline in eight weeks. This is the lowest level since July 2009. The annualized growth rate declined to -7.7% and another new low for the year and the fourth week in negative territory. This was the 12th decline in 13 weeks for the growth rate. The rate decline in the WLI is very troubling because it does not represent just a hiccup like we saw in November and February. This is a serious change in economic sentiment.

Weekly Leading Index Chart

Even though the ISM was on Thursday I am going to touch on it again. The national ISM dropped sharply from 59.7 to 56.2 for June and this was the second consecutive decline and the lowest level since December. The production, new orders and employment components all declined.

Manufacturing has been powering the U.S. economic growth for the last year. Now we have seen in the factory order report and the ISM that manufacturing is dropping sharply. Something happened and it is not an isolated incident or region. The manufacturing sector hit a proverbial wall.

Even more disturbing was a -20 point drop in the prices paid component from 77.5 to 57.0. This is the lowest level since November 2007. This could be suggesting we are heading into a deflationary environment.

There have only been two depressions in the last 100+ years but their impact is lasting. In a high debt environment this would be a disaster. The government needs inflation to take us out of the recession and give the government cheap dollars to pay back debt. Deflation is many times more serious than inflation to our long-term economic health. Bernanke and company will use every tool at their disposal to avoid a depression and I suspect we will start seeing some of those tools come out of the closet very soon.

The economy is coming to a crossroads and the options are not pretty. The nation is facing the biggest tax increase in history in 2011. No deductions are sacred and because of the breadth of the changes we could all see our individual taxes go up by 15% or more. I know the marginal tax rates are only going up 3-5% but the loss of deductibility on almost everything means your taxable income will be a lot higher. Deductions for children are going down. Health savings accounts are going away. The marriage penalty returns along with the death tax, medicine cabinet tax, alternative minimum tax, etc. The alternative minimum tax hit four million people in 2009. That will jump to 28.5 million in 2011. Taxes on dividends will jump from 15% to 39.6% with another 3.8% hike in 2013. Here is a link to a brief checklist of the most onerous tax changes. Largest tax increase in history

The new Federal taxes will remove about 1% of U.S. GDP and new state and local taxes are going to remove another 1%. With GDP only projected to be +2% later this year that means the tax increases alone could push us back into recession. John Mauldin claims that tax cuts or increases have a 3X multiplier effect on the economy where tax increases have a negative effect and tax cuts a positive effect.

These higher taxes will depress consumer spending, depress small businesses and cost hundreds of thousands of jobs. This new weight on the economy comes just as the stimulus spending ends and the government "supposedly" begins to cut spending in an attempt at austerity. The government has been borrowing from future generations for decades and those bills are finally coming due simply because they can't borrow any more money. By 2015 the interest will be over $1 trillion per year. The European debt crisis has highlighted the coming U.S. debt crisis and at a time that the U.S. is no longer the world's growth engine. (According to Tim Geithner last week)

I don't want to turn into a preacher of doom and gloom but we are rapidly approaching the point where continuing to do what we have been doing will no longer be an option. As investors we should be aware of the coming economic problems because they will impact our investments and our income.

The market is already taking into account the coming problems. The yield on the 10-year was under 2.9% on Thursday and the yield on the 2-year treasury was under 0.6% and a new historic low. Investors are searching for safety and U.S. debt is still considered safe by many despite our huge debt load. To put this into perspective, investors are so sure that equities will not provide a return over the next two years that they are buying bonds instead at less than 1% return.

Consumer confidence is tanking badly with more than a 10-point drop in June to 52.9. The present situation component fell to 25.5 because of worries over jobs and home values. Analyst Greg Weldon pointed out that the number of people planning vacations has fallen by -35% over the last three years to the second lowest number ever. People planning on buying appliances are near a 16-year low according to the confidence survey. Over 17% of survey respondents claim their income is decreasing.

Pending home sales fell -30% in May. That was due to the expiration of the homebuyer tax credit in April but regardless of the reason sales fell off the cliff and the results to the economy are the same.

Home Sales Chart

The market is discounting all those points above and the Dow has been down for seven consecutive days. The economic data is clearly pointing to a slowing economy and with the great recession still vividly on our consciousness, investors are fleeing the potential for a double dip. The stimulus is over or it will be by the end of 2010. Lawmakers and the president have said there will be no further stimulus. That means we are going to have to tough out the next 6-12 months. With the Fed at zero percent it is time for helicopter Ben to start warming up those helicopters for money drops to head off not just the second dip but the possibility of deflation. I expect the Fed to start announcing new programs soon. There is far too much deflation risk to wait.

Economics for next week are very slim. This is clearly a holiday week calendar with no material events. I had to stretch to even highlight the ISM Services and jobless claims as important.

Economic Calendar

We are still a week away from the start of the Q2 earnings cycle with Alcoa's announcement on Monday July 12th. Quite a few companies join Alcoa on that Monday followed by Intel and YUM on Tuesday, Google and JPM on Thursday. The following week is a tsunami of announcements as everyone of importance piles into that week.

I am going out on a limb here and suggest we will see a rally into earnings. Despite the stronger comparisons and the potential for some lackluster guidance I believe we will see an attempt to trade the earnings cycle. However, I don't think the rally will last. I think it will be temporary and we will see lower lows before Q3 is over. There will be some individual winners but I think overall the market is not done going down.

The last double dip recession was 1980-1982 so investor memory is still somewhat intact. Fortunately if we do have a double dip it won't be for the same reasons as the 2008 recession. Big banks are not going to be failing on a weekly basis. There is no subprime problem to suddenly appear and wreck the banking system. If we have a double dip the second dip will be the garden-variety recession brought on by a declining business climate and a lack of consumer spending. The Q2 earnings reports will tell us through their guidance if this is really a possibility or just another case of over cautious analysts.

In stock news, what little there was to see on Friday, Apple said it was shocked to find out that the iPhone signal strength indicator (bars) had been incorrect since 2008. I am shocked that Apple really expects the consuming public to believe that they did not know the problem existed. In fact there is a large contingent of iPhone users that believes Apple knowingly showed an incorrect number of bars in order to deflect criticism of the horrible AT&T network.

The problem started in 2008 when iPhone users kept complaining that they only had one or two bars of service and could not make calls or calls kept cutting out or dropping. Apple promised to fix it and had users download a new OS (2.1). Suddenly two bars went to four and everything was fine. At least fine until you tried to make a call and couldn't and connected calls still dropped. CNET ran tests that suggested there was no difference and Apple had just changed the bar display. As many as 40% of iPhone users believed Apple just changed the programming to show more bars as AT&T scrambled to upgrade their network.

Fast forward to 2010 and Apple said on Friday it was "stunned" to find out the iPhone has been exaggerating signal strength since 2008 by displaying too many bars indicating there was stronger reception than actually existed. Apple claims it was a bug in the software that will be fixed soon. Apple claims it discovered the problem while trying to debug the mystery of the disappearing bars on the iPhone 4 after users complained about the disappearing signal strength bars when the phone was held a certain way.

For a company that is positively fanatic about the details and features on their phones it strikes me as exceedingly strange that this "glitch" went unnoticed for two years across multiple versions of operating systems. That would assume that nobody tested the new operating systems to see if they were outputting the correct information. I find that highly unlikely and plenty of iPhone customers fell the same way. AT&T posted a letter on their website declining to comment on the problem and referring questions on the issue to Apple. To top it off customers are reporting even worse dropped calls on the new phone than the 3GS they were using before. Three separate lawsuits were filed last week alleging Apple knowingly sold a defective product. Apple shares have fallen from $279 just before the phone became available to a low of $243 on Friday. Despite the glitches in the signal strength and the antenna problem I would still be a buyer of Apple at $235-240. Most analysts have a price target at $325-$350 once the market shakes off this weakness.

Apple Chart

The Dow has given back -908 points since the high at 10594 on June 21st. That is an average of -100 points per day and an 8.5% drop. If you were only looking at the Dow I would say there is further pain ahead. The S&P has fallen -109 points from the 1131 high for a 9.6% decline. The intraday low on Thursday was 1011 and only one point above the 38% fib retracement level from the March 2009 bottom. This should not be material support but the S&P did rebound from that level. On Friday the low was 1015 but the volume was very anemic at just a hair over 7.0 billion shares. The holiday weekend started early for most traders.

While I don't see 1010 as material support it is a crossroad that the S&P did not violate on the first attempt. When the S&P began to rally on Friday afternoon to 1029 I expected the normal Friday afternoon short covering after a big down week. When it failed to hold it suggested the shorts were so confident about further declines that they were in no hurry to exit even ahead of a three-day weekend. That would be some brave or possibly foolhardy traders.

Possibly they were looking at the death cross about to occur with the 50/200-day averages. A death cross is when the 50-day average crosses through the 200-day average. It can be any set of averages but in reference to the S&P those are the averages commonly followed. Both averages closed on 1111 on Friday. Since averages don't reverse instantly there is no way to avoid the death cross on Tuesday. If you want to be a stickler for detail the 50 at 1111.66 has already crossed the 200 at 1111.77 but that is a little too technical for me.

S&P Chart with Death Cross

With a three-day weekend there is always the possibility of some foreign market event pushing the futures higher on Monday and causing a gap open on Tuesday. Of course with the news we have had lately there is a much better chance of a gap down and that probably kept traders short.

Funds that had fully invested ahead of the end of the quarter on Wednesday probably took advantage of Thr/Fri to uninvest that cash again. Volume was high at more than 11 billion shares on Thursday. All the gaming should be over and next week should stand on its own for market direction.

The perfect scenario would be for the S&P to gap down at Tuesday's open and retest that fib support at 1010 then rebound and close positive. Next week is going to be a light volume week with no material earnings or economics so the market will be left to trade on news events and short covering. If the S&P could close higher on Tue/Wed we might get a decent bout of short covering that could lead into a brief earnings rally.

Initial support is 1010 but there is pretty solid resistance at 1045. Any rally for any reason would face a serious challenge crossing that barrier. A further break and close under 1010 is lights out in my book. That means there is no buying sentiment even for a trade for earnings.

S&P Chart

The Dow chart has Friday's closing candle hanging in uncharted territory and below support. The nearest light support is the 38% Fib level at 9439 but that is probably wishful thinking. The 50/200 have not crossed yet but they will this week. Friday's close was a new low for the year and like I said earlier just looking at the Dow chart paints an ugly picture of more losses to come.

Dow Chart

The Nasdaq is a different picture. The Nasdaq Composite has decent support in the 2050-2063 range with Friday's close at 2091. The 2063 level is the 50% Fib retracement and it should be decent support. There were also some support lows from Oct/Nov around 2050, which should also sustain the first retest. If RIMM and AAPL were not racing each other lower the Nasdaq would be a lot better off. Techs are not normally in favor in the summer and especially not in favor as long as there is worry over a double dip. The Nasdaq has the seasonal problems to overcome but there are some support points from which to mount a defense.

Nasdaq Chart

In summary I don't expect volume to pickup next week. We could easily see a major move at Tuesday's open but the direction will be left up to the overseas markets. We are still seeing forced margin selling as underwater investors are liquidated. Putting off selling a losing position because you can't afford to take the loss will eventually get you a bigger loss when the broker closes the margined position against your will. This happened every day last week.

We need that big down day to flush all the remaining weak holders and give the funds an excuse to buy ahead of earnings. If we had a big decline on Tuesday I would be a buyer for a trade. If the shorts can be convinced to cover we could have a decent rally into the first real week of earnings but I suspect we will be heading lower before the month is out.

Jim Brown

Index Wrap

Decline Should Slow

by Leigh Stevens

Click here to email Leigh Stevens

I view the recent waterfall decline as a continuation of the correction that began in late-June, not as a 'signal' for a new bear market. My thought that prices may dip again, probably after a minor rebound, is the lack of even one day of heavy bearish sentiment among those actually trading options. There just hasn't been a recent extreme in daily put volume relative to calls/ The volume ratio between CBOE equities daily call to put numbers is what I use to reflect active traders' sentiment, not surveys, etc. I'll get more into sentiment as an indicator as part of my commentaries on the S&P 500 (SPX) and the (Nasdaq) Composite (COMP).

While I (last week) wasn't predicting as big a fall as occurred, I wasn't surprised either especially given the lack of a bearish extreme in my daily sentiment numbers. It's almost like the Market 'has' to go lower to get more traders into capitulation; i.e., personal recognition of the bearish (fear) phase the market is in. My 'minimum' downside projections on SPX and NDX (Nas 100) noted last week, based on hourly chart bear flag patterns, was to the 1050 area in the S&P and around 1800 in the Nas 100. These are always seen as 'minimum' objectives and of great value in suggesting what targets we might be able to 'count on'; a further profitable move is the gravy.

When the market/biz media seeks out technical types at periods when they don't have a clue as to what is going on (and not asked so much during major rallies) a couple of things may have filtered down to you: 1.) a major Head & Shoulder's (H&S) Top especially seen in the Dow and # 2, a Dow Theory sell signal.

I've traced the talked about Head & Shoulder's pattern on the INDU weekly chart below and also noted a 'conventional' measurement of the further downside potential when an H&S neckline is pierced.

I would also note that the retracement to date of the big run up from early last year has been a relatively shallow one so far and hasn't yet equaled a Fibonacci 38% retracement (at 9420); at which point the correction would still be a fairly minor retracement. The point is not to have a bearish viewpoint driven by fear but to continue to take the most objective look possible.

A basic problem with the above analysis is that a Head & Shoulder's (H&S) top pattern has been most seen and studied on a daily chart basis, tending to signal an intermediate decline only. The formula to measure the downside possibilities, once a stock or index has broken below an H&S 'neckline', has usually only applied to shorter-term charts.

On a daily chart basis in the major stock indexes, no Head and Shoulder's top pattern is seen. Even if there was, the downside price target measurement (after a neckline break) would not have resulted in anything as low as the Dow 8200 area gotten by transposing a target calculation to a long-term (weekly) chart. Such a low ball target is very speculative, but when the market is in a panic/fear phase bearish speculations ramp up.


The other longer-term chart consideration I've been asked about is whether a Dow Theory 'sell signal' has been triggered, which would alert long-term holders of stock to lighten holdings. I wouldn't suggest that a bearish Dow theory readings won't occur if stocks keep sinking, but let's see what index at what level would suggest the major or primary trend of the Market had reversed to down. Dow theory is too slow to alert you to an intermediate-term trend change, only a major one. Its relevance is to us as investors, not traders.

To identify what index at what level: a weekly Close in the Dow Transportation Average (TRAN) under 3822 would suggest a bear market was upon us. (TRAN closed at 3922 this past week.) This analysis is according to my interpretation of Dow Theory. That is a problem with the theory also; there are some different ways to interpret Dow's work.



The S&P 500 (SPX) chart is bearish as prices continue to fall. What can also be said relating to the potential for SPX to rebound is that the chart shows now two down legs that are approximately equal, for a possible 'measured move' objective. Moreover, there is now a lower channel line that's been traced out, suggesting possible support in the low-1000 area. Add to this the fully oversold RSI reading suggests not getting complacent about taking your time to capture put profits.

My lowermost objective in SPX last time was to the 1010-1000 area, in an area of possible longer term support. I've noted key support at the low end of the downtrend channel; at 1005 currently. I don't have an immediate lower 'support' target as its not predictable chart wise; maybe in the 943 area, representing a next (50%) key retracement level.

I've noted resistance at 1150, then around 1072, the top end of the gap lower from Monday-Tuesday of this past week.


Trader sentiment levels on a daily basis and showed little change last week as NO dips to or under the 'extreme' bearish 'oversold' level seen above occurred this past week. This as prices took a further big nosedive, suggesting continued complacency by those who are actually trading options (versus people mostly expressing OPINIONS).

I anticipate that a final low, whether that is a lower low (or a higher pullback low) will come when there is more fear of a bear market and more greed to capture the expected big further decline. There is no price target in this prediction, only that more bearishness is likely to occur BEFORE there is a tradable or sustained rally.


The S&P 100 (OEX) chart is unrelentingly bearish. As with the S&P 500, I see some potential for a limited rebound. OEX is oversold enough and there is now a lower trendline from which it might bounce and at which I've noted potential support, currently intersecting (at the trendline) at 458. I'd peg possible next substantial support for the 435 area, representing a 50% retracement of the March '09 to late-April ('10) advance.

500 is looks like major resistance (what used to look like major 'support'), with more immediate and also tough resistance coming in around 486, at the upper end of the bearish downside overnight gap from this past week. You see where the price 'gap' is just slightly from the daily chart. Sizable chart gaps are seen on the Nasdaq charts as they show first trade as the 'Open'; not last night's close when NYSE openings are delayed.

Key near support is suggested at the lower (down) trendline as described already above. The index is as oversold as it tends to get without at least a minor rebound such as occurred on two occasions in May.


The Dow 30 Average (COMP) chart is in some ways not THE index to focus on for determining how the Market is doing. In other ways the INDU chart traces out what is sometimes the most compelling technical picture in helping forecast the current and future trends.

A different aspect in the Dow chart, in best 'definition' so to speak, is a possible bullish declining wedge. It's too soon to call this as anything but early musings, but I'll be watching how prices unfold in the coming weeks relative to a possible bullish 'wedge' pattern. It may be nothing, but the pattern (if it develops) may end up zeroing in on timing for an oversold upside rebound when it comes.

INDU is at possible technical support (not major support) implied by the lower down trendline intersecting around 9600 currently. I'd peg fairly major support at 9420-9400. 9420 would represent a key retracement level (and potential support) at 38%; this relative to the long advance from the March '09 low to the recent late-May top.

Resistance is noted at 9908 or just call it the 9900 area; next, around 10134. Major resistance is suggested at 10400 currently.


The Nasdaq Composite (COMP) Index's chart shows the steepest weekly decline since the early May week that kicked off this bear move. It's a 'galloping' bear market, although that motion seems more applicable to the bulls.

Given the oversold extreme seen on a 13-day basis (not yet on the 8-week RSI) you are advised to take, start taking, profits on puts. The probabilities of some bullish news or analysis coming along seems to increase in oversold markets. Well, lets say that the possibility of a bullish interpretation of some news, event or sequence of events, increase proportionate to how many shorts there are that could drive a next rally.

Support is noted on my COMP daily chart at 2050. 2048 represents potential support implied by COMP having reached a 38% fibonacci retracement (of the March '09 to late-May advance). 2000 is one of those big round numbers with a few zeros that could invite speculative buying. 2000-2025 in the Composite is probably the Dow's 10000 in terms of how it's perceived.

Near resistance/selling pressure now looks to come in at 2200, with next resistance seen around 2250. 2300 is resistance implied by my declining down trendline and an important level technically if overcome.

I think we're at or near where support/buying interest will be found, between 2050 and 2100 in COMP in the coming shortened week. Enough buying interest ahead in this oversold market for a rebound toward 2200. On the other hand, a close below 2050 in COMP suggests a new low ahead, such as to 2000. A touch to 1900 couldn't then be ruled out at some point; just not what I'm expecting currently, especially not near-term.


Trader sentiment levels on a daily basis and showed little change last week as NO dips to or under the 'extreme' bearish 'oversold' level seen above occurred this past week. This as prices took a further big nosedive, suggesting continued complacency by those who are actually trading options (versus people mostly expressing OPINIONS).

I anticipate that a final tradable low, whether that is a lower low (or a higher pullback low) will come when there is more fear of a bear market and more greed to capture the expected big further decline. There is no price target in this prediction, only that more bearishness is likely to occur BEFORE there is a tradable or sustained rally.


The Nasdaq 100 (NDX) chart now shows the bearish aspect of the sizable downside price gap between Monday's low and Tuesday's high; the resulting 'space' representing a so-called (bearish downside) 'gap', showing visually increasing downside momentum.

The upper end of such gaps tend to mark substantial resistance and selling pressures; so, as noted on the NDX chart, this 'defines' key technical resistance for the 1823 area. Immediate overhead resistance, while not easy to ascertain after a straight line fall, may start around 1775.

Support/buying interest comes in potentially around 1700, following that lower down trendline. It's also where I'm focused in looking for a buy in point for a trade.

This selling may be getting overdone. Doesn't mean it's going to rally, just that a lot of shorts covering in a short span are enough potential buyers to lift the market ahead, especially if sellers get more selective and wanting higher prices to step into renewed selling and shorting. Major fund managers are not going to let go of all their tech bets; better to sell other sectors.


The chart is bearish. The only short-term bullish aspect to the chart picture is that QQQQ has now fallen to the low end of a possible downtrend channel, which could lift the stock a bit or at least mean that a further decline will slow, suggesting at least a pause in the 'waterfall' straight-down decline. This is important to know in options and assessing not only how much farther prices might fall but how QUICKLY.

Support, even if minor, is implied in the 42 to 41.6 area. It looks like a fair amount of short-covering and speculative buying occurred after the Thursday low was made, causing the brief dip under 42.0. It's easy to anticipate near support in this area. 40.6 begins a next key support area.

Tough overhead resistance begins in the 44.0 area, extending up to 44.8. Major resistance begins around 46.8.

Right now I'd rather be long under 42 (exiting stop set at 41.5) than short at 44.0. If I was short above 44, I'd wish for another dip below 42 in which to cover.


The Russell 2000 (RUT) has this kind of downward sloping 'wedge' pattern but its way to soon to say this offers a bullish hope for a resumption of what has been a long-term uptrend. The recent touch to, and rebound from, the lower down trendline at least suggests one potential change ahead and a price dip to an area offering a launch for a bounce.

I've noted support in the early going this week at 587; more of a support zone between 600 and 587. 580 is a possible next lower support. Below 580, RUT could be in something like free fall again for awhile, at least until possibly the 568 area.

Resistance is at 638-640, extending to 650. A sustained move above 650, at the current down trendline, is needed to suggest a retest of the last upswing high at 677 or beyond.




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

Short Plays in Machinery and Coffee

by Scott Hawes

Click here to email Scott Hawes


Deere & Co. - DE - close 54.50 change -0.71 stop 60.05

Company Description:
Deere & Company, together with its subsidiaries (John Deere) operates in three business segments: agriculture and turf segment, construction and forestry segment, and credit segment. The agriculture and turf segment, created by combining the former agricultural equipment and commercial and consumer equipment segments, manufactures and distributes a range of farm and turf equipment, and related service parts. The construction and forestry segment manufactures, distributes to dealers and sells at retail machines and service parts used in construction, earthmoving, material handling and timber harvesting. The credit segment finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment. In addition, it provides wholesale financing to dealers of the foregoing equipment, provides operating loans, finances retail revolving charge accounts, offers crop risk mitigation products and invests in wind energy generation.

Target(s): 53.25, 51.75, 50.25, 49.05
Key Support/Resistance Areas: 60.00, 57.50, 56.50, 56.00, 54.00, 52.70, 51.50
Time Frame: 1 to 2 weeks

Why We Like It:
Last week DE broke below its 20-day, 50-day, and 100-day SMA's and a trend line that began in August of 2009. The stock traded all the way down to its 200-day SMA on Thursday and Friday where I expect it bounce. I suggest readers enter short positions on strength in the stock. I've chosen $55.75 as an entry trigger. Depending on the strength of any bounces readers may also consider waiting until the $56.50 to $57.50 area prior to initiating short positions (see rectangle on chart). This area is below the 20-day and 50-day SMA's which should be the extent of any bounces in the stock. I'm just not sure DE will bounce that high which is why I have chosen $55.75. We'll use a wide stop at $60.05 and will adjust it after we are in the position. Our primary target is $51.75 but I have offered several other targets readers can us as a guide to tighten stops or simply take profits if things move in our direction.

Suggested Position: Buy August $55.00 PUTS if DE trades to $55.75, current ask $3.80, estimated ask at entry 3.15

Annotated chart:

Entry on July xx
Earnings 8/18/2010 (unconfirmed)
Average Daily Volume: 5.4 million
Listed on July 3, 2010

Starbucks Corp. - SBUX - close 24.35 change -0.31 stop 26.31

Company Description:
Starbucks Corporation, together with its subsidiaries (Starbucks) is the roaster and retailer of specialty coffee. It purchases and roasts whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a range of food items, a selection of premium teas, and beverage-related accessories and equipment, through Company-operated retail stores. Starbucks also sells coffee and tea products and licenses its trademark through other channels such as licensed retail stores and, through certain of its licensees and equity investees, Starbucks produces and sells a range of ready-to-drink beverages. The Company operates in three business segments: United States (US), International and Global Consumer Products Group (CPG).

Target(s): 23.70, 22.55, 21.30
Key Support/Resistance Areas: 26.50, 26.00, 25.25, 24.80, 24.00, 23.60, 22.50
Time Frame: 1 to 2 weeks

Why We Like It:
Last week SBUX broke below a trend line that began in October 2009 and collapsed below it 20-day, 50-day, and 100-day SMA's. These SMA's (in particular the 100-day SMA) have been key areas where the stock has bounced during its rally over the past year. And now that the stock is below them it has probably seen its best days, at least for awhile. I would like to use a trigger of $24.75 to enter short positions which is below the stock's 100-day SMA, the underside of the broken trend line, and the recent steep downtrend line, all of which are converging (see oval on chart). The $25.00 area could also be considered an entry point but I chosen $24.75 because it is near Friday's highs which could possibly form a double top on the intraday charts. Our primary target is $22.55 but I have also listed $23.70 as area to consider tightening stops. It is above the 200-day SMA which SBUX has not touched in over a year.

Suggested Position: August $25.00 PUTS, current ask $1.82, estimated ask at entry $1.60

Annotated chart:

Entry on June xx
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on July 3, 2010

In Play Updates and Reviews

Short Into Strength

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good Evening. I hope you are enjoying the long Independence Day weekend, having fun with your family, and coming into next week with a clear mind for what is shaping up to be an interesting trading environment for the remainder of the summer. Our model portfolio has narrowed significantly over the past week or two as we have been taking profits on short positions as the market has headed lower. Several of our profitable trades have continued on their path lower and we were probably a little early in taking profits on some of them. The reasons I made the decisions to take profits is twofold. First, the market is oversold and when looking at the price patterns over the past year there have been many quick intraday reversals to the upside which wiped out profits on short positions very quickly. I did not want this to happen, especially for readers who do not trade intraday. Secondly, I am not a believer of trying to squeeze out every last bit of a move as this is a recipe for disaster. I would rather get 50% of the move and walk away with a gain. This strategy is what keeps your account growing. In the end, we have booked some nice winners over the past few weeks and have kept losses on losing trades small. I will have the portfolio ramped back up this week ready to take advantage of the market that lies ahead.

The S&P 500 closed down again on Friday which makes 9 out of 10 days of selling pressure. In case any readers missed it I would like to reprint a portion of the intraday market update I wrote from Friday regarding my view of where the broader market may be headed as measured by the S&P 500. I have also provided additional thoughts. Please observe the weekly chart of the SPX below.

On Thursday, the SPX printed a bottoming tail daily candlestick at the 38.2% Fibonacci Retracement measured from the March 2009 lows to the April 2010 highs. Thursday's lows of 1,010 also corresponds to the 11/08 highs (see ovals on the chart) and the 100-week SMA (see green SMA). Will all of this be enough to produce a bounce in the market? Probably, but the bounce should be stopped in its tracks if it approaches the 1,040 to 1,060 area. The fact is we may consolidate between 1,010 and 1,050 for a couple of weeks before we get a larger move down. More reliable support is down near 940 and then 880 which corresponds to the late 2008 and May to July 2009 congestion area as highlighted on chart with the grey rectangle. Interestingly this congestion area is right smack in the middle of the 50% and 61.8% Fibonacci Retracement levels and the backside of the broken trend line drawn from the 10/07 highs to the 5/08 highs. My outlook is to expect choppy trading with a bias to the short side. I will continue to pick good entries into short trade set-ups with the expectation of an ensuing drop in the SPX.

The market clearly looks vulnerable and we could easily fall farther without any bounces. The swing trading environment has been brutal in that the market has had a knack for not letting shorts or longs in. Rather, it has been relentless in running one direction rather quickly until a reversal point which often happens with a large intraday move. If the sell off continues next week prior to a relief rally occurring we may find support at 1,000 (more of a psychological area), but most likely at 980. The 980 level corresponds to the August 2009 lows and the late October 2008 highs (see green dashed line). Without a relief rally these areas become more important and are levels where I think holding shorter term short positions become more dangerous, simply because the market would be even more oversold than it is today. However, if we consolidate the oversold conditions at current levels and drift higher over the next several days to several weeks it should provide a fertile ground to initiate short positions. This is how I am positioning new plays, i.e. picking good entries into short trade set-ups in anticipation of an ensuing drop in the broader market.

With all of that said, earnings season gets underway in earnest the week of July 12th (one week from Monday). Just to name a few Alcoa, CSX, and Intel all report on Monday, July 12th. I believe traders will be more focused on guidance than actual prior quarter earnings. In the end, this is sure to create volatile conditions in both directions. I personally think earnings could be a catalyst to get things moving lower, however, I can not and will not make that prediction, but will instead react to what the market tells me. There are also many geopolitical factors that could send the markets either direction. But there is one thing that is certain and that is from a pure technical analysis standpoint there is a lot of overhead congestion to keep any strength in check. And until that is broken the path of least resistance is lower.

Finally, the S&P 500 has made the much talked about death cross on its daily chart where the 50-day SMA has crossed below the 200-day SMA, normally a very bearish technical pattern. The 50-day SMA is now a few cents lower than the 200-day SMA as of Friday's close. This doesn't mean the market will immediately sell-off and I would tend to argue that it won't until there is a bounce to shake some weak hands that are short out of the market. Simply put, the market has a knack for doing this so staying nimble is highly recommended and if we have to shift gears we'll do so with caution. Enjoy the rest of your weekend and please email me with any questions.

Current Portfolio:

PUT Play Updates

Children's Place - PLCE - close 43.57 change -1.06 stop 48.10

Target(s): 43.40, 41.70, 40.70, 40.05
Key Support/Resistance Areas: 46.40, 47.00, 46.00, 44.50, 43.40, 41.50
Current Gain/Loss: -5%
Time Frame: 1 to 2 weeks
New Positions: Yes

7/3: PLCE printed a bearish engulfing candlestick on its daily chart. However, there is also a bullish inverse head and shoulders pattern forming on the intraday charts. This could be good for a bounce early next week but I believe there is enough overhead resistance to keep any bounces under control. If PLCE breaks down first without bouncing I suggest readers be quick to take profits at $41.70. Otherwise we'll monitor any bounces and adjust as things develop. I'm going to keep a wide stop for now due to the volatility.

7/1: The follow through to the downside in PLCE just didn't happen today. In hindsight I should not have listed our lower trigger to enter, especially with the oversold market conditions. My thought process was PLCE would hit our $41.70 target relatively quick on a breakdown, but things reversed. And I didn't think we would snap right back up after breaking down. The good news is PLCE is testing the backside of its broken downtrend line and remains below its declining 20-day and 50-day SMA's. There is a lot of congestion overhead which I think will keep bounces under control. A tighter stop could be placed at $47.05 which is above both of the aforementioned SMA's. We may need to exhibit some patience with this trade but I think the sellers will show up.

6/30: PLCE has two consecutive closes below an upward trend line that began in December 2009. The stock has broken below its 20-day and 50-day SMA's and they are declining. I am anticipating a bounce up towards its 50-day SMA and a key resistance area near $46.00. I suggest readers initiate short positions at $45.75 which is an ideal entry. However, if PLCE breaks below today's low and trades to $43.19 use that as a trigger also, whichever occurs first. Our targets are down near the stock's recent lows. Our stop is $48.10 which is above the 20-day SMA and lots of congestion that I think PLCE will have a hard time navigating through on any bounces. It will be adjusted once we are in the position.

Current Position: August $45.00 PUTS, entry was at $4.00

Annotated chart:

Entry on July 1, 2010
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 700,000
Listed on June 30, 2010

Lululemon Athletica Inc. - LULU - close 36.32 change -1.48 stop 48.10

Target(s): 35.25, 34.05, 33.00
Key Support/Resistance Areas: 42.25, 39.75, 37.00, 35.16, 32.75
Time Frame: 1 week

7/3: This is an example of a stock not letting shorts in for swing trade. It may be wishful thinking to expect LULU to bounce all the way up to $39.25 after the selling pressure on Friday. It would be ideal to see LULU make a run up towards its declining 50-day SMA which would be the first time testing it from below since it was broken on 6/28. But I doubt that will happen so I suggest we lower our trigger to enter to $38.40 which is just below Thursday's high. In the end, I think LULU trades down to its 200-day SMA but if it keeps declining prior to bouncing we may lose our chance. For readers who trade intraday LULU provides some good opportunities and if things are moving fast (up or down) this is a good stock to consider trading.

7/1: LULU has been whipsawing in a wide $10 range for past 3 months and I think it is ready to let go to the downside. When it happens it should let go fast. LULU is maintaining one last trend line from its 7/09 lows to its 2/10 lows. But I'm not too concerned about this trend line holding in today's market conditions. The retail sector is weak and LULU trades at a high P/E. The stock is below its declining 20-day and 50-day SMA's and there is a lot of congestion to keep any bounces under control. I suggest initiating short positions into strength. $39.25 provides an ideal entry point which we will use a trigger to enter short positions. I will also add that more conservative traders may want to wait until LULU tests its 50-day SMA from below which also corresponds with the back side of its most recent trend line that broken this week. We'll place an initial wide stop at $43.10 to account for volatility and will adjust it once we are in the position.

Suggested Position: Buy August $35.00 PUTS if LULU trades to $38.25, current ask $2.90, estimated ask at entry 2.00

Annotated chart:

Entry on July xx
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 700,000
Listed on July 1, 2010